2020 (7) TMI 236 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its debt - pre-existing dispute or not - HELD THAT - The facts as narrated do not establish that the debt and default in question are not in dispute, as contended by the Applicant/ petitioner. The Petitioner, though places work orders in question, has not enclosed all other terms and conditions as mentioned in the work order so as to examine whether the Petitioner is entitled to claim the amount in question or not - The Petitioner got issued notice dated 28.06.2019 to the Respondent in the context of dishonor of cheques issued by the Respondent. In response to this notice also, the Respondent has issued a Reply dated 12.07.2019, through their Counsel, by inter alia pointing out the defective services and the reasons for stopping the payment, the failure to rectify the defective services etc. Subsequently, they have filed Criminal Complaint before Chief Metropolitan Magistrate at Bangalore, and the case is stated to be pending there and appeal against is also stated to be pending. The Petitioner issued yet another Demand Notice dated 25.06.2019, under Rule 5 of I B, 2016, to the Respondent by inter alia demanding to pay the outstanding amount within a period of ten days on failure to pay the outstanding amount the instant Company Petition filed by seeking to initiate CIRP in respect of the Corporate Debtor and thus filed the instant Petition. The facts and circumstances shows that the amount claimed by the Petitioner is in substantial dispute, which is deemed to be pre-existing one. The Petitioner also invoked multiple remedies for same cause of action, which is not tenable basing on Principle of natural justice and doctrine of double jeopardy - It is also not in dispute that the Respondent has paid part amount for the work done, and the remaining claimed amount could not be paid due to the reasons explained supra. Admittedly, the Respondent is solvent Company having 40 employees and the Respondent has not paid the alleged amount due to the defective service rendered by the Petitioner. It is a settled position of law that provision of the code cannot be invoked when there is pre-existing dispute and it also cannot be invoked for the recovery of the alleged outstanding amount. Petition dismissed.

Summary

Issues Involved:
1. Initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Existence of a pre-existing dispute regarding the quality of work.
3. Multiple legal proceedings initiated by the Operational Creditor for the same cause of action.
4. Solvency of the Corporate Debtor and the appropriateness of using IBC as a recovery forum.

Issue-Wise Detailed Analysis:

1. Initiation of Corporate Insolvency Resolution Process (CIRP):
The petition was filed by the Operational Creditor under Section 9 of the IBC, 2016, seeking to initiate CIRP against the Corporate Debtor for a default amount of ?49,24,887.48. The Operational Creditor argued that the debt and default were not in dispute and that the Corporate Debtor had failed to pay the outstanding amount despite multiple follow-ups and the issuance of post-dated cheques, some of which were dishonored.

2. Existence of a Pre-Existing Dispute:
The Corporate Debtor opposed the petition, contending that there was a serious dispute regarding the quality of work performed by the Operational Creditor. The Corporate Debtor highlighted that the Operational Creditor had failed to provide a joint warranty bond as required by the contract and that there were significant defects in the waterproofing work, including leakages and cracks. This dispute was evidenced by a letter dated 19th June 2019 from the Corporate Debtor to the Operational Creditor, detailing the deficiencies and the financial and reputational impact on the Corporate Debtor.

3. Multiple Legal Proceedings:
The Operational Creditor had initiated multiple legal proceedings for the same cause of action, including a criminal complaint under Section 200 of the Code of Criminal Procedure for cheque bouncing and a complaint before the Micro and Small Enterprises Facilitation Council (MSEFC). The Corporate Debtor argued that these multiple proceedings constituted an abuse of the process of law and courts.

4. Solvency of the Corporate Debtor:
The Corporate Debtor asserted that it was a solvent company with a turnover of ?14.46 Crores as of 31.03.2019 and that it had paid part of the amount for the work done. The Corporate Debtor contended that the remaining amount was withheld due to the defective services rendered by the Operational Creditor. The tribunal noted that the IBC is not intended to be a substitute for a recovery forum, especially when there is a pre-existing dispute.

Conclusion:
The tribunal concluded that the amount claimed by the Operational Creditor was in substantial dispute and that the dispute was pre-existing. It also noted that the Operational Creditor had invoked multiple remedies for the same cause of action, which is not tenable based on the principles of natural justice and the doctrine of double jeopardy. The tribunal referred to the Supreme Court's ruling in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited, which held that the IBC is not a substitute for a recovery forum. Consequently, the tribunal dismissed the petition to initiate CIRP, without prejudice to the rights of the Operational Creditor to prosecute the pending cases before the Criminal Court and MSEFC.