2023 (5) TMI 249 - AT - Insolvency and Bankruptcy

Initiation of CIRP - NCLT admitted the application - Operational Creditors - dispute with respect to supply of materials and failure of completion of work order on time by the Operational Creditor - pre-existing disputes or not - service of notice of dispute beyond 10 days - HELD THAT - With regard to an Operational Creditor, the existence of dispute and its communication to the Operational Creditor is therefore statutorily provided for in Section 8. In the present case, it is an undisputed fact that the demand notice was issued by the Operational Creditor on 16.09.2019 and notice of dispute was raised by the Corporate Debtor on 07.11.2019 but beyond the prescribed period of ten days. Perusal of the impugned order makes it clear that the Adjudicating Authority simply relied on the email dated 09.01.2019 to come to the conclusion that there was debt and default and admitted the Section 9 petition. The satisfaction of the Adjudicating Authority is sans consideration of the reply to the demand notice and the voluminous exchange of correspondences which has taken place between the two parties relating to supplies, delay in completion of project, pendency of risk and cost account of BHEL and LD related issues. The tone and tenor of these protracted correspondences clearly manifest existence of dispute prior to the date of Section 8 demand notice on 16.09.2019 - these disputes were raised much before the issue of the issue of Demand Notice. For such disputed operational debt, Section 9 proceeding under IBC cannot be initiated at the instance of the Operational Creditor. Though there is no need to enter into final adjudication with regard to existence of dispute between the parties regarding operational debt, but the contents of these emails/ letters/minutes of meetings ought to have been factorized to arrive at a finding whether the defence taken by the Corporate Debtor is moonshine defence unsupported by evidence. Surprisingly none of these emails and letters establishing the existence of pre-existing disputes between the parties have been taken into cognisance by the Adjudicating Authority. These being pertinent factors for consideration, to our mind the Adjudicating Authority has committed an error in side-stepping these aspects and admitting Section 9 application - Where operational creditor seeks to initiate insolvency process against a Corporate Debtor, it can only be done in clear cases where no real dispute exists between the two parties which is, however, not so borne out given the facts of the present case. The Adjudicating Authority committed serious error in admitting Section 9 application in the facts of the present case. We thus allow this appeal and set aside the impugned order initiating CIRP of the Corporate Debtor and all other orders issued pursuant to the impugned order. The Corporate Debtor is released from the rigours of CIRP and is allowed to function independently through its board of directors with immediate effect. The Resolution Professional shall however be paid his fees/expenses by the Operational Creditor - Appeal disposed off.

Summary

Issues Involved:
1. Pre-existing disputes between the parties.
2. Maintainability and defects in the Section 9 application.
3. Adjudicating Authority's failure to appreciate the existence of disputes.

Summary:

Pre-existing disputes between the parties:
The Appellant contended that the Operational Creditor failed to adhere to project timelines despite several extensions, leading to delays. The Corporate Debtor had to request BHEL to complete the project at their risk and cost. The Corporate Debtor disputed the claims of dues and communicated on 06.07.2019 that no amount was payable to the Operational Creditor after adjustments, including liquidated damages (LD). The Corporate Debtor asserted that the disputes existed before the Section 8 demand notice dated 16.09.2019, as indicated in their reply on 07.11.2019.

Maintainability and defects in the Section 9 application:
The Appellant argued that the Section 9 application was defective as the total debt claimed in the demand notice (Rs. 87,01,843) did not match the amount in the Section 9 application (Rs. 1,84,80,706). The Appellant cited the Supreme Court judgment in M/s S.S. Engineers v. Hindustan Petroleum Corporation Ltd. to support their contention that IBC is not a debt recovery forum.

Adjudicating Authority's failure to appreciate the existence of disputes:
The Respondent No.1 argued that the Operational Creditor had performed its obligations and submitted invoices and Material Receipt Certificates (MRCs). The Corporate Debtor had acknowledged the outstanding dues in emails dated 14.11.2017 and 09.01.2019. The Respondent claimed that the Corporate Debtor's defence of risk and cost action and LD was an afterthought. The Adjudicating Authority admitted the Section 9 application based on an email dated 09.01.2019, without considering the pre-existing disputes evidenced by the correspondences between the parties.

Judgment:
The Appellate Tribunal noted that the Adjudicating Authority erred in overlooking the pre-existing disputes and solely relying on the email dated 09.01.2019. The Tribunal emphasized that the IBC is not a debt recovery mechanism and that Section 9 applications should only be admitted in clear cases where no real dispute exists. The Tribunal set aside the impugned order initiating CIRP against the Corporate Debtor and allowed the appeal, releasing the Corporate Debtor from CIRP. The Tribunal also allowed the Operational Creditor to seek alternative legal remedies for its dues.