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2024 (8) TMI 407 - AT - Insolvency and BankruptcyStatutory construct of IBC post issue of demand notice by the Operational Creditor as laid down in Section 9 of IBC - whether payment to the Respondent No. 2 was due from the Corporate Debtor? - whether a default has been committed by the Corporate Debtor in respect of payment of such debt and whether there was any pre-existing dispute surrounding the debt? HELD THAT - From a plain reading of the statutory provisions, it is clear that the existence of dispute and its communication to the Operational Creditor is statutorily provided for in Section 8. In the present case, it is an undisputed fact that Section 8 demand notice was issued by the Operational Creditor- Respondent No. 2 on 20.06.2018 and in response a notice of dispute was also raised by the Corporate Debtor on 29.06.2018. Besides attributing a grave charge against Respondent No. 2 for bankrupting SPIN, the Corporate Debtor had effectuated revision of the role, responsibilities and salary compensation of Respondent No. 2. More significantly, the disputes raised in these letters are central to the payments claimed by Respondent No. 2 and had a bearing on the computation of outstanding dues arising out of the hand written agreement of 18.09.2013 which has been the bone of contention between the two parties. These disputes, raised prior to demand notice, were germane to deciding whether there was a debt and if the debt was disputed by the Corporate Debtor. The present is therefore not a case where there is an undisputed debt for which Corporate Debtor can be brought under the rigors of CIRP. Triggering the drastic consequences of CIRP on the Corporate Debtor on the basis of debt and default which is mired in pre-existing disputes, in our considered view, is not acceptable. It is well settled that in Section 9 proceeding, there is no need to enter into final adjudication into the disputes between the parties regarding operational debt. In terms of the Mobilox judgement 2017 (9) TMI 1270 - SUPREME COURT , all that the Adjudicating Authority was required to do was to see whether any notice of dispute was raised by the Corporate Debtor and take a call on the plausibility of these disputes which in the present facts of the case the Adjudicating Authority has hopelessly failed to do. Disputes once raised and found plausible, they require detailed consideration which is beyond the ambit of the Adjudicating Authority since IBC only provides for summary proceedings. For such disputed operational debt, Section 9 proceeding under IBC cannot be initiated at the instance of the Operational Creditor. The Adjudicating Authority committed serious error in admitting Section 9 application. The impugned order initiating CIRP of the Corporate Debtor is set aside. The Corporate Debtor is released from the rigours of CIRP with immediate effect. The Resolution Professional shall however be paid his fees/expenses by the Appellant. The Registry is directed to take appropriate action without any delay to refund the amount which was deposited by the Appellant in Fixed Deposit Receipt in pursuance of the interim order of this Tribunal dated 10.11.2023. Appeal allowed.
Issues Involved:
1. Existence of operational debt and default by the Corporate Debtor. 2. Admissibility of welfare claims as operational debt. 3. Pre-existing disputes between the parties. 4. Application of set-off/counter-claims by the Corporate Debtor. 5. Compliance with statutory requirements under Sections 8 and 9 of the IBC. Detailed Analysis: 1. Existence of Operational Debt and Default by the Corporate Debtor: The Appellant argued that there was no admitted, crystallized operational debt due to Respondent No. 2. It was contended that the sums claimed by Respondent No. 2 were not in accordance with the Employment Agreement (EA) and that Respondent No. 2 had already received advance payments exceeding his entitlements. The Adjudicating Authority, however, found that the Corporate Debtor had admitted a liability of Rs. 4.18 lakhs as salary and Rs. 24.44 lakhs towards Provident Fund (PF) dues in its balance sheet, thus establishing the existence of a debt above the pecuniary threshold of Rs. 1 lakh. The Authority held that the Corporate Debtor had not provided conclusive evidence to show that these amounts had been paid, thereby confirming default. 2. Admissibility of Welfare Claims as Operational Debt: The Appellant contended that welfare claims such as PF, Gratuity, and other benefits do not qualify as operational debt and cannot be the basis for initiating CIRP. The Respondent No. 2 argued that these claims were part of the EA and thus payable. The Tribunal referred to the judgment in Kishore K. Lonkar Vs. Hindustan Antibiotics Ltd., which held that welfare claims do not constitute operational debt under the IBC. The Tribunal agreed with this interpretation, noting that such claims cannot be the basis for CIRP. 3. Pre-existing Disputes Between the Parties: The Appellant argued that there were pre-existing disputes regarding the claims made by Respondent No. 2, which were communicated through emails and other correspondence before the issuance of the Section 8 demand notice. The Adjudicating Authority, however, found that no valid disputes were raised before the statutory demand notice. The Tribunal disagreed, finding that the Corporate Debtor had raised detailed disputes about the mismanagement and financial crisis caused by Respondent No. 2, which were communicated prior to the demand notice. These disputes were central to the claims made by Respondent No. 2 and indicated that the debt was not undisputed. 4. Application of Set-off/Counter-claims by the Corporate Debtor: The Adjudicating Authority held that the Corporate Debtor's claim of set-off/counter-claims was not sustainable under the summary jurisdiction of the IBC. The Tribunal, however, found that the Corporate Debtor's contention that Respondent No. 2 had received more than his entitlement as per the EA was not merely a set-off claim but a valid defense against the claims made. The Tribunal noted that the Adjudicating Authority had failed to consider the financial statements showing advances paid to Respondent No. 2, which indicated that no default had occurred. 5. Compliance with Statutory Requirements under Sections 8 and 9 of the IBC: The Tribunal emphasized the statutory requirements under Sections 8 and 9, which mandate that the Operational Creditor must deliver a demand notice and that the Corporate Debtor must respond within ten days, indicating the existence of any dispute. The Tribunal found that the Corporate Debtor had complied with these requirements by raising a notice of dispute within the stipulated period, outlining various disputes related to the debt claimed by Respondent No. 2. Conclusion: The Tribunal concluded that the Adjudicating Authority had committed a serious error in admitting the Section 9 application, as the debt and default were mired in pre-existing disputes. The Tribunal set aside the impugned order, released the Corporate Debtor from CIRP, and directed that the Resolution Professional be paid his fees/expenses by the Appellant. The Tribunal allowed the appeal and provided that Respondent No. 2 could seek alternative legal remedies in an appropriate forum.
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