2025 (1) TMI 485 - AT - IBC

Dismissal of Section 9 application filed by the Operational Creditor for initiating Corporate Insolvency Resolution Process - novation of the original contract between the parties - pre-existing dispute existed between the Operational Creditor and the Corporate Debtor - HELD THAT - A look at the relevant statutory construct of IBC at this juncture would be useful. Section 8 of the IBC requires the Operational Creditor, on occurrence of a default by the Corporate Debtor, to deliver a Demand Notice in respect of the outstanding Operational Debt. Section 8(2) lays down that the Corporate Debtor within a period of 10 days of the receipt of the Demand Notice would have to bring to the notice of the Operational Creditor, the existence of dispute, if any. After issue of demand notice by the Operational Creditor, if the Operational Creditor does not receive payment from the Corporate Debtor or notice of the dispute under Section 8(2), he may file an Application under Section 9(1) of IBC - it is clear that the existence of dispute and its communication to the Operational Creditor is therefore statutorily provided for in Section 8. It is an undisputed fact in the present matter that the Operational Creditor did not receive any payment from the Corporate Debtor and had therefore proceeded to file an application under Section 9 of IBC. Pre-existing dispute - HELD THAT - It is also a well settled proposition of law that for a pre-existing dispute to be a ground to nullify an application under Section 9, the dispute raised must be truly existing at the time of filing a reply to notice of demand as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application. In the present case, the pre-existing dispute has been predicated on notice invoking arbitration dated 19.01.2023 prior to the issue of Section 8 Demand Notice on 25.02.2023 as was highlighted by in the Notice of dispute of the Corporate Debtor dated 17.03.2023 - the reply to the Section 8 Demand Notice clearly articulates the ongoing arbitration between the two parties which predated the Section 8 demand notice. In the present case, it is an undisputed fact that the demand notice was issued by the Operational Creditor on 25.02.2023 and a notice of dispute raised by the Corporate Debtor on 17.03.2023 wherein the issue of invocation of notice of arbitration of 19.01.2023 on was articulated as a ground of pre-existing dispute. The pre-existing dispute must relate to the transaction or debt that forms the basis of the Section 9 application. Clearly the debt in this case arises out of RA Bills relating to the original work order of 12.10.2018. When an arbitration notice is served in respect of disputes stemming from the original work order and the arbitration notice was issued before the Section 8 demand notice, clearly it signifies that a dispute already existed between the parties. As an arbitration notice is a formal communication from one party to the other, initiating arbitration proceedings, the arbitration notice evidences a pre-existing dispute. This therefore constitutes sufficient ground for rejection of a Section 9 application. Conclusion - There was no novation of the contract and that a pre-existing dispute existed, leading to the dismissal of the appeal. The existence of a pre-existing dispute, as evidenced by an arbitration notice, is sufficient to reject a Section 9 application under the IBC. The Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant - Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether there was a novation of the original contract between the parties, transferring obligations from the original party to the Corporate Debtor.
• Whether a pre-existing dispute existed between the Operational Creditor and the Corporate Debtor, which would preclude the initiation of a Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code (IBC).
• The validity and implications of an arbitration notice issued prior to the Section 8 demand notice, and whether it constitutes a pre-existing dispute under IBC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Novation of Contract

• Relevant Legal Framework and Precedents: The concept of novation is governed by Section 62 of the Indian Contract Act, 1872, which allows for the substitution of a new contract in place of an old one.
• Court's Interpretation and Reasoning: The court examined whether the addendum and Memorandum of Understanding (MoU) effectively transferred obligations from the original party (H&S) to the Corporate Debtor.
• Key Evidence and Findings: The court noted that the addendum was not signed by the Corporate Debtor, and no new work order was issued by the Corporate Debtor.
• Application of Law to Facts: The absence of a signed addendum by the Corporate Debtor and the lack of a new work order indicated that novation did not occur.
• Treatment of Competing Arguments: The Respondent argued that the conditions for novation were unmet, which the court found persuasive.
• Conclusions: The court concluded that there was no novation of the original contract.

Issue 2: Pre-existing Dispute

• Relevant Legal Framework and Precedents: Section 8 and Section 9 of the IBC outline the process for issuing a demand notice and the conditions under which a CIRP can be initiated, including the existence of a pre-existing dispute.
• Court's Interpretation and Reasoning: The court focused on whether the arbitration notice constituted a pre-existing dispute under Section 8(2) of the IBC.
• Key Evidence and Findings: The arbitration notice was issued before the Section 8 demand notice, indicating a pre-existing dispute.
• Application of Law to Facts: The court referenced the Mobilox Innovations case, which clarified that a dispute must be genuine and not spurious or illusory.
• Treatment of Competing Arguments: The Appellant argued that the arbitration notice was not relevant as it was issued by a third party (H&S), but the court found that the arbitration notice related to the original work order and was relevant.
• Conclusions: The court concluded that there was a pre-existing dispute, which barred the Section 9 application.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "It is clear that such notice must bring to the notice of the operational creditor the ‘existence’ of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties."
• Core Principles Established: The existence of a pre-existing dispute, as evidenced by an arbitration notice, is sufficient to reject a Section 9 application under the IBC.
• Final Determinations on Each Issue: The court determined that there was no novation of the contract and that a pre-existing dispute existed, leading to the dismissal of the appeal.

The judgment underscores the importance of clearly establishing the existence of a pre-existing dispute when considering applications under Section 9 of the IBC, and it emphasizes the necessity for clear evidence of novation for contractual obligations to be transferred effectively.