2025 (1) TMI 1098 - AT - IBC

Admission of the Section 9 application under the Insolvency and Bankruptcy Code 2016 (IBC) - pre-existing dispute between the parties or not - transactions under running account - demand is barred by Limitation Act 1963. Pre-existing dispute between the parties - HELD THAT - Any dispute between the Promoters / Directors / Shareholders of the Respondent No.1 or Corporate Debtor is outside the scope of Section 9 of the IBC as both Respondent No.1 and Corporate Debtor are separate corporate legal entities different from their Promoters / Directors / Shareholders. Furthermore the pre-existing dispute has to relate to the debt which is the subject matter of the application. The purported dispute does not relate to the subject matter of the present proceeding. In the conspectus of the case issue of the pre-existing dispute cannot be put to a strait jacket as there is a complex nature of transactions when the Demand Notice was issued. It is found that there is a pre-existing dispute between the Promoters inter-mingled with the two legal entities and is not a patently feeble argument or an assertion of fact unsupported by evidence rather it is an actual dispute requiring adjudication. The Hon ble Supreme Court in the matter of Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited 2017 (9) TMI 1270 - SUPREME COURT has mandated that such an application needs to be dismissed under Section 9(5)(ii)(d). There is a pre-existing dispute between the parties and Section 9 petition is not maintainable. There is sufficient material on record to suggest that there is a pre-existing dispute and Section 9 petition is not maintainable even then the other additional grounds raised by the Appellant - with respect to limitation and the account being running account or not are being delved in subsequent paragraphs to unearth the real nature of transactions between the two parties. Time limitation - HELD THAT - Even the Adjudicating Authority has concluded that The latest part-payment being made on 02.03.2022 extended the limitation for further 3 years hence the claim of the Operational Creditor in respect of the invoices raised is not time-barred. This conclusion of Adjudicating Authority doesn t provide any benefit to the Appellant and the maintainability of the petition cannot be questioned on the grounds of limitation. Conclusion - There are multiple transactions which were happening in the purported running account - some of which relate to the supply of goods and their payment from two legal corporate entities but others not directly related to the supply of goods and services. The dispute is apparent from the material on record with respect to the arrangement for use of the premises on rent. There are disputes which are between the Operational Creditor and its Promoters and Corporate Debtor and its Promoters. The transactions between the Corporate Debtor and the Operational Creditor cannot be seen in isolation and it is required to go beyond the corporate veil. The disputes between all of them cannot be brushed aside. Therefore it is concluded that there is a pre-existing dispute between the Corporate Debtor and the Operational Creditor. The Section 9 proceedings against the Corporate Debtor are set aside - Appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The judgment revolves around the following core legal questions:

Whether there is a pre-existing dispute between the parties that would bar the admission of the Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC).
Whether the transactions between the parties constitute a 'running account' and the implications of this on the limitation period under the Limitation Act, 1963.
Whether the demand is barred by the Limitation Act, 1963.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Pre-existing Dispute

Relevant Legal Framework and Precedents: Under Section 9 of the IBC, a pre-existing dispute between the operational creditor and the corporate debtor can bar the admission of an insolvency application. The Supreme Court's decision in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited is pivotal, which mandates that if a dispute exists, the application must be rejected.
Court's Interpretation and Reasoning: The court examined the nature of the disputes, which were primarily between the promoters of the corporate debtor and the operational creditor. It concluded that these disputes were intertwined with the corporate entities, thus constituting a pre-existing dispute under Section 9.
Key Evidence and Findings: Evidence included transcripts of conversations indicating disputes over rent and adjustments of payments, and proceedings from the Delhi High Court, which highlighted ongoing litigations between the promoters.
Application of Law to Facts: The court applied the precedent set by the Supreme Court, determining that the disputes were not merely between individuals but involved the corporate entities, thus falling within the scope of a pre-existing dispute under the IBC.
Treatment of Competing Arguments: The operational creditor argued that disputes between promoters should not affect the corporate entities. However, the court pierced the corporate veil, recognizing the disputes as relevant to the insolvency proceedings.
Conclusions: The court concluded that the existence of a pre-existing dispute barred the Section 9 application.

Issue 2: Running Account and Limitation

Relevant Legal Framework and Precedents: A running account involves continuous transactions and can affect the limitation period under Section 19 of the Limitation Act, which allows for a fresh limitation period from the date of the last payment.
Court's Interpretation and Reasoning: The court scrutinized the nature of transactions and payments between the parties, noting that the complexity of transactions extended beyond simple supply of goods.
Key Evidence and Findings: The court examined bank statements and transaction records, which showed multiple business dealings, including rent payments and other financial exchanges.
Application of Law to Facts: The court found that the transactions did not constitute a simple running account for goods and services due to the involvement of rent and other unrelated payments.
Treatment of Competing Arguments: The operational creditor's assertion that the transactions were a running account was challenged by evidence of mixed transactions, leading the court to reject the notion of a straightforward running account.
Conclusions: The court concluded that the transactions were too complex to be deemed a running account solely for the supply of goods, affecting the limitation period analysis.

Issue 3: Limitation

Relevant Legal Framework and Precedents: The Limitation Act, 1963, particularly Section 19, governs the extension of limitation periods based on part-payments.
Court's Interpretation and Reasoning: The court considered whether the part-payments made extended the limitation period, ultimately finding that the complexity of transactions precluded a straightforward application of Section 19.
Key Evidence and Findings: The last part-payment was made on 02.03.2022, which the adjudicating authority initially found to extend the limitation period.
Application of Law to Facts: The court determined that the nature of payments and transactions did not clearly extend the limitation period due to the intertwined disputes and mixed nature of transactions.
Treatment of Competing Arguments: The operational creditor's reliance on part-payments to extend the limitation was countered by the corporate debtor's evidence of disputes and non-payment of some debts.
Conclusions: The court found that the limitation period was not straightforwardly extended due to the nature of the transactions and disputes.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."
Core Principles Established: The court reinforced the principle that pre-existing disputes between corporate entities, even if involving their promoters, can bar insolvency proceedings under Section 9 of the IBC.
Final Determinations on Each Issue: The court determined that there was a pre-existing dispute, the transactions did not constitute a simple running account, and the limitation period was not clearly extended, leading to the dismissal of the Section 9 application.

Order: The appeal was allowed, and the Section 9 proceedings against the corporate debtor were set aside, with no orders as to costs.

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