2025 (4) TMI 1404 - AT - IBC

Dismissal of Section 9 Application filed before the Adjudicating Authority - initiation of CIRP - Existence of debt and default or not - quality of goods or services - breach of a representation or warranty - HELD THAT - Upon perusal of the Purchase Orders which form basis of the current Company Petition annexed as ANNEXURE V-1 to V-8 we find that all the said Purchase Orders have been signed by Mrs. Ashwini Ghodi or Mr. Gaurang Ghodi and not a single Purchase Order bears the signature of the Intervener Mrs. Sheetal Dahanukar. Further it is claimed by the Intervener that all the said purchase orders are post April 2021 which is after the date on which dispute between Mr. Nilesh Dahanaukar and the Intervener grew strenuous and the intervener left her matrimonial house. This disputed nature of the aforementioned facts raises serious doubts about the genuineness of the claim filed by the Petition Firm. Thus the Intervener s contention with respect to the same holds merit and cannot be ignored. There exists a nexus between the partner of Pan Products Mr. Gaurang Ghodi and the Respondent Company and Mr Nilesh who is the Director of Appellant-OC-Om Sai. In view of the aforementioned email dated 03.01.2023 and the Purchase Orders dated 27.10.2021 and 13.06.2022 which are signed by Mr Ghodi we find that Mr. Gaurang Ghodi is also involved in the day-to-day internal affairs and workings of the Respondent-CD-Plastomax Engineering to such an extent that Mr. Gaurang Ghodi was in a position to send official emails and even sign Purchase Orders on behalf of the Respondent Company. The allegations of fabrication of documents as alleged by the Intervenor Mrs. Sheetal Dahanukar who is wife of the Petitioner also noted. The Intervenor has raised serious allegations about the authenticity of the invoices and purchase orders presented by the Petitioner - keeping this offence of forgery committed by Mr. Nilesh Dahanukar in mind and in view of the contentions raised by the Intervener we have sufficient grounds to believe that it is plausible for Mr. Nilesh Dahanukar to forge signature of his wife the Intervener and the contention raised by the Intervener with respect to the same holds merit and cannot be brushed aside. The Appellant claims to qualify as an operational creditor under Section 5(20) of the IBC and accordingly claims that the debt is clearly an operational debt arising from the supply of goods to the Respondent. It claims that the personal and matrimonial disputes raised by the director of the Respondent do not constitute a dispute as per Section 5(6) of the IBC. And the IBC defines a dispute as one related to the existence of the debt quality of goods/services or breach of warranty or representation none of which are applicable to the alleged personal disputes between the parties. The disputes raised by Mrs. Sheetal Dahanukar were personal in nature (e.g. matrimonial issues and shareholder oppression) and not related to the operational debt or quality of goods supplied - It is also claimed that the Respondent did not raise any valid dispute about the debt and the alleged disputes are related to personal matters such as matrimonial discord and shareholder disputes which do not qualify as valid disputes under Section 5(6) of the IBC. Conclusion - The company petition has not been filed for insolvency proceedings but is for ulterior motives. There are no infirmity in the findings of the adjudicating authority that the Section 9 application has been filed to settle personal disputes and such an act is reprehensible. In this background the finding of the adjudicating authority for imposition of a cost of Rs. 10 lakhs on the petitioner for filing frivolous and motivated petition also agreed. Appeal dismissed.

Summary

Issues Presented and Considered

The core legal questions considered in this judgment are:

1. Whether the Section 9 Petition filed by the Operational Creditor for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor is maintainable in light of alleged personal disputes between the parties.

2. Whether the disputes raised by the Respondent, which are matrimonial and shareholder oppression related, qualify as a "dispute" under Section 5(6) of the Insolvency and Bankruptcy Code (IBC), thereby precluding admission of the Section 9 Petition.

3. Whether the claim of operational debt for supply of goods is genuine or fabricated, considering the close nexus between the parties and allegations of forgery and collusion.

4. Whether the Adjudicating Authority (NCLT) was justified in dismissing the Section 9 Petition on grounds of abuse of process of law and imposing costs on the Operational Creditor.

Issue-wise Detailed Analysis

Issue 1: Maintainability of Section 9 Petition in presence of personal disputes

Legal Framework and Precedents: Section 9 of the IBC allows an Operational Creditor to file a petition for initiation of CIRP upon default of payment of operational debt. Section 5(6) defines "dispute" to include disputes relating to existence of debt, quality of goods/services, or breach of representation or warranty. The law mandates that only bona fide disputes relating to operational debt can preclude admission of Section 9 Petition.

Court's Interpretation and Reasoning: The Court noted that the Appellant filed the Section 9 Petition for recovery of Rs. 1.27 crore for goods supplied with proper invoices and delivery challans, with no dispute raised at the time of supply. The Respondent raised objections based on personal matters such as matrimonial disputes and shareholder oppression, which do not fall within the scope of "dispute" under Section 5(6) of the IBC. However, the Court also noted that the nexus between the parties is extremely close, with Mr. Nilesh Dahanukar (partner of Appellant) being husband of Mrs. Sheetal Dahanukar (Director of Respondent), and Mr. Nilesh also acting as Secretary of the Respondent Company and having access to company's email and documents.

Key Evidence and Findings: The Court found that the email address of the Respondent Company was the personal email of Mr. Nilesh Dahanukar, and the registered office of the Respondent Company was his residential address. The purchase orders and invoices were signed by other directors or partners closely linked to the Appellant, raising suspicion about genuineness. The Respondent's Director, Mrs. Sheetal, filed an Intervention Application and an Oppression and Mismanagement Petition, alleging collusion and fabrication of documents by Mr. Nilesh and others.

Application of Law to Facts: While the Appellant argued that personal disputes do not constitute a valid dispute under Section 5(6), the Court observed that the facts revealed a manufactured insolvency scenario, where personal and matrimonial disputes were intertwined with corporate transactions. The Court emphasized that the insolvency process cannot be used as a tool for settling personal scores or for revenge litigation.

Treatment of Competing Arguments: The Appellant relied on the absence of dispute over debt existence or quality of goods and the statutory definition of dispute under IBC. The Respondent countered with allegations of forged documents, collusion, and misuse of company resources by the Appellant's partner. The Court gave weight to the Respondent's contentions supported by documentary evidence and ongoing criminal proceedings against Mr. Nilesh for forgery.

Conclusion: The Court concluded that the Section 9 Petition was not maintainable as it was filed with malafide intention and to misuse the insolvency process for personal vendetta rather than genuine recovery of operational debt.

Issue 2: Whether the disputes raised by the Respondent qualify as "disputes" under Section 5(6) of the IBC

Legal Framework: Section 5(6) of the IBC defines "dispute" as including suits or arbitration proceedings relating to (a) existence of amount of debt, (b) quality of goods or services, or (c) breach of representation or warranty.

Court's Reasoning: The Court observed that the disputes raised by the Respondent were matrimonial disputes and shareholder oppression and mismanagement allegations, which are personal and internal corporate governance issues, not related to the operational debt or quality of goods supplied. The Court noted that these disputes do not qualify as "disputes" under Section 5(6) and hence cannot be grounds for rejecting the Section 9 Petition.

Key Evidence: The Respondent's objections were based on personal and shareholder disputes, and the Appellant's partner was involved in management and operations of the Respondent Company. The Court also noted the absence of any dispute raised at the time of supply or in relation to quality or existence of debt.

Application of Law to Facts: The Court held that personal disputes, matrimonial discord, and shareholder conflicts are outside the scope of Section 5(6) and cannot be treated as valid disputes to reject a Section 9 Petition.

Competing Arguments: The Appellant relied on statutory definitions to argue that personal disputes are irrelevant. The Respondent contended that these personal disputes are intertwined with the business and affect the genuineness of the claim. The Court acknowledged the personal disputes but emphasized that they do not legally constitute disputes under IBC.

Conclusion: The Court affirmed that the personal disputes raised do not qualify as disputes under Section 5(6) and hence do not justify dismissal of the Section 9 Petition on that ground alone.

Issue 3: Genuineness of the operational debt and allegations of fabrication and collusion

Legal Framework: For admission of Section 9 Petition, the operational debt must be genuine, undisputed, and default must have occurred. The Court must examine if the claim is bona fide or an abuse of process.

Court's Interpretation and Reasoning: The Court found that the operational debt claimed was intertwined with personal disputes and that the partner of the Appellant had control over the Respondent Company's affairs, including access to company seal, email, and digital signatures. The Court noted allegations of forged invoices, back-dated purchase orders, and misuse of company documents. The Court also took note of ongoing criminal proceedings against Mr. Nilesh for forgery under Section 465 of IPC, and that the demand notice was issued shortly after adverse judicial orders against him, suggesting retaliatory motives.

Key Evidence: Evidence included email correspondences, purchase orders signed by related parties, absence of signatures of the Respondent's intervener director on key documents, registered email and address being that of the Appellant's partner, and criminal case records.

Application of Law to Facts: The Court applied the principle that insolvency proceedings should not be used as a tool for revenge or to settle personal disputes. The nexus between the parties and the evidence of collusion and forgery led the Court to conclude that the operational debt claimed was not genuine but manufactured.

Treatment of Competing Arguments: The Appellant argued that invoices and delivery challans were proper and GST was paid, indicating genuineness. The Respondent countered with allegations of fabrication and misuse of company resources. The Court found the Respondent's contentions credible given the criminal proceedings and the circumstances.

Conclusion: The Court concluded that the operational debt was not genuine but part of a manufactured insolvency to harass the Respondent and settle personal scores.

Issue 4: Justification for dismissal of Section 9 Petition and imposition of costs

Legal Framework: Section 9(5)(ii) of the IBC allows dismissal of petition if the application is incomplete, debt is paid, invoice not delivered, dispute exists, or disciplinary proceedings pending against the resolution professional. Courts also have inherent powers to impose costs for frivolous or vexatious litigation.

Court's Reasoning: The Adjudicating Authority dismissed the Section 9 Petition on grounds of abuse of process, motivated by personal agendas, and collusion between parties. The Court upheld this finding, emphasizing that the petition was filed to misuse the insolvency process rather than genuine recovery. The Court agreed with the imposition of Rs. 10 lakh costs on the Appellant for filing a frivolous and vexatious petition.

Key Findings: The Court found that the Section 9 Petition was a strategic maneuver to settle matrimonial disputes and shareholder conflicts, not a bona fide insolvency proceeding. The nexus between parties and ongoing criminal proceedings reinforced this conclusion.

Application of Law to Facts: The Court applied the principle that misuse of insolvency proceedings for personal vendetta is reprehensible and justifies dismissal and costs.

Competing Arguments: The Appellant sought admission of the petition and set aside of costs. The Court rejected these on the basis of the evidence and findings.

Conclusion: The Court upheld the dismissal of the Section 9 Petition and the imposition of costs as justified and appropriate.

Significant Holdings

"There exists a close nexus between the parties, Mr. Nilesh Dahanukar being Secretary of the Respondent Company, the personal email address of Mr. Nilesh Dahanukar and official email address of the Respondent Company is same, and there exists a blatant collusion between the Directors of Pan Products and the Petitioner Firm, and the backdrop of personal disputes all point towards a blatant attempt to abuse and misuse the legal process by misleading the courts."

"Such a deception is gravely prejudicial to the cause and interest of justice and also to the judicial institution as well."

"The present Company Petition is an attempt to exploit the provisions of the Insolvency and Bankruptcy Code for purposes other than its true and correct objective."

"Personal disputes between Mr. Nilesh and Ms. Sheetal have reached such extreme that Mr. Nilesh is using the insolvency proceedings through Appellant to settle personal score and take revenge."

"The Section 9 application has been filed to settle personal disputes and such an act is reprehensible."

Core principles established include:

• Section 9 Petitions under IBC must be bona fide and not motivated by personal vendettas or disputes unrelated to operational debt.
• Personal and matrimonial disputes do not qualify as "disputes" under Section 5(6) of the IBC to reject a Section 9 Petition.
• Close nexus and collusion between parties, including control over company affairs and forgery allegations, can negate the genuineness of operational debt claims.
• Insolvency proceedings cannot be misused as a tool for revenge litigation or oppression of minority shareholders.
• Courts have the authority to dismiss frivolous petitions and impose costs to deter misuse of legal processes.

Final determinations:

The appeal filed by the Operational Creditor was dismissed, the impugned order of dismissal of Section 9 Petition was upheld, and the imposition of costs of Rs. 10 lakh was affirmed. The Court found no infirmity in the Adjudicating Authority's conclusion that the petition was a misuse of the insolvency process motivated by personal disputes and collusion, and thus not maintainable.