2022 (7) TMI 242 - AT - Insolvency and Bankruptcy

Validity of CIRP initiated - impleadment of IRP as 2nd Respondent - existence of debt and disputes between parties or not - Operational creditors - HELD THAT - The Corporate Debtor has made out a case that there were pre-existing disputes between the parties. Without going in detail, it can be held that the documents reflect regarding pre-existence of dispute between the parties. As claimed by the Operational Creditor outstanding was lying since the year 2019 and vide letter dated 06.02.2020 issued by the Respondent No.1 addressed to the Appellant, it appears that Respondent No.1 admitted that he had received payment of Rs.35 lakhs till 1st August, 2019. In the said letter the Respondent has given detail regarding outstanding dues. The Appellant s letter dated 20th February, 2020 which was addressed to Respondent No.1 reflects regarding pre-existing dispute. In its letter dated 20th February, 2020 while referring to letters of Respondent No.1 dated 2nd August, 3rd August, 2019, 20th August, 2019, 4th September, 2019 30th September, 2019 and 6th February, 2020, the Appellant in categorical term had denied regarding demand raised by Respondent No.1. Besides other documents letter dated 11th March, 2020 addressed to the Corporate Debtor issued on behalf of the Operational Creditor makes it clear that for reconciliation of account date was fixed to 14th March, 2020. However, record shows that thereafter no reconciliation of accounts had taken place in between the parties. It goes without saying that in accounting, reconciliation is the process of ensuring that two sets of records are in agreement. Accordingly it can be inferred that in absence of reconciliation of accounts there was pre-existing dispute between the parties. it is evident that date for reconciliation of account was fixed by the Operational Creditor to 14th March, 2020. It goes without saying that since there was no settlement of account in between the parties and there were some disputes, the Respondent No.1 had agreed for fixing a date for reconciliation of the account. This fact is itself enough to infer that demand raised by the Operational Creditor/Respondent No.1 was not undisputed rather there was some dispute. Once under the provisions of Section 9 of the IBC, a Corporate Debtor is in a position to satisfy that there was pre-existing dispute, there is no requirement for initiation of CIRP - Admittedly before the Adjudicating Authority, Application under Section 9 of the IBC was filed on 28.07.2020 whereas there are materials on record which we have discussed hereinabove suggests that dispute was continuing in between the parties regarding outstanding claim and this was the reason that the Respondent No.1 had fixed the date as 14.03.2020 for reconciliation of the account and reconciliation had never been done. Thus, the Learned Adjudicating Authority has incorrectly allowed the application filed under Section 9 of the IBC on behalf of the Operational Creditor/Respondent No.1 which requires interference - appeal allowed.

Summary

Issues Involved:
1. Pre-existing dispute between the parties.
2. Validity of the invoices and supporting documents.
3. Reconciliation and verification of accounts.
4. Return and dishonor of post-dated cheques.
5. Adjudicating Authority's decision under Section 9 of the IBC.

Analysis of Judgment:

1. Pre-existing dispute between the parties:
The Appellant argued that there was a pre-existing dispute regarding the outstanding dues claimed by the Respondent. The Appellant highlighted several documents, including letters dated 20th February 2020 and 14th March 2020, which indicated that the Respondent had agreed to a reconciliation exercise. The Appellant contended that the Adjudicating Authority overlooked these documents and the pre-existing dispute, thus incorrectly initiating the Corporate Insolvency Resolution Process (CIRP). The Tribunal found that there were indeed pre-existing disputes between the parties, as evidenced by the correspondence and the agreed reconciliation date, which was never completed.

2. Validity of the invoices and supporting documents:
The Appellant claimed that the invoices raised by the Respondent were vague and lacked basic particulars such as the period, specifications, locations, and rates of the services provided. The Appellant also noted that some invoices were raised long after the alleged provision of services. The Tribunal observed that several invoices bore endorsements indicating they were received for verification, further substantiating the need for reconciliation. The Respondent's failure to provide adequate supporting documents for the invoices was a significant factor in establishing the pre-existing dispute.

3. Reconciliation and verification of accounts:
The Appellant emphasized that the reconciliation and verification of accounts were critical due to the nature of the services provided. The Respondent had agreed to a reconciliation exercise on 14th March 2020, but this was never carried out. The Tribunal noted that reconciliation is essential for ensuring that two sets of records are in agreement. The absence of reconciliation indicated that the demand raised by the Respondent was not undisputed, supporting the Appellant's claim of a pre-existing dispute.

4. Return and dishonor of post-dated cheques:
The Appellant argued that the return of post-dated cheques by the Respondent without initiating legal proceedings indicated an acknowledgment that the amounts due required reconciliation. The Respondent countered that the cheques were returned based on an assurance of payment through other means. The Tribunal found the Appellant's argument credible, noting that the return of cheques without reservation suggested an acknowledgment of the need for reconciliation.

5. Adjudicating Authority's decision under Section 9 of the IBC:
The Tribunal concluded that the Adjudicating Authority had incorrectly allowed the application under Section 9 of the IBC, as there was a clear pre-existing dispute between the parties. The Tribunal referred to the Supreme Court's judgment in Mobilox Innovations Pvt Ltd v. Kirusa Software Pvt Ltd, which mandates rejecting an application under Section 9 if there is a plausible contention requiring further investigation and the dispute is not spurious, hypothetical, or illusory. The Tribunal set aside the Adjudicating Authority's order, allowing the appeal and emphasizing that the setting aside of the order does not preclude the Respondent from taking other legal actions if necessary.

Conclusion:
The Tribunal found that there was a pre-existing dispute between the parties, which the Adjudicating Authority failed to consider. The invoices raised by the Respondent lacked sufficient details, and the agreed reconciliation exercise was never completed. The return of post-dated cheques without initiating legal proceedings further indicated the need for reconciliation. Consequently, the Tribunal set aside the order initiating CIRP, allowing the appeal and reinforcing the requirement for a thorough examination of disputes before proceeding under Section 9 of the IBC.