2023 (1) TMI 746 - AT - Insolvency and Bankruptcy

Initiation of CIRP - existence of debt and dispute or not - Operational Creditors - NCLT admitted the application - Ex-parte order - Corporate Debtor did not make any appearance before the Adjudicating Authority nor filed any submissions - HELD THAT - It is a well settled proposition 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. The Operational Creditor neither having received any reply to the demand notice nor having received any further payments from the Corporate Debtor had proceeded to file Section 9 application and at this stage the Adjudicating Authority is only required to look into the substance of the pleadings to find out whether a real dispute is discernible from the stated facts - The relevant proof for late receipt of notice has been placed at page 322-323 of the Appeal Paper Book ( APB in short). Moreover, the poor health of the Appellant prevented him from following up the matter in the court and in substantiation thereof medical certificate has been placed at page 321 of APB which we find to be sufficient cause to explain their inability to agitate the matter before the Adjudicating Authority. In the interest of justice, we are of the considered view that the present appeal filed before this Tribunal deserves to be considered on merit. It is well settled that in Section 9 proceeding, there is no need to enter into final adjudication with regard to existence of dispute between the parties regarding operational debt. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court - The present is not a case where there is an undisputed debt for which insolvency can be initiated against the Corporate Debtor. The Adjudicating Authority having heard the matter ex-parte has failed to appreciate the facts of the case in its entirety and therefore committed an error in admitting the Section 9 application and we therefore hold that the impugned order passed is unsustainable. The Adjudicating Authority has erroneously admitted the application under Section 9 of IBC - Appeal allowed.

Summary

Issues Involved:
1. Existence of an outstanding operational debt.
2. Allegations of pre-existing disputes.
3. Validity and enforceability of the Memorandum of Understanding (MoU).
4. Procedural fairness and natural justice in the adjudication process.

Issue-wise Detailed Analysis:

1. Existence of an Outstanding Operational Debt:
The Operational Creditor claimed an outstanding amount of Rs. 1,34,96,652/- against the Corporate Debtor for the supply of raw materials and additional payments. The Corporate Debtor was supposed to supply Ethyl Acetate in return, but a shortfall led to the claimed outstanding amount. The Corporate Debtor, however, contended that the transaction was quantity-based and not amount-based, and they had fulfilled their obligations by supplying more than the agreed quantity of Ethyl Acetate.

2. Allegations of Pre-existing Disputes:
The Corporate Debtor argued that there was a pre-existing dispute regarding the reconciliation of accounts and the terms of the agreement. They claimed that the Operational Creditor had supplied raw materials at higher rates and purchased the final product at lower rates, leading to a dispute. The Operational Creditor had allegedly evaded requests for account reconciliation. The Tribunal noted that for a pre-existing dispute to nullify a Section 9 application, it must be truly existing at the time of filing the reply to the demand notice or at the time of the Section 9 application. The Corporate Debtor had not furnished any reply to the demand notice, and the Tribunal found that the dispute was not a mere bluster but required further investigation.

3. Validity and Enforceability of the MoU:
The MoU signed on 03.01.2020 indicated the Corporate Debtor's agreement to pay the outstanding amount within 18 months. The Corporate Debtor contended that the MoU was signed under duress and without consideration, making it invalid. The Operational Creditor argued that the MoU was a clear admission of debt and the Corporate Debtor's failure to honor the cheques reinforced the debt and default. The Tribunal found that the Corporate Debtor's defense regarding the MoU was not illusory or a sham and required adjudication by a competent court.

4. Procedural Fairness and Natural Justice in the Adjudication Process:
The Corporate Debtor claimed that the impugned order was passed ex-parte and in violation of the principles of natural justice. They argued that they had missed the hearing due to the late receipt of the notice and the poor health of the appellant. The Tribunal found the reasons for non-appearance and non-receipt of notice on time to be sufficient cause and considered the appeal on merit.

Conclusion:
The Tribunal concluded that the defense raised by the Corporate Debtor was not illusory or a sham and that the nature of the dispute required adjudication by a competent court. The Adjudicating Authority had erred in admitting the Section 9 application without appreciating the facts in their entirety. The impugned order was set aside, and the Corporate Debtor was released from the rigors of the Corporate Insolvency Resolution Process (CIRP) with immediate effect. The appeal was allowed, and no order as to costs was made.