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2024 (3) TMI 565 - AT - Insolvency and BankruptcyMaintainability of Section 9 application - initiation of CIRP - pre-existing dispute - dispute came into the picture before the Demand Notice or not - It was contended that the grounds of pre-existing dispute raised by the Respondent were illusory and created only to wriggle out from clearing the outstanding liability - HELD THAT - In the present case, it is an undisputed fact that the demand notice was issued by the Operational Creditor on 15.12.2017 and notice of dispute was raised by the Corporate Debtor on 26.12.2017. It is also an undisputed fact that in the present matter the Operational Creditor did not receive any further payment from the Corporate Debtor and therefore proceeded to file an application under Section 9 of IBC on 20.06.2018. From a plain reading of the notice of dispute, it is noticed that the Corporate Debtor clearly articulated how the Agency Agreement was breached by the Appellant leading to forfeiture of their payments. It is an undisputed fact that in March 2011, the CBI had arrested some officials of the Appellant for paying illegal gratification. It is therefore the case of the Corporate Debtor that in terms of Clause 7(2) of the Agency Agreement, this constituted a breach of the said Agreement. Hence, they claimed to have terminated the Agency Agreement and consequently payments related to SAD invoices were also withheld by them. The Notice of Dispute thus makes it clear that the Corporate Debtor had not only denied their liability to pay the SAD claims but also laid the edifice of the ongoing disputes between the two parties. The issue of denial of payment and termination of Agency Agreement by the Corporate Debtor had continued to fester the business relationship of the two parties is reinforced by another communication sent on 12.03.2015 by the Appellant in which they have sought review of the termination of their services by the Corporate Debtor. This letter has been placed on record at pages 140-141 of the APB. The said communication also reads like an admission of aberration committed on their part and failure to meet the exacting standards of compliance expected by the Corporate Debtor leading to the punitive action of termination of services. 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 - from the material available on record, the dispute over payment of operational debt which has been claimed by the Appellant is writ large and this dispute also clearly precedes the issue of Demand Notice. The Adjudicating Authority has made no mistake in taking cognizance of the fact that there clearly existed dispute between the two parties anterior to the date of demand notice and that there has been a consistent and clear denial on the part of the Corporate Debtor of their liability to discharge the obligations to pay. In the present factual matrix, there are no material which has been placed on record which substantiates that the defence raised by the Corporate Debtor was moonshine, spurious, hypothetical or illusory. 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. Keeping in view that the present facts of the case indicates that the operational debt is disputed, the Adjudicating Authority has therefore correctly rejected the Section 9 application. There are no reasons to disagree with the findings of the Adjudicating Authority. Considering the overall facts and circumstance of the present case, and in view of the foregoing discussion, it is clear that the Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant. Appeal dismissed.
Issues Involved:
1. Pre-existing Dispute 2. Termination of Agency Agreement 3. Validity of Section 9 Application Summary: Pre-existing Dispute: The primary issue was whether there was a pre-existing dispute regarding the operational debt. The Appellant argued that there was no valid termination of the Agency Agreement and that the Adjudicating Authority erred in rejecting the Section 9 application on the grounds of pre-existing dispute. The Respondent contended that the Appellant breached clause 7 of the Agency Agreement, leading to the termination of the agreement and the withholding of payments related to SAD invoices. The Tribunal found that the Corporate Debtor had clearly articulated the existence of a dispute in their notice of dispute and that this dispute was not spurious, hypothetical, or illusory. Termination of Agency Agreement: The Appellant claimed that there was no documentary proof of the written termination of the Agency Agreement, which was a sine qua non for valid termination. They argued that the Respondent continued to avail services and made payments till 2014, indicating the continuation of the business relationship. The Respondent, however, provided evidence that the Agency Agreement was terminated due to the Appellant's breach, as some officials of the Appellant were arrested by the CBI for paying illegal gratification. The Tribunal noted that the termination of the Agency Agreement and the dispute over payments were well-documented and predated the demand notice. Validity of Section 9 Application: The Tribunal examined whether the Section 9 application was valid in light of the pre-existing dispute. It referred to the Mobilox judgment, which states that the Adjudicating Authority must reject a Section 9 application if there is a plausible contention of a dispute that requires further investigation. The Tribunal found that the Adjudicating Authority had correctly identified a pre-existing dispute and exercised caution in not adjudicating the legality of the termination of the Agency Agreement. The Tribunal upheld the Adjudicating Authority's decision to reject the Section 9 application, concluding that the operational debt was disputed and that the defense raised by the Corporate Debtor was not moonshine, spurious, hypothetical, or illusory. Conclusion: The appeal was dismissed, affirming the Adjudicating Authority's decision to reject the Section 9 application due to the pre-existing dispute between the parties. The Tribunal noted that the Appellant could resort to other remedies available under any other law.
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