2025 (3) TMI 391 - AT - IBC

Dismissal of Application filed under Section 9 of the IBC seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor erroneously on the ground of pre-existing disputes - whether pre-existing dispute exists or not basis which the Section 9 Petition was rejected? - HELD THAT - Disputes regarding the outstanding amount claimed by the Appellant existed even before the statutory Demand Notice was issued. These disputes are genuine and substantial rather than being spurious hypothetical or illusory. Section 8(2)(a) of the IBC 2016 stipulates that a Corporate Debtor must within ten days of receiving a Demand Notice or invoice under Section 8(1) inform the Operational Creditor of the existence of a dispute if any or provide a record of any pending suit or arbitration proceedings initiated before the receipt of such Notice or invoice in relation to the dispute. In the present case the Corporate Debtor has complied with this requirement. Further the Adjudicating Authority in line with the provisions of Section 9(5)(i)(d) of the Code and relying on established legal precedents has concluded that the Corporate Debtor cannot be admitted into insolvency. Upon reviewing the facts of the present case it is evident that disputes and conflicts existed regarding the alleged outstanding amount claimed by the Applicant even before the issuance of the statutory Demand Notice and the filing of the present Application. These disputes specifically pertain to the invoices raised by the Applicant/Operational Creditor. A pre-existing dispute is apparent as the invoices do not align with the agreed schedule of fees. Additionally the discrepancies in these invoices remain unaddressed despite prior communications highlighting the inconsistencies. The issue relating to limitation has not been gone into as all the details of the bills has not been placed on record. Moreover since pre-existing dispute has been clearly established in the facts of the case it is not required to go into any further issue. Conclusion - A pre-existing dispute existed between the parties as evidenced by the Respondent s objections to the invoices and the Appellant s subsequent actions. Appeal dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment was whether there existed a "pre-existing dispute" between the Operational Creditor (Appellant) and the Corporate Debtor (Respondent) that justified the dismissal of the Appellant's Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal also examined the validity of the invoices and whether the Respondent's objections to these invoices constituted a genuine dispute.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework revolves around Section 9 of the IBC, which allows an Operational Creditor to initiate a Corporate Insolvency Resolution Process (CIRP) against a Corporate Debtor upon the occurrence of a default. Section 8 of the IBC mandates that a Demand Notice be served to the Corporate Debtor, who must respond within ten days, either by paying the debt or by notifying the existence of a dispute. The Tribunal relied on precedents such as Mobilox Innovations Private Limited vs Kirusa Software Private Limited and Sabarmati Gas Limited vs. Shah Alloys Limited, which establish that the existence of a genuine dispute precludes the initiation of CIRP.

Court's Interpretation and Reasoning

The Tribunal interpreted the term "pre-existing dispute" to mean any genuine and substantial disagreement over the debt claimed by the Operational Creditor, existing prior to the issuance of the Demand Notice. It emphasized that the dispute should not be spurious, hypothetical, or illusory. The Tribunal found that the Respondent had raised valid concerns regarding the accuracy and validity of the invoices, which were based on the Appellant's own fee structure rather than the agreed schedule of fees.

Key Evidence and Findings

The Tribunal noted that the Respondent had, in its Reply dated 18.01.2019, specifically challenged the invoices issued by the Appellant, citing discrepancies in the fee structure and the need for additional supporting documents. The Appellant's subsequent withdrawal and reissuance of the Demand Notice with a reduced claim further indicated the existence of a dispute. Additionally, the Appellant's decision to file a Writ Petition before the High Court of Delhi seeking payment of the invoices, and the acknowledgment of a sum of Rs 5,00,000/- as payable during discussions, underscored the presence of unresolved issues.

Application of Law to Facts

Applying the legal principles from the aforementioned precedents, the Tribunal concluded that the Respondent had successfully demonstrated the existence of a pre-existing dispute. The discrepancies in the invoices, the Respondent's objections, and the Appellant's actions collectively indicated that the debt was not undisputed. Therefore, the conditions for initiating CIRP under Section 9 of the IBC were not met.

Treatment of Competing Arguments

The Tribunal carefully considered the arguments from both parties. The Appellant argued that the Respondent's failure to pay the invoices amounted to a default. However, the Tribunal found merit in the Respondent's contention that the invoices were disputed due to inconsistencies with the agreed fee schedule and the lack of necessary supporting documents. The Tribunal also noted that the Appellant's reliance on the High Court's acknowledgment of a payable sum did not negate the existence of a broader dispute.

Conclusions

The Tribunal concluded that the existence of a pre-existing dispute, as demonstrated by the Respondent, precluded the admission of the Appellant's Application under Section 9 of the IBC. The discrepancies in the invoices and the Respondent's objections were genuine and substantial, warranting the dismissal of the Application.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the parties."

Core Principles Established

The Tribunal reaffirmed the principle that the existence of a genuine and substantial dispute, rather than a spurious or illusory one, is sufficient to prevent the initiation of CIRP under Section 9 of the IBC. It emphasized the need for the dispute to be plausible and requiring further investigation, rather than merely being a feeble legal argument.

Final Determinations on Each Issue

The Tribunal determined that a pre-existing dispute existed between the parties, as evidenced by the Respondent's objections to the invoices and the Appellant's subsequent actions. Consequently, the Tribunal upheld the Adjudicating Authority's decision to dismiss the Section 9 Application, thereby preventing the initiation of CIRP against the Corporate Debtor.