NCLAT Sets Aside Section 9 Admission Due to Pre-Existing Dispute Under Facility Agreement: Upholds Mobilox Principle

The NCLAT set aside the admission of a Section 9 application under the IBC, holding that the existence of a pre-existing dispute under the Facility Agreement barred insolvency proceedings, in line with the principles laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, while adjudicating a company appeal, held that a Section 9 application under the IBC cannot be admitted when there exists a genuine and pre-existing dispute between the parties, as evidenced by prior correspondence, termination of contract, and counterclaims; mere reconciliation efforts or unilateral demand notices do not negate such disputes, in line with the Supreme Court's ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.

The National Company Law Appellate Tribunal (NCLAT) allowed an appeal filed by the suspended director of Sahara Hospitality Limited, setting aside the admission of a Section 9 application by the NCLT Mumbai Bench. The operational creditor, KTR Management Services Pvt. Ltd., had filed the application based on unpaid dues under a Facility Agreement dated 01.04.2018 for manpower supply services at a hotel. The corporate debtor had consistently disputed the claim, citing deficiencies in service, and had terminated the agreement on 26.12.2019. A counterclaim of ₹10 Crores was also raised by the corporate debtor.

Prior to the demand notice under Section 8 of the Insolvency and Bankruptcy Code (IBC) issued on 03.01.2020, the corporate debtor had already responded to earlier legal notices, including one dated 01.07.2019, and had categorically outlined disputes via email and written replies. In its reply to the demand notice dated 28.01.2020, the corporate debtor reiterated the existence of a genuine, bona fide, and pre-existing dispute, referred to prior correspondence, financial counterclaims, deficiencies in service, and the arbitration clause under the Facility Agreement.

The Adjudicating Authority had brushed aside these submissions, relying instead on the reconciliation meeting dated 16.10.2019. However, the NCLAT noted that the reconciliation attempt preceded the termination of the contract and the demand notice, and could not override the record of prolonged disputes.

Relying on the Supreme Court’s precedent in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the NCLAT held that the corporate debtor had issued a valid notice of dispute within the meaning of Section 9(5)(d) of the IBC, and the application under Section 9 was thus not maintainable. The Tribunal emphasised that insolvency proceedings cannot be used as a recovery mechanism where there exists a substantial pre-existing dispute.

Accordingly, the NCLAT allowed the appeal, quashed the NCLT's admission order dated 21.11.2024, and rejected the Section 9 application. It directed the refund of the deposit made pursuant to interim orders and allowed the operational creditor to pursue other remedies under the Facility Agreement. The appellant also agreed to pay the IRP’s fees and expenses within one month upon submission of supporting documents.

Shri Krishnendu Datta, Sr. Advocate, with Mr. Sandeep Bajaj, Mr. Mayank Biyani, Ms. Alina Marin Mathew, Advocates, represented the Appellant.

Mr. Rahul Chitnis, Ms. Shwetal Shepal and Mr. Preshit Surshe, Advocates, appeared for the Respondent No. 1.

Mr. Ganesh Ramani, Advocate, appeared for the IRP.

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