NCLAT Upholds Initiation of CIRP Despite Corporate Debtor's Claims of Pre-Existing Dispute
- REEDLAW
- Sep 8, 2024
- 2 min read
NCLAT held that the initiation of the Corporate Insolvency Resolution Process (CIRP) was valid despite the appellant's unsubstantiated claims of a pre-existing dispute.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench led by Justice Rakesh Kumar Jain (Judicial Member) and Mr. Arun Baroka (Technical Member) reviewed an appeal and observed that the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the IBC was valid despite claims of a pre-existing dispute if such claims were not substantiated with credible evidence and the debt remains undisputed and unpaid.
In the appeal filed under Section 61 of the Insolvency and Bankruptcy Code (IBC), the Appellant, a member of the suspended Board of Directors of M/s Ahuja Cotspin Private Limited, contested the decision of the Adjudicating Authority that admitted the application by Aggarwal Enterprises (Respondent No. 1) and initiated the Corporate Insolvency Resolution Process (CIRP). The Corporate Debtor, incorporated on December 6, 2010, had previously been involved in disputes with Respondent No. 1 over unpaid invoices and GST issues.
Respondent No. 1 issued invoices to the Corporate Debtor between August and September 2018, which were subsequently disputed by the Corporate Debtor due to allegations of fake invoices and a related GST scam. The Corporate Debtor ceased payments and faced GST raids in early 2019, resulting in compliance actions and payments totalling ₹20,00,000. Despite these actions, a demand notice for ₹1,91,51,792 was issued by Respondent No. 1 in May 2019, which the Corporate Debtor contested, claiming disputes over the invoices and the legitimacy of the demand notice.
The Appellant's arguments included that the Adjudicating Authority did not properly consider the GST-related dispute and that the initiation of CIRP was erroneous due to a pre-existing dispute over GST issues. Citing judgments such as Feng Ji v. Giesecke & Devrient MS India (P) Ltd., Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, and S.S. Engineers v. Hindustan Petroleum Corporation and Others, REEDLAW 2022 NCLAT Del 07549, the Appellant argued that these disputes should preclude the initiation of CIRP.
The NCLAT, however, found that the Corporate Debtor did not sufficiently demonstrate a pre-existing dispute relevant to Respondent No. 1’s claim. The GST issues were deemed between the Corporate Debtor and the GST Department rather than directly involving Respondent No. 1. The three-fold test established in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545 was applied, confirming that the debt was undisputed and actionable under Section 9 of the IBC. The Corporate Debtor's claims were found insufficient to invalidate the CIRP initiation.
Ultimately, the NCLAT upheld the Adjudicating Authority's decision, dismissing the appeal as the Corporate Debtor failed to prove a pre-existing dispute under Section 9. The order of June 12, 2024, initiating the CIRP against M/s Ahuja Cotspin Private Limited was maintained, with all related interim applications closed and no costs awarded.
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