NCLAT Sets Aside NCLT Section 9 Admission, Confirms Pre-Existing Dispute Prevents Enforcement
- REEDLAW
- 2 hours ago
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REEDLAW Legal News Network reports: In a key ruling on Section 9 of the Insolvency and Bankruptcy Code, the National Company Law Appellate Tribunal, New Delhi Bench, clarified that a Section 9 application cannot be admitted where a bona fide pre-existing dispute exists between the Corporate Debtor and Operational Creditor. The Tribunal emphasised that the Adjudicating Authority’s role is limited to assessing the plausibility of such disputes, rather than adjudicating the merits of contractual claims.
The National Company Law Appellate Tribunal, New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a Company Appeal, held that the existence of a bona fide pre-existing dispute between the Corporate Debtor and the Operational Creditor bars admission of a Section 9 application. The Bench clarified that the Adjudicating Authority is only required to examine the plausibility of the dispute, and is not mandated to resolve contractual claims or determine substantive rights.
The Appellant, a suspended director of the Corporate Debtor, challenged the order dated 18.09.2023 passed by the Adjudicating Authority (NCLT), New Delhi Bench (Court-II), which admitted a Section 9 application filed by the Operational Creditor. The Corporate Debtor was engaged in the business of online and offline examination services and had entered into a Facility Agreement with the Operational Creditor and its partner for conducting an online examination on behalf of the Indian Council of Agricultural Research (ICAR) in June 2018. Following the examinations, ICAR sought CCTV footage from multiple centres to investigate alleged mass copying. The Corporate Debtor repeatedly requested the Operational Creditor and its partner to provide the CCTV data, which was partially unavailable or deleted. Despite engagement of a third-party agency to recover the recordings, certain data could not be retrieved, leading to termination of the Corporate Debtor’s contract by ICAR on 30.07.2018. Subsequently, the Operational Creditor issued invoices and a demand notice claiming payment for services allegedly rendered, which were disputed by the Corporate Debtor on the grounds of deficiencies in service and pre-existing disputes.
The Appellant contended that the Corporate Debtor had raised a bona fide dispute regarding the quality of services provided by the Operational Creditor and its partner, including failure to provide complete CCTV footage. It was argued that the Corporate Debtor had issued a notice of dispute immediately after receiving the demand notice, highlighting deficiencies and losses incurred due to incomplete services, and thus, the Section 9 application ought to have been rejected. The Appellant further submitted that reliance on the ledger showing an alleged balance exceeding the threshold under Section 9 was misplaced, as the alleged debt was disputed.
The Operational Creditor argued that under the Facility Agreement, the Corporate Debtor was responsible for arranging backup of CCTV recordings and that there was an undisputed operational debt exceeding the statutory threshold. It was submitted that the dispute raised by the Corporate Debtor was a spurious attempt to avoid liability and that the Corporate Debtor itself had represented to the Ministry of Agriculture that the examination was conducted successfully. The Adjudicating Authority admitted the Section 9 application based on the ledger balance, observing that the Corporate Debtor had an outstanding amount exceeding Rs. 1 lakh.
The Tribunal examined the submissions and noted that the Corporate Debtor had, in fact, raised a pre-existing dispute supported by contemporaneous correspondence and documentary evidence concerning deficiencies in services by the Operational Creditor and its partner. It was held that the Adjudicating Authority exceeded its jurisdiction by entering into the merits of the dispute rather than examining whether the dispute raised was bona fide or spurious. Reliance on the Corporate Debtor’s representation to the Ministry of Agriculture was found irrelevant for determining the existence of a dispute between the parties. Applying the law laid down by the Hon’ble Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the Tribunal held that the Section 9 application could not be admitted where a pre-existing dispute existed, irrespective of the ledger balance.
Accordingly, the NCLAT allowed the appeal, set aside the order dated 18.09.2023, and rejected the Section 9 application CP (IB) No. 556 of 2020, with parties directed to bear their own costs. The core ratio of the judgment established that an operational creditor cannot invoke Section 9 of the IBC where a bona fide pre-existing dispute is shown, and the Adjudicating Authority is required to examine only the existence of a plausible dispute, not the merits of the contractual claims.
Ms. Pooja Saigal Sr. Advocate, with Mr. Milan Singh Negi, Mr. Nikhil Kumar Jha, Mr. Nivesh Dixit and Ms. Ananya Choudhary, Advocates, represented the Appellant.
Mr. Tushar Thareja, Advocate, appeared for the respondent no. 1.
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