NCLAT held that a pre-existing dispute evidenced through prior communications barred the initiation of CIRP under Section 9 of the IBC.
On 05-03-2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Arun Baroka, dismissed an appeal, holding that a Section 9 application under the IBC must be rejected if a pre-existing dispute is evidenced through prior communications, including objections to invoices, demands for supporting documents, or legal proceedings. Relying on the Supreme Court's ruling in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the Tribunal reiterated that an operational creditor cannot initiate a CIRP where substantial disputes regarding the existence or quantum of debt were raised before the issuance of the statutory demand notice.
The National Company Law Appellate Tribunal (NCLAT) adjudicated an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 (IBC), challenging the Final Order dated 26.07.2024, wherein the Adjudicating Authority dismissed an application under Section 9 of the IBC seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, State Trading Corporation of India Ltd., on the ground of pre-existing disputes. The Appellant, a senior advocate, contended that the Respondent had defaulted in payment of professional fees amounting to Rs 6,26,90,985/-, comprising a principal sum of Rs 3,93,55,110/- and interest of Rs 2,33,35,875/-. Despite multiple communications and acknowledgments of liability by the Respondent, the outstanding dues remained unpaid, leading to the issuance of a Demand Notice under Section 8 of the IBC on 26.07.2019, followed by a Section 9 application before the NCLT on 16.12.2019.
The Respondent opposed the application, arguing that an advocate, particularly a senior advocate, should not invoke Section 9 of the IBC against a client, as such proceedings could force a client into insolvency, violating professional ethics. Additionally, the Respondent contended that the Appellant had already approached the Delhi High Court through Writ Petition (C) No. 6146/2022, seeking processing and payment of invoices, implying that the alleged debt was yet to be determined. The Respondent further argued that the claim was time-barred concerning invoices raised between 2006 and 2015, as per the Supreme Court's ruling in B.K. Educational Services Private Limited v. Parag Gupta and Associates, REEDLAW 2018 SC 10542. Moreover, disputes regarding the accuracy of invoices were raised prior to the Demand Notice, and discrepancies in the claimed amounts demonstrated the existence of a genuine pre-existing dispute, making the Section 9 petition untenable under the Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545 precedent.
Upon review, the Tribunal found that the Appellant had initially issued a Demand Notice on 08.01.2019, seeking Rs 6,48,17,455/-, which was contested by the Respondent in its Reply dated 18.01.2019. Following the withdrawal of the first notice due to calculation errors, a revised Demand Notice was issued on 26.07.2019, reducing the claim to Rs 6,26,90,985/-. The Tribunal noted that disputes over outstanding fees had been raised as early as 2017, with the Respondent consistently contesting the validity and quantum of invoices. Furthermore, the Appellant had simultaneously sought relief before the Delhi High Court, further demonstrating that the alleged debt was not undisputed. The Tribunal observed that under Section 8(2)(a) of the IBC, a Corporate Debtor is required to notify an Operational Creditor of an existing dispute within ten days of receiving a Demand Notice, a requirement duly met by the Respondent. Consequently, applying the principles laid down in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545 and Sabarmati Gas Limited v. Shah Alloys Limited, REEDLAW 2023 SC 01537, the Tribunal concluded that a valid pre-existing dispute existed, rendering the Section 9 application non-maintainable. Accordingly, the Appeal was dismissed, and the Adjudicating Authority's Order dated 26.07.2024 was upheld.
Ms. Stuti Jain and Mr. Akshu Jain, Advocates, represented the Appellant along with Mr. D.R. Choudhuri, Appellant in Person.
Mr. Uday Gupta, Sr. Advocate, with Ms. Shivani Lal, Mr. Hiren Dasan, Mr. Sanam Singh, Mr. Unmukt Gera and Mr. Ajay Sharma, Advocates, appeared for the Respondent.
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