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The Corporate Debtor's Reply to the Demand Notice Clearly Indicates the Substantial Disputes Between Parties



The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra and Arun Baroka (Technical Members) was hearing an appeal and observed that the Adjudicating Authority had erred in concluding that there was no substantial dispute.


The NCLAT bench noted that the corporate debtor's reply to the demand notice clearly indicated issues beyond what was mentioned in the notice. The Authority had overlooked the pre-existing dispute regarding faulty cables and other materials, as evidenced by the correspondence between the parties. The Appellate Tribunal reversed the order of the Adjudicating Authority to admit the Section 9 Application.


In the case of Company Appeal (AT) (Insolvency) No. 22 of 2024, the NCLAT considered an appeal against the Adjudicating Authority's decision to admit a Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant, a suspended director of 'Dhanlaxmi Electricals Private Limited,' challenged the admission of the application filed by the operational creditor.


The operational creditor supplied wires and cables to the corporate debtor and raised invoices from 29.09.2019 to 06.10.2019. The corporate debtor disputed the invoices, citing issues with the quality and quantity of the materials supplied. In response to a demand notice issued on 25.08.2021 claiming Rs. 2,85,20,800/-, the corporate debtor disputed the claim and issued debit notes for faulty cables and non-supply of materials.


Despite the reply, the operational creditor did not immediately file a Section 9 application. The corporate debtor made a partial payment of Rs. 61 Lakhs between 30.08.2021 to 31.03.2022. However, the Adjudicating Authority admitted the Section 9 Application ex parte on 06.12.2023.


The appellant argued that there was a pre-existing dispute between the parties, and the application should not have been admitted. The operational creditor contended that the reply to the demand notice was a frivolous attempt to avoid liability, as the corporate debtor had acknowledged the amount due in an email dated 04.08.2021.


The Appellate Tribunal examined the statutory scheme under Sections 8 and 9 of the IBC, noting that the reply to the demand notice could be considered as a notice of dispute. Despite the corporate debtor's arguments, the Tribunal upheld the order admitting the Section 9 Application, finding the notice of dispute invalid and allowing the operational creditor to initiate insolvency proceedings.


In its decision, the NCLAT referred to a Supreme Court judgment emphasizing that for an operational creditor to trigger the Corporate Insolvency Resolution Process (CIRP) under the IBC, there must be an undisputed debt and a default in payment. If the debt is disputed, the application for CIRP initiation must be dismissed.


The NCLAT found that the corporate debtor had raised substantial disputes regarding the quality of cables supplied by the operational creditor, leading to financial losses. The corporate debtor had also issued debit notes for specific amounts related to the faulty cables and non-supply of other materials.


The NCLAT observed that the Adjudicating Authority had erred in concluding that there was no substantial dispute, as the corporate debtor's reply to the demand notice clearly indicated issues beyond what was mentioned in the notice. The Authority had overlooked the pre-existing dispute regarding faulty cables and other materials, as evidenced by the correspondence between the parties.


Based on these findings, the NCLAT allowed the appeal, set aside the Adjudicating Authority's order, and dismissed the Section 9 application filed by the operational creditor. The NCLAT also directed the payment of fees and expenses to the Insolvency Resolution Professional (IRP) as fixed by the Adjudicating Authority, to be borne by the operational creditor.





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