2025 (5) TMI 44 - Tri - IBC

Maintainability of application u/s 9 of IBC - initiation of CIRP - operational debt under Section 5(21) of the Insolvency and Bankruptcy Code 2016 or not - existence of pre-existing dispute between the Operational Creditor and the Corporate Debtor prior to the issuance of the demand notice under Section 8 of the Code - HELD THAT - A mere reading of Section 5(21) of the Code expressly states the pre-requisite circumstances on the basis of which any debt can be made eligible to be operational debt . However in accordance with the information provided to the Adjudicating Authority concerning the instant application the debt that has been termed as default under Section 9 of the Code hereof cannot be considered as operational debt due to the basis of the said debt not falling under the aforementioned pre-requisite conditions. In the judgment passed by Ld. National Company Law Tribunal Indore Bench in the matter of Permali Wallace Pvt. Ltd. vs Narbada Forest Industries Pvt. Ltd. 2022 (11) TMI 1551 - NATIONAL COMPANY LAW TRIBUNAL INDORE which is of the opinion that any amount outstanding arising out a settlement agreement can be said to be operational debt in accordance with Section 5(21) of the Code. This Adjudicating Authority is of the considered view that there are disputes existing between the parties involved as admitted by the Applicant herein. As a result this Adjudicating Authority is of the considered opinion to reject the instant application on the basis of the said ground - this Adjudicating Authority is of the considered view that due to the prior existence of the dispute between the parties concerning the quality of the products the instant application cannot be admitted under Section 9 of the Code. Conclusion - i) The debt claimed does not qualify as operational debt under the Code and hence the Section 9 application is not maintainable on this ground. ii) There existed a pre-existing dispute between the parties prior to the demand notice which bars admission of the Section 9 application. iii) The application filed under Section 9 of the Code is rejected for non-compliance with the statutory requirements and due to the existence of disputes and the nature of the debt. Petition rejected.

The core legal questions considered by the Tribunal in this matter are:

1. Whether the alleged debt qualifies as an 'operational debt' under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (the Code), thus enabling initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code.

2. Whether there exists a pre-existing dispute between the Operational Creditor and the Corporate Debtor prior to the issuance of the demand notice under Section 8 of the Code, which would bar admission of the Section 9 application.

3. Whether the application filed under Section 9 of the Code is maintainable in light of the facts and circumstances, including the nature of the debt and the existence of disputes.

Issue-wise Detailed Analysis

1. Qualification of the Debt as Operational Debt under Section 5(21) of the Code

Relevant Legal Framework and Precedents: Section 5(21) of the Code defines 'operational debt' as a claim in respect of the provision of goods or services including employment or a debt payable under any law to government authorities. Section 9 of the Code allows an operational creditor to initiate CIRP only when there is a default in payment of such operational debt.

The Tribunal referred to a precedent from the National Company Law Tribunal, Indore Bench, which held that amounts arising out of settlement agreements do not qualify as operational debt. This view was upheld by the National Company Law Appellate Tribunal (NCLAT), which emphasized that the Code is not a recovery mechanism but a resolution process for insolvency, and amounts due under settlement agreements are better suited for recovery proceedings.

Court's Interpretation and Reasoning: The Tribunal observed that the debt claimed by the Applicant arose from a settlement agreement (the Second Memorandum of Understanding dated 01.06.2024) between the parties to resolve prior disputes. The debt amounting to INR 4,29,98,630/- inclusive of principal and interest was thus not a straightforward operational debt arising from supply of goods or services, but an amount agreed upon to settle disputes.

Accordingly, the Tribunal concluded that such a debt cannot be categorized as operational debt within the meaning of Section 5(21) of the Code. The Tribunal relied on the aforementioned precedents to reinforce this interpretation, emphasizing that the Code is not intended for recovery of disputed amounts settled through agreements but for insolvency resolution.

Application of Law to Facts: Since the debt arose from a settlement agreement and not from an undisputed operational transaction, the Tribunal held that the claim does not satisfy the statutory definition of operational debt necessary for initiating CIRP under Section 9.

Treatment of Competing Arguments: Although the Applicant contended that the debt was due and payable, the Tribunal gave primacy to the nature of the debt and the legal framework, dismissing the claim as operational debt. The Applicant's reliance on the dishonor of post-dated cheques and issuance of legal notices under the Negotiable Instruments Act was not sufficient to override the statutory interpretation.

Conclusion: The debt in question does not qualify as operational debt under the Code, and thus the Section 9 application is not maintainable on this ground.

2. Existence of Pre-existing Dispute Between the Parties

Relevant Legal Framework and Precedents: Section 9(5)(ii)(d) of the Code mandates rejection of an application if a dispute exists between the parties prior to the demand notice. The NCLAT has consistently held that the existence of a bona fide dispute is a valid ground for rejection of a Section 9 application. Landmark judgments cited include M/s. Sumilon Polyester Pvt. Ltd. vs M/s. Parikh Packaging Pvt. Ltd. and Mr. Umesh Saraf vs Tech India Engineers Pvt. Ltd., which emphasize that the Code is not a recovery statute and that pre-existing disputes bar insolvency proceedings.

Court's Interpretation and Reasoning: The Tribunal noted that the parties had entered into multiple correspondences and legal notices concerning disputes over work allocation and profit-sharing. The existence of the Second Memorandum of Understanding itself was a consequence of these disputes. The Tribunal observed that such disputes were clearly in existence prior to the issuance of the demand notice under Section 8 of the Code.

Key Evidence and Findings: The record revealed multiple communications, legal notices, and complaints exchanged between the parties. The Applicant admitted to the existence of disputes and the need for a second settlement agreement to resolve them.

Application of Law to Facts: Given the admitted pre-existing disputes, the Tribunal held that the application under Section 9 was not maintainable. The Code envisages CIRP only in cases of undisputed default, and the presence of a dispute negates the prerequisite condition for admission.

Treatment of Competing Arguments: The Applicant argued that the disputes were resolved by the second MoU and that the debt was due and payable. However, the Tribunal found that the existence of disputes prior to the demand notice was established and that the second MoU was itself a product of those disputes. Thus, the application could not be admitted.

Conclusion: The Tribunal concluded that the application must be rejected due to the existence of pre-existing disputes, which are fatal to the maintainability of a Section 9 application.

3. Maintainability of the Application Under Section 9 of the Code

Relevant Legal Framework and Precedents: Section 9 of the Code lays down procedural and substantive requirements for an operational creditor to initiate CIRP, including delivery of demand notice, absence of payment, and absence of dispute. The Supreme Court in Swiss Ribbon Pvt. Ltd. vs. Union of India clarified that the Code is not a recovery mechanism but a resolution process for insolvency.

Court's Interpretation and Reasoning: The Tribunal reviewed compliance with procedural requirements and found that although the demand notice was issued, the existence of dispute and the nature of the debt disqualified the application. The Tribunal emphasized that the Code's objective is to revive corporate debtors and not to serve as a tool for recovery of disputed debts.

Application of Law to Facts: The application was incomplete in the sense that it failed to meet the substantive conditions for admission under Section 9, particularly the absence of dispute and the nature of the debt.

Treatment of Competing Arguments: The Applicant's reliance on dishonored cheques and demand notices was insufficient to override the statutory bar created by the existence of disputes and the non-qualification of the debt as operational debt.

Conclusion: The application was held to be non-maintainable and was accordingly rejected.

Significant Holdings

"The debt that has been termed as 'default' under Section 9 of the Code hereof, cannot be considered as 'operational debt' due to the basis of the said debt not falling under the aforementioned pre-requisite conditions as mentioned above."

"Any amount outstanding arising out of a settlement agreement cannot be termed as operational debt within the meaning of Section 5(21) of the IBC, 2016."

"The Code is not a recovery proceeding and the Application which has been filed in the present case is only the application for recovery of balance amount of the interest and application was not filed for resolution of any insolvency of the Corporate Debtor."

"If there was a 'Dispute in existence' even before the issuance of Demand Notice under Section 8(1) of the I&B Code, the Application for initiation of Insolvency Process by an Operational Creditor can be rejected by the Adjudicating Authority."

"The Code is beneficial legislation intended to put the Corporate Debtor on its feet and it is not a mere money recovery legislation for the Creditors."

The Tribunal's final determinations were:

1. The debt claimed does not qualify as operational debt under the Code and hence the Section 9 application is not maintainable on this ground.

2. There existed a pre-existing dispute between the parties prior to the demand notice, which bars admission of the Section 9 application.

3. The application filed under Section 9 of the Code is rejected for non-compliance with the statutory requirements and due to the existence of disputes and the nature of the debt.

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