2025 (6) TMI 1823 - AT - IBC

Rejection of application under Section 9 of I B Code - Finacial Debt or not - material concealment of material fact - existence of pre-existing dispute - Pendency of writ petitions challenging the award - HELD THAT - This Appellate Tribunal is of the view that in the courts of law when a party approaches for adjudication of his grievances or to press any of its legally enforceable rights it is expected to approach the Court/Tribunals with clean hand in the instant case there have been Concealment of material fact firstly to the effect that the basis of demand dated 05.05.2021 was the award of MSEFC Bhopal dated 16.04.2018 secondly that there had been a concealment of the fact that a Writ Petition as against the said award being Writ Petition (C) No. 25454/2018 was pending consideration before the Honourable Kerala High Court. Thirdly as there is this averment of the Appellant in the application under Section 9 of I B Code that the Demand Notice of 05.05.2021 was not denied which itself was contrary to the records because the reply was submitted by the Corporate Debtor to the Demand Notice under Section 8 on 28.05.2021 denying the liability on the ground of a pre-existing dispute and the reply was part of the records of Appellant. Therefore the Tribunal on these grounds declined to entertain the Section 9 Application since the very basis of proceeding was based upon a false averment and upon material concealment of vital fact holding thereof that no equity was available for the Appellant. The said view taken by the Tribunal does not suffer from any apparent error for the reason being that time and again various Honourable High Courts of the country have held that the party to a proceedings has to approach before a court of law by disclosing all facts which may bearing on the adjudication. The Honourable Apex Court in Ramjas Foundation and Another Vs. Union of India Ors. 2010 (11) TMI 936 - SUPREME COURT has observed that a person who approaches the judicial forum for adjudication of his rights has to approach it with clean hands and if there is a material concealment of fact or facts which has got a vital bearing on the merits of the matter he is not even supposed to be heard. Conclusion - In view of the fact that the entire proceedings under Section 9 of I B Code as initiated by the Appellant was based upon a material concealment of fact in addition to there being evidence of pre-existing disputes the application preferred under Section 9 of I B Code was rightly rejected by the Tribunal which does not call for any interference. Appeal dismissed.

Summary

The principal issues considered in this appeal revolve around the maintainability of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("I&B Code") filed by an Operational Creditor against a Corporate Debtor. The core legal questions addressed include:

1. Whether the Operational Creditor was justified in initiating proceedings under Section 9 of the I&B Code based on an award passed by the Micro and Small Enterprises Facilitation Council (MSEFC), despite the pendency of writ petitions challenging the award and related matters.

2. Whether there was a pre-existing dispute between the parties that precluded the initiation of insolvency proceedings under Section 9.

3. Whether the Operational Creditor approached the Tribunal with clean hands, particularly in light of alleged concealment of material facts including the pendency of writ petitions and the Corporate Debtor's reply to the demand notice.

4. The legal effect of concealment or suppression of material facts on the maintainability of proceedings under the I&B Code.

Issue-wise Detailed Analysis:

1. Justification for Initiation of Section 9 Proceedings Based on MSEFC Award

The Operational Creditor contended that it had supplied drugs and medicines pursuant to tenders awarded by the Corporate Debtor and that the Corporate Debtor had acknowledged receipt of goods without raising quality objections during the subsistence of the contracts. The Operational Creditor relied on an award dated 16.04.2018 passed by the MSEFC, which directed the Corporate Debtor to pay Rs. 2,12,48,146.48 inclusive of principal and interest. The Operational Creditor issued demand notices under Section 8 of the I&B Code based on this award, and upon non-payment, initiated proceedings under Section 9.

The Corporate Debtor, however, challenged the award by filing writ petitions before the Kerala High Court, contending that the award was sub judice and that there existed disputes regarding quality of goods and blacklisting of the Operational Creditor. The Corporate Debtor also replied to the demand notice denying liability on the ground of pre-existing disputes.

The Tribunal noted that the pendency of writ petitions challenging the award and related matters constituted a pre-existing dispute, which was material to the determination of the debt. The Court recognized that the MSEFC award was not accorded finality due to ongoing judicial scrutiny, and therefore, the Operational Creditor could not treat the award as conclusive proof of financial debt for initiating insolvency proceedings.

2. Existence of Pre-existing Dispute

The Tribunal found that the Corporate Debtor had raised quality issues for the first time during the MSEFC proceedings and had challenged the award via writ petitions. Additionally, the Corporate Debtor had replied to the demand notice denying the debt on the basis of these disputes. The Tribunal held that such disputes were pre-existing and genuine, which under the settled legal framework, preclude the initiation of insolvency proceedings under Section 9.

The Court applied the principle that insolvency proceedings cannot be initiated where there is a bona fide dispute existing prior to the issuance of the demand notice. The Tribunal's approach aligns with the established jurisprudence that the existence of a pre-existing dispute is a bar to insolvency proceedings.

3. Concealment of Material Facts and Clean Hands Doctrine

The Tribunal observed that the Operational Creditor had concealed vital facts in its pleadings and affidavits, such as:

• The pendency of writ petitions challenging the MSEFC award and the blacklisting order.
• The fact that the Corporate Debtor had replied to the demand notice denying liability.
• The Operational Creditor's false averment that the demand notice was neither replied to nor disputed.

These concealments were deemed material because they directly impacted the maintainability of the Section 9 application. The Tribunal emphasized the principle that a party approaching the Court or Tribunal must do so with clean hands, disclosing all facts material to the adjudication.

The Court relied on authoritative precedents, including a leading judgment which held that "every Court is not only entitled but is duty bound to protect itself from unscrupulous litigants who do not have any respect for truth and who try to pollute the stream of justice by resorting to falsehood or by making misstatement or by suppressing facts which have bearing on adjudication of the issue(s) arising in the case."

The Tribunal's reliance on this principle led to the conclusion that the Operational Creditor's application was barred by its own conduct, as it had failed to disclose material facts and had made false averments.

4. Application of Law to Facts and Treatment of Competing Arguments

The Operational Creditor argued that since no interim order was in place in the writ petitions, the award should be treated as final and the debt as due, justifying the initiation of Section 9 proceedings. The Tribunal rejected this argument, holding that the pendency of writ petitions challenging the award rendered the debt disputed.

Furthermore, the Operational Creditor contended that the writ petition challenging the blacklisting order had no bearing on the Section 9 proceedings. The Tribunal found that since the blacklisting was based on allegations of supply of sub-standard goods, which was a core dispute between the parties, it was relevant and material to the question of debt and liability.

On the issue of concealment, the Tribunal noted that the Operational Creditor had itself produced the Corporate Debtor's reply to the demand notice, which contradicted the assertion that the notice was not replied to or disputed. The Tribunal treated this as a deliberate concealment and misrepresentation, which vitiated the proceedings.

5. Conclusions

The Tribunal concluded that:

• The existence of pre-existing disputes, including challenges to the MSEFC award and blacklisting, barred the initiation of insolvency proceedings under Section 9.
• The Operational Creditor's failure to disclose material facts and false averments constituted a breach of the clean hands doctrine, disentitling it from relief.
• The Tribunal's rejection of the Section 9 application on these grounds was justified and did not suffer from any error warranting interference.

Significant Holdings:

"The principle that a person who does not come to the Court with clean hands is not entitled to be heard on the merits of his grievance and, in any case, such person is not entitled to any relief is applicable not only to the petitions filed under Articles 32, 226 and 136 of the Constitution but also to the cases instituted in other courts and judicial forums."

"Every Court is not only entitled but is duty bound to protect itself from unscrupulous litigants who do not have any respect for truth and who try to pollute the stream of justice by resorting to falsehood or by making misstatement or by suppressing facts which have bearing on adjudication of the issue(s) arising in the case."

"When an applicant comes to the Court to obtain relief on an ex parte statement he should make a full and fair disclosure of all the material facts - facts, not law... The penalty by which the Court enforces that obligation is that if it finds out that the facts have not been fully and fairly stated to it, the Court will set aside any action which it has taken on the faith of the imperfect statement."

"In view of the fact that the entire proceedings under Section 9 of I & B Code, as initiated by the Appellant was based upon a material concealment of fact in addition to there being evidence of pre-existing disputes, the application preferred under Section 9 of I & B Code, was rightly rejected by the Tribunal which does not call for any interference."