2025 (7) TMI 708 - AT - IBC

Rejection of section 9 application - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of genuine pre-existing dispute surrounding the debt claimed by the Operational Creditor to be due and payable to them by the Corporate Debtor or not - civil suit could be treated as pre-existing dispute or not - demand notice already sent - HELD THAT - It is an undisputed fact that the Operational Creditor had initially sent a Demand Notice on 12.02.2019 to the Corporate Debtor. This demand notice was purportedly despatched by the Appellant by speed post on the same date. On looking at the material placed on record it is clear that the first Demand Notice was however received by the Corporate Debtor only on 16.02.2019 as evident from the Tracking Report placed at page 118 of Appeal Paper Book (APB). More significantly the first demand notice was admittedly withdrawn by the Operational Creditor on grounds of typographical error in that they had failed to take into account certain payments already received by them from the Corporate Debtor. The demand notice of 12.02.2019 under Section 8 of the IBC was withdrawn it is now to be alalysed whether the second demand notice of 25.04.2019 can be held to be in continuation of the first demand notice or a fresh notice. It is found that that the second demand notice itself mentions of being a fresh notice . The second demand notice also nowhere mentions that it was a continuation of the first demand notice. In such circumstances there is force in the contention of the Corporate Debtor that the first demand notice having been withdrawn stood abandoned. On looking at the ground cited by the Appellant behind the revision of the first demand notice it was claimed to have been actuated by clerical/typographical errors. However the ground of clerical error lacks credence as we find that there were substantial changes in the second demand notice from the first demand notice with regard to amounts of default date of default date on which last payments was received etc. The Adjudicating Authority in paragraphs 12 and 13 of the impugned order has belaboured in outlining the modified particulars which has already been extracted at para 13 above. The second demand notice was clearly a novated demand notice with particulars of debt and default and date of default being at variance from the first demand notice. Hence the Adjudicating Authority did not commit any infirmity in adjudicating on the pre-existence of disputes from the perspective of the date of the issue of the fresh second demand notice. Whether the civil suit qualified as a pre-existing dispute? - HELD THAT - It is a well settled proposition of law that for a pre-existing dispute to be a ground to nullify an application under Section 9 the dispute raised must be truly existing at the time of filing a reply to notice of demand as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application. In the present case the pre-existing dispute has been predicated on civil suit dated 16.04.2019. This civil suit was also highlighted in the Notice of dispute of the Corporate Debtor in response to the second demand notice. There are no doubts in mind therefore that the civil suit had been filed prior to the issue of second Section 8 Demand Notice on 25.04.2019 and was a pre-existing dispute and therefore there is no infirmity committed by the Adjudicating Authority in treating the civil suit to be a pre-existing dispute. It is well settled that a Section 9 application filed by an Operational Creditor cannot be sustained in case there is evidence of existence of dispute and if such disputes have been communicated to the Operational Creditor before the receipt of Section 8 notice as has happened in the present case. In the present case the contract termination notice and civil suit had both preceded the date of issue of Section 8 demand notice on 25.04.2019 - a dispute already existed between the parties which constituted sufficient ground for rejection of a Section 9 application. In the face of such pre-existing disputes the Adjudicating Authority had not committed any error in rejecting the Section 9 application. It is misconstrued on the part of the Appellant to contend that that the impugned order is contrary to the Mobilox judgement 2017 (9) TMI 1270 - SUPREME COURT . The Adjudicating Authority did not commit any error in returning this finding of pre-existing disputes keeping in mind that IBC bestows only summary jurisdiction upon the Adjudicating Authority. Once plausibility of a pre-existing dispute is noticed it is not required of the Adjudicating Authority to make further detailed investigation. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court. It is well settled that in a Section 9 proceeding the Adjudicating Authority is not to enter into final adjudication with regard to existence of dispute between the parties regarding the operational debt. Conclusion - There was no requirement for the Adjudicating Authority in the present case to go under the skin of dispute and therefore the Adjudicating Authority rightly held that the Section 9 application was not maintainable in the present factual matrix. The Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant - there are no good reasons to disagree with the findings of the Adjudicating Authority - There is no merit in the Appeal - appeal dismissed.

Summary

The core legal questions considered by the Tribunal in this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") were:

1. Whether the Section 9 application filed by the Operational Creditor was maintainable in the face of alleged pre-existing disputes between the parties.

2. Whether the civil suit filed by the Corporate Debtor prior to the second demand notice could be treated as a pre-existing dispute under Section 8(2)(a) of the IBC.

3. Whether the first demand notice issued under Section 8 of the IBC, which was subsequently withdrawn and replaced by a second demand notice, could be treated as a valid initial demand notice for the purpose of determining the timeline and existence of disputes.

4. The legal effect of the withdrawal of the first demand notice and issuance of a fresh demand notice on the maintainability of the Section 9 application.

5. Whether the Adjudicating Authority erred in rejecting the Section 9 application on the ground of pre-existing dispute, particularly in light of the Supreme Court's ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.

Issue-wise Detailed Analysis

1. Maintainability of Section 9 Application in the Presence of Pre-existing Disputes

The Tribunal examined the statutory framework under Sections 8 and 9 of the IBC, which mandates that an Operational Creditor issue a demand notice upon default and that the Corporate Debtor must communicate any dispute within 10 days of receipt of such notice. The existence of a pre-existing dispute is a valid ground for rejection of a Section 9 application.

The Tribunal noted that the Corporate Debtor had raised disputes through a civil suit, termination of contract, and various communications prior to the issuance of the second demand notice. The Adjudicating Authority had relied on these facts to conclude that a genuine dispute existed, which was pre-existing as of the date of the second demand notice.

Relevant precedents such as the Supreme Court's decision in Mobilox Innovations were considered, which emphasize that a dispute must exist prior to the receipt of the demand notice to be considered pre-existing. The Tribunal analyzed the timeline of events to determine whether the dispute predated the demand notice.

The Tribunal found that the civil suit was filed on 16.04.2019, before the second demand notice dated 25.04.2019, and the contract termination occurred on 14.02.2019, also before the second demand notice. Additionally, multiple emails evidencing disputes over quality, quantity, delay, and billing were exchanged prior to the second demand notice.

Applying the law to the facts, the Tribunal held that these circumstances established the existence of a pre-existing dispute, justifying the rejection of the Section 9 application.

2. Legal Effect of Withdrawal of First Demand Notice and Issuance of Second Demand Notice

The Appellant contended that the first demand notice dated 12.02.2019 was valid and predated the civil suit, and that the second demand notice dated 25.04.2019 was merely a corrected continuation of the first, relating back to the original date. They argued that the civil suit filed after the first notice could not be a pre-existing dispute.

The Corporate Debtor countered that the first demand notice was withdrawn and abandoned, and the second demand notice was a fresh notice issued after the civil suit was filed.

The Tribunal examined the language of the second demand notice, which explicitly described itself as a "fresh demand notice" issued due to an "inadvertent error" in the first. The Tribunal observed substantial differences between the two notices in amounts claimed, dates of default, and last payment received, indicating that the second notice was not a mere correction but a novation.

The Tribunal distinguished the present facts from the precedent relied upon by the Appellant, where a second notice was issued purely on technical grounds without modification of particulars. Here, the second notice was a fresh notice, not a continuation of the first.

Consequently, the Tribunal held that the first demand notice was effectively abandoned, and the second demand notice was the operative notice for determining the timeline of disputes. Since the civil suit and contract termination predated the second demand notice, the pre-existing dispute stood established.

3. Nature and Timing of Disputes Raised by the Corporate Debtor

The Tribunal analyzed the evidence submitted by the Corporate Debtor, including the civil suit, contract termination notice, and a series of emails exchanged over a period starting from mid-2017 through late 2018. These communications revealed disputes regarding delays, quality, quantity, inflated billing, abandonment of work, and introduction of new commercial terms beyond the Letter of Intent.

The Tribunal noted that despite these disputes, the Corporate Debtor continued to make payments on running account bills 1 to 18, which demonstrated a complex commercial relationship but did not negate the existence of disputes.

Applying the law, the Tribunal observed that the existence of such disputes prior to the second demand notice satisfied the requirement under Section 8(2)(a) of the IBC for a pre-existing dispute, which bars the maintainability of a Section 9 application.

4. Interpretation of the Adjudicating Authority's Role and Jurisdiction

The Tribunal reaffirmed the settled principle that the Adjudicating Authority under the IBC exercises summary jurisdiction and is not required to conduct a detailed inquiry into the merits of disputes. It suffices that the dispute is plausible and requires adjudication by a competent civil court.

The Tribunal agreed with the Adjudicating Authority's approach in not delving deeply into the substance of the disputes but focusing on the existence of a genuine dispute communicated before or at the time of the demand notice.

Thus, the Tribunal found no error in the Adjudicating Authority's rejection of the Section 9 application on the ground of pre-existing dispute.

5. Applicability of Mobilox Innovations Judgment

The Appellant relied heavily on the Supreme Court's ruling in Mobilox Innovations, which held that a dispute must exist prior to the receipt of the demand notice to be considered pre-existing. The Appellant argued that since the civil suit was filed after the first demand notice, the dispute could not be pre-existing.

The Tribunal clarified that the operative demand notice for the present case was the second demand notice, which was issued after the civil suit. Therefore, the Mobilox principle was correctly applied by the Adjudicating Authority in holding that the civil suit was a pre-existing dispute.

Conclusions on Issues

1. The Section 9 application was rightly rejected due to existence of a genuine pre-existing dispute, evidenced by the civil suit, contract termination, and numerous documented disputes predating the operative demand notice.

2. The first demand notice was withdrawn and abandoned, and the second demand notice was a fresh notice, not a continuation, thus the timeline for assessing pre-existing disputes commenced from the second notice date.

3. The Adjudicating Authority correctly applied the principles governing pre-existing disputes under the IBC and did not err in rejecting the Section 9 application.

Significant Holdings

"The intention of the Operational Creditor is quite clear that it intended to issue a fresh demand notice with modified particulars and the fresh notice (dated 25 April, 2019) was not intended to be in continuation of the previous one, i.e. 12 February, 2019. Hence, previous erroneous notice dated 12 February, 2019 should be ignored and the fresh notice u/s 8 dated 25 April, 2019 should be taken into account, and it is evident that before it could be served the civil suit already stood filed on 06 April, 2019."

"It is well settled that a Section 9 application filed by an Operational Creditor cannot be sustained in case there is evidence of existence of dispute and if such disputes have been communicated to the Operational Creditor before the receipt of Section 8 notice as has happened in the present case."

"Once plausibility of a pre-existing dispute is noticed, it is not required of the Adjudicating Authority to make further detailed investigation. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court."

"The Adjudicating Authority rightly held that the Section 9 application was not maintainable in the present factual matrix."