national company law appellate tribunal

National Company Law Appellate Tribunal: A Division bench comprising of M. Venugopal,* J., and Shreesha Merla (Technical Member), held that an application filed under Section 9 of the IBC is not maintainable, when there exists any pre-existing dispute. Moreover, the Adjudicating Authority requires strict proof of ‘debt’ and ‘default’ to entertain Section 9 application.

Factual Matrix

In the present matter, the appellant-Operational Creditor gave Quotation to the respondent-Corporate Debtor with a mention of requirement of advance payment. The respondent issued the Purchase Order on 25-09-2018 under the condition that payment will be made sixty days after the invoice. The products were not supplied and consequentially the invoice was not generated. According to the appellant, the respondent was supposed to pay in advance, whereas the respondent denied any such liability. The appellant preferred an application under Section 9 of the IBC before the Adjudicating Authority for initiation of insolvency process against the Corporate Debtor, but the same was dismissed by the Adjudicating Authority vide order dated 25-05-2022 for want of debt and default on the part of the respondent. Aggrieved by the impugned order passed by the Adjudicating Authority, the appellant preferred an appeal before the NCLAT, challenging the same.

Appellant’s Contention

The appellant stated that Himachal Futuristic Communications Limited (HFCL) issued a Purchase Order in favour of the respondent, who in turn issued the Purchase Order upon the appellant. The appellant contended that the Adjudicating Authority failed to take into account that there is default on part of the Corporate Debtor and because of this default the order for Corporate Insolvency Resolution Process (CIRP) should have been passed. The appellant further contended that the terms of payment were mentioned in the Quotations and it was stated that an advance payment of was required to be paid and rest of the payment was to be done in 60 days from the date of invoice and the terms were agreed upon by both the parties. The appellant also contended that there was no pre-existing dispute to form ground for rejection of an application under Section 9 of the IBC.

Respondent’s Contention

The respondent reiterated their stand taken before the Adjudicating Authority that the application preferred by the appellant was incomplete and no invoice was raised by the appellant, therefore, no amount is payable on the part of the respondent. The respondent further contended that the payment can only be due after the invoice is confirmed as correct and the only payment due for an advance are the NRE charges and any other amount asked as an advance is contradictory to the terms of payment, moreover, the NRE amount being less than 1 Crore i.e., the ‘Threshold’, the application before the Adjudicating Authority was not-maintainable. The respondent also contended that since there is a difference in the amount demanded by the appellant and the amount payable according to the respondent, there was a clear ‘pre-existing dispute’ between the parties.

NCLAT’s Observation

The NCLAT observed that any application filed under Section 9 of the IBC requires a strict proof of ‘debt’ and ‘default’ and in case of any pre-existing dispute, the application is not maintainable.

“…an Application under Section 9 of the Code, requires a ‘strict proof’ of ‘Debt and Default’. An existence of a ‘Pre-existing Dispute’, is a bar to the initiation of the ‘Corporate Insolvency Resolution Process’, at the instance of an ‘Operational Creditor’.”

NCLAT’s Verdict

NCLAT dismissed the present appeal and held that the appellant failed to prove a default on the part of the Corporate Debtor and dismissed therefore, the order of the Adjudicating Authority had no legal frailty.

[SFO Technologies (P) Ltd. v. Vanu India (P) Ltd., 2023 SCC OnLine NCLAT 301, order dated 07-06-2023]

*Judgment by Justice M. Venugopal

Advocates who appeared in this case :

Dr. K.S. Ravichandran, Counsel for the Appellant.

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