Section 9 insolvency plea cannot be rejected when disputed claim is not raised prior to demand notice: NCLAT

The National Company Law Appellate Tribunal has held that existence of a ‘disputed claim’ cannot be a ground to reject an application under Section 9 of the Insolvency and Bankruptcy Code 2016 (hereinafter referred as the Code), if the dispute was not raised prior to the issuance of demand notice under Section 8(1).

The above reasoning was pronounced by the NCLAT in the matter of Ahluwalia Contracts (India) Ltd. vs. Raheja Developers Ltd. (C.A(AT) (Insolvency) No. 703/2018) decided on 23.07.2019.

Challenge

The Appellant had filed an application under Section 9 IBC against Corporate Debtor, Raheja Developers Limited (Respondent).

The National Company Law Tribunal, New Delhi (Adjudicating Authority) rejected the application on the ground that the claim of the Appellant fell within the ambit of ‘disputed claim’ and arbitration proceedings in respect of the same had been initiated.

The Appellant submitted that as on date of issuance of demand notice under Section 8(1), no arbitration proceeding was initiated or pending and that the arbitration proceeding was filed by the Respondent only after receipt of the demand notice.

Held

The Appellate Tribunal observed that the claim amount raised by the Appellant was a disputed claim and it was ‘always open’ to the Respondent/Corporate Debtor to point out the pre-existence of such dispute. However, it is to be shown that the dispute was raised prior to the issuance of demand notice under Section 8(1) of the Code.

Relying on the Supreme Court’s decision in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software (P) Limited (2017 1 SCC Online SC 353), the Appellate Tribunal stated that the existence of dispute must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice. If it comes to the notice of the Adjudicating Authority that the operational debt is exceeding Rs. 1 lakh and the application shows that the aforesaid debt is due and payable and has not been paid, in such case, in absence of any existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt, the application under Section 9 cannot be rejected and is required to be admitted.

The Appellate Tribunal also perused the Supreme Court’s decision in Innoventive Industries Ltd. v. ICICI Bank and Anr [2018 (1) SCC407] and observed that a ‘claim’ means a right to payment even if it is disputed.

The Appellate Tribunal also observed that it was not in dispute that the arbitration proceeding was initiated by the Respondent after about one month from the date of issuance of demand notice under Section 8(1). Hence, the Respondent cannot rely on the arbitration proceeding to suggest a pre-existing dispute.

Therefore, since the Respondent had defaulted in payment of more than Rs. 1 Lakh and there was no pre-existing dispute, the Appellate Tribunal held that the application under Section 9 preferred by the Appellant was fit to be admitted.