Introduction:

Brand Realty Services Ltd. being the Operational Creditor ("Appellants / Operational Creditor") filed an Appeal1 before the Hon'ble National Company Law Appellate Tribunal, Delhi ("NCLAT") challenging the order passed by the National Company Law Tribunal, New Delhi ("NCLT") thereby rejecting the application filed under Section 9 of Insolvency and Bankruptcy Code, 2016 ("IBC") against M/s. Sir John Bakeries India Pvt. Ltd. ("Corporate Debtor").

Facts:

  1. The Appellant was a consultant investor with the Corporate Debtor and they entered into an Agreement dated 28th November 2014 which was further ratified into an Account Settlement Agreement dated 15th June 2018. However, the Corporate Debtor failed to honour the Settlement Agreement and lapsed in making payments to Operational Creditor. Upon which, the Operational Creditor issued a Demand Notice dated 30th April 2019 ("Demand Notice") which was delivered to the Corporate Debtor on 04th May 2019. The Corporate Debtor replied to the said Demand Notice on 25th May 2019 thereby raising the issue of pre-existing dispute. However, this reply was addressed after the 10 day period as prescribed under IBC.
  2. Thereafter, on 03rd June 2019, the Operational Creditor filed an Application under Section 9 of IBC for initiating the Corporate Insolvency Resolution Process against the Corporate Debtor on failure to make payment of the operational debt tuning to Rs. 54,94,974. It was the case of the Corporate Debtor that they received the Demand Notice only on 17th May 2019, however, they were unable to prove the same.
  3. On consideration of the facts of this case, an order dated 22nd July 2020 ("Impugned Order") was passed wherein NCLT inter alia observed that the Corporate Debtor failed to raise the dispute within the time period prescribed under Section 8 (2) of the IBC, the Corporate Debtor cannot take the objection of 'pre-existing dispute'. However, the NCLT still rejected the claim of Operational Creditor on the finding that the default of instalment of the settlement agreement does not come within the definition of 'Operational Debt'. In light of this, the Appellant filed an Appeal against the Impugned Order.

Issues before the Hon'ble NCLAT:

  1. Whether default under the agreement dated 28th November 2014 and 15th June 2018 comes within the definition of Operational Debt?
  2. Whether the Corporate Debtor can raise the issue of a pre-existing dispute after the time prescribed under Section 8 (2) of IBC?

Submissions:

  1. On the first issue, the Appellant submitted that as per the Agreement dated 15th November 2014 and 15th June 2018, the Appellant was entitled to receive payments. Therefore, the claim of the Appellant flows from these Agreements and cannot be discarded on merely being default on instalment of settlement agreement.
  2. On the second issue, the Corporate Debtor submitted that they immediately replied to the Demand Notice where the Appellant's claim was disputed and the same was further raised in detailed reply to the section 9 Application filed before NCLT.

Observations:

  1. On the first issue, the NCLAT observed that the Agreement dated 28th November 2014 indicates that the Appellant was to receive certain payments from the Corporate Debtor and the Agreement was not a kind of a settlement agreement. In fact, the Agreement gave rights and obligations to the parties, therefore, NCLAT observed that the basis of rejecting the application is erroneous and set aside the Impugned Order.
  1. On the second issue, the NCLAT interpreted the Section 8 (2) and 9 (1) of IBC as reproduced hereinbelow:

"8 (2)   The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

  1. existence of a dispute, [if any, or] record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; ..."

"9 (1)   After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process. ..."

  1. On perusal of Section 8 (2) with Section 9 (1) of IBC, NCLAT observed that the Operational Creditor can file an application before NCLT if no payment has been received by the Corporate Debtor or no notice of dispute has been received. Neither in Section 8 or 9 of IBC, does it indicate that in an event reply to notice is not filed within 10 days, the Corporate Debtor is precluded from raising the question of dispute. It also referred to a judgment in the case of Neeraj Jain vs Cloudwalker Streaming Technologies Pvt. Ltd.2
  1. NCLAT further observed that the scheme of Section 9 (5) of IBC provides that NCLT can reject the application even if no notice of dispute has been received and but there is record of dispute in Information Utility.

Conclusions:

On consideration of the above observations, NCLAT held that in the case where the reply to notice under Section 8 is given after 10 days of receipt of Demand Notice or there is no reply to the Demand Notice, it shall not preclude the Corporate Debtor from establishing the pre-existing dispute pertaining prior to issuance of Demand Notice. Further in Reply to Section 9 application the Corporate Debtor can bring material to show that there are pre-existing disputes. NCLAT set aside the Impugned Order and remanded back the application to NCLT for fresh consideration and made it clear that they are not expressing any views on the merits of the case

Footnotes

1 Company Appeal (AT) (INS) No. 958 of 2020M

2 Company Appeal (AT) (INS) No. 1354 of 2019M

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