Corporate Debtor Not Barred From Raising Pre-Existing Dispute Even in absence of reply within period u/s 8 of IBC: NCLT [Read Order]

The National Company Law Tribunal (NCLT) Mumbai has held that failure to respond to a demand notice within 10 days under Section 8 of the Insolvency and Bankruptcy Code, 2016 (the Code) does not bar the Corporate Debtor from asserting the existence of a pre-existing dispute especially when such dispute was raised before the issuance of the demand notice.

The Application was filed on 27.07.2022 under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) read with Rule  6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (AAA Rules) by Himatsingka Seide Limited, the Operational Creditor (OC), through Mr. P. Rama Krishna, Senior General Manager-Legal of the OC, authorised for initiating Corporate Insolvency Resolution Process (CIRP) in respect of Textile Professional LLP, the Corporate Debtor (CD).

Five unpaid bills for cotton fiber provided to the corporate debtor in 2021–2022 are the cause of the default in this instance.  Invoices dated 16 December 2021 to 19 January 2022 show a 30-day payment due time, even though Part 1V of the application does not specifically state the date of default.  The Operational Creditor has submitted this application under section 9 of the Code in order to start the Corporate Insolvency Resolution Process (CIRP) because the corporate debtor has not paid the required amount.

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The corporate debtor never contested the quantity or quality of the items prior to the demand notice, according to the operational creditor, who also claimed that the invoices are uncontested. Furthermore, it was contended that the corporate debtor's emails from November 3, 2021, and January 10, 2022, really refute its assertion of a pre-existing conflict and instead show an intention to maintain the bulk supply contractual relationship. Thus, the argument put out by the corporate debtor is weak and unacceptably so.

It was further stated that, in accordance with the legislation established by the Appellate Tribunal in Deepak Modi v. Shalfeyo Industries (2023), the Corporate Debtor cannot avoid its duties to the Operational Creditor after accepting the goods without any demur. In contrast, the Corporate Debtor argued that the Operational Creditor had not provided any proof of its performance of its obligations as a seller and that the accuracy of the invoices it had produced was in doubt.

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Furthermore, it was contended that the Corporate Debtor's response to the demand notice was not produced by the Operational Creditor. However, the Corporate Debtor recorded its reply notice dated 09.06.2022 in its Additional Affidavit dated 13.06.2023. The presence of a dispute between the Corporate Debtor and the Operational Creditor is indicated by the aforementioned reply notice, copies of invoices, and multiple emails attached.

The bench comprising of Shri K. R. Saji Kumar (Judicial Member) and  Shri Sanjiv Dutt (Technical Member) observed that the Corporate Debtor's emails from January 10–21, 2022, emphasized disagreements regarding subpar products and late payments that the Operational Creditor did not challenge. These disagreements were further detailed at a meeting that was attended by both parties on April 6, 2022.

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It also stated that even though the meeting minutes were not signed, they were sent to the Operational Creditor via email on April 11, 2022, and the Operational never contested them. In a response to the Operational Creditor's demand notice, the corporate debtor further emphasized the disagreements. Therefore, a corporate debtor may still argue pre-existing problems, particularly if they were brought up prior to the notice being given, even if they do not reply to a section 8 notice within 10 days.

The Tribunal while dismissing the petition,  held that the applications filed by the corporate debtor before various fora and exchanged emails confirms the existence of a pre-existing dispute. Since these disputes arose before the filing of the present petition and the operational creditor's demand notice, the operational debt cannot be considered undisputed.

To Read the full text of the Order CLICK HERE

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