Second Demand Notice Issued u/s 8 of IBC amounts to Fresh Notice: NCLAT [Read Order]

In a recent case, the Principal Bench of the National Company LawAppellate Tribunal (NCLAT) observed that the second demand notice issued under section 8 of the Insolvency and Bankruptcy Code (IBC), 2016, amounts to a fresh notice. Since the second demand notice for all legal purposes was a continuation of the first demand notice, the Civil Suit cannot be treated as a pre-existing dispute as it had been filed after the receipt of the first demand notice by the Corporate Debtor.

Innovators Cleantech Private Limited, the Appellant, challenged the order passed by the Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, CourtII). By the impugned order, the Adjudicating Authority has rejected Section 9 application. Aggrieved by the impugned order, the present appeal has been preferred by the Appellant.

Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here

The Operational Creditor-Innovators Facade Solutions Private Limited was engaged by the Corporate Debtor-Pasari Multi projects Private Limited to provide design-built services in building construction for a project, Biowonder, which was a commercial-cum-Hotel project. A Letter of Intent (‘LoI’) was issued on 09.07.2015 for Rs.10.68 crore by the Corporate Debtor to the Operational Creditor for this project.

The Project was commenced by the Operational Creditor on 09.07.2015 and the first Running Account Bill (‘RAB’ in short) was raised on

15.03.2016. The corporate debtor failed to discharge payment for RAB-19 of Rs. 4.68 crores raised by the operational creditor despite reminders. Since the corporate debtor failed to make payments, the operational creditor issued a demand notice in Form-3 for an amount of Rs. 4.91 crore including interest. This first demand notice was issued on 12.02.2019. The operational creditor withdrew this first demand notice due to certain alleged clerical error made by them in the computation.

After the withdrawal of the first demand notice, the Appellant thereafter issued another demand notice dated 25.04.2019. This second demand notice, according to the corporate debtor, was a revised demand notice for an amount of Rs.4.75 crores after adjusting certain payments received by the operational creditor. There was thus a reduction in the claimed amount from the original demand notice.

The appellant raised bills RAB 01 to RAB-18 against which the corporate debtor paid Rs. 5,51,56,183/- to the appellant. The Appellant thereafter raised RAB-19 for Rs. 4,91,72,294/- which was not paid by the Respondent. The Appellant, therefore, issued a demand notice dated 12.02.2019 for Rs. 4,91,72,294/- which was purportedly dispatched by the Appellant on 12.02.2019 by Speed-Post. Realising that one of the payments made by the Corporate Debtor had not been factorised while computing the due demand, the Appellant issued a revised demand notice for Rs. 4,75,70,047/- on 25.04.2019 after reducing the amount which had not been factorised earlier.

As the Corporate Debtor did not make the due payment, the Appellant filed the Section 9 application which however the Adjudicating Authority erroneously dismissed on the ground of pre-existing dispute that the Corporate Debtor had filed a civil suit against the Appellant on 16.04.2019. This civil suit could not be treated as pre-existing dispute since it was filed after the first demand notice was issued on 12.02.2019 and the second demand notice was a continuation of the first demand notice.

It was vehemently contended that the Adjudicating Authority had failed to appreciate the fact that the Operational Creditor had issued the first demand notice on 12.02.2019 which demand notice was issued before the filing of the civil suit. The Adjudicating Authority also failed to consider that the Corporate Debtor had even replied to the first demand notice. The first demand notice therefore clearly pre-dated the filing of the title suit on 16.04.2019.

Admittedly the first demand notice had to be revised due to a clerical error but it was strenuously contended that merely because the first Demand Notice had to be revised for bonafide reasons, it cannot be overlooked that the Civil Suit had been filed after the receipt of the first demand notice by the Corporate Debtor and hence did not qualify to be a pre-existing dispute. It was also emphatically asserted that for any dispute to be treated as a pre-existing dispute under Section 8(2)(a) of IBC, the dispute has to arise prior to the receipt of demand notice by the Corporate Debtor.

While admitting that the demand notice was amended after filing of the Civil Suit, it was contended by the Appellant that the amended demand notice would relate back to the date of original demand notice. Amendment of the demand notice on account of clerical error and subsequent issue of a corrected demand notice cannot be viewed as a fresh demand notice.

A two member bench of Justice Ashok Bhushan, Chairperson, and Barun Mitra, Member (Technical) observed that since the second demand notice for all legal purposes was a continuation of the first demand notice, the Civil Suit cannot be treated as a pre-existing dispute as it had been filed after the receipt of the first demand notice by the Corporate Debtor.

The short point for consideration is whether there was any genuine preexisting dispute surrounding the debt claimed by the Operational Creditor to be due and payable to them by the Corporate Debtor. Section 8 of the IBC requires the Operational Creditor, on occurrence of a default by the Corporate Debtor, to deliver a Demand Notice in respect of the outstanding Operational Debt. Section 8(2) lays down that the Corporate Debtor within a period of 10 days of the receipt of the Demand Notice would have to bring to the notice of the Operational Creditor, the existence of dispute, if any. From a plain reading of the above provision, it is clear that the existence of dispute and its communication to the Operational Creditor is therefore statutorily provided for in Section 8.

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.

Cumulatively seen, it clearly signifies that 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.

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. 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 NCLAT held that the Adjudicating Authority did not commit any error in rejecting the Section 9 Application filed by the Appellant and dismissed the appeal.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates