Can the debtor company raise the issue of a pre-existing dispute if it is not raised within 10 days of receipt of the formal notice?

Introduction:

Brand Realty Services Ltd. being the Operational Creditor (“Appellants / Operational Creditor“) filed an appeal1 before the honorable National Company Law Appeals Tribunal, delhi (“NCLAT“) challenging the order made by the National Company Law Court, New Delhi (“NCLT“) thereby dismissing the application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC“) against M/s. Sir John Bakeries India Pvt. ltd. (“Corporate debtor“).

Facts:

  1. The appellant was an investor advisor to the debtor company and they entered into an agreement dated 28e November 2014 which was then ratified in a settlement agreement dated 15e June 2018. However, the debtor company failed to honor the settlement agreement and failed to make payments to the operating creditor. Whereupon, the Operational Creditor issued a Notice of Demand dated 30e April 2019 (“Notice of formal notice“) which was delivered to the Debtor Company on 04e May 2019. The Corporate Debtor responded to said Notice of Demand on 25e May 2019 thus raising the question of a pre-existing dispute. However, this response was sent after the 10-day period prescribed by BAC.
  2. Subsequently, on 03rd June 2019the operational creditor has filed an application under section 9 of the IBC to initiate the process of corporate insolvency resolution against the corporate debtor in the event of non-payment of the operational debt granting to Rs.54,94,974. This is the case of the debtor company which only received the notice of formal notice on 17e May 2019however, they were unable to prove the same.
  3. After reviewing the facts of the case, an order dated 22n/a July 2020 (“Order contested“) was adopted in which NCLT among others has observed that the Debtor Company has not raised the dispute within the period prescribed by Article 8 (2) of the IBC, the Debtor Company cannot uphold the objection of “pre-existing dispute”. However, the NCLT still denied the Operational Creditor’s claim on the grounds that the failure to pay the settlement agreement does not fall within the definition of “Operational Debt”. In light of this, the Appellant appealed the Impugned Order.

Questions before the Honorable NCLAT:

  1. If the default under the agreement of 28e November 2014 and 15e June 2018 falls within the definition of operational debt?
  2. Can the debtor company raise the issue of a pre-existing dispute after the prescribed period under IBC Section 8(2)?

Submissions:

  1. On the first question, the Appellant argued that, in accordance with the agreement of 15e November 2014 and 15e June 2018, the appellant was entitled to receive payments. Accordingly, the Appellant’s claim arises out of these Agreements and cannot be dismissed for the mere fact that it is a failure to pay the settlement agreement.
  2. On the second question, the debtor company argued that it had immediately responded to the notice of formal notice where the appellant’s claim was disputed and that the same thing had been raised in a detailed response to the request for under Section 9 filed with NCLT.

Comments:

  1. On the first question, the NCLAT observed that the agreement of 28e November 2014 indicates that the Appellant was to receive certain payments from the debtor company and that the agreement was not some sort of settlement agreement. In fact, the agreement gave rights and obligations to the parties, therefore, NCLAT observed that the basis for the dismissal of the application is erroneous and rescinded the contested order.
  1. On the second question, the NCLAT has interpreted sections 8(2) and 9(1) of the IBC as reproduced below:

“8 (2) The debtor legal person must, within ten days of receipt of the notice of formal notice or the copy of the invoice mentioned in paragraph (1), bring to the attention of the operational creditor

  1. existence of a dispute, [if any, or] record of the pending suit or arbitration proceeding filed prior to receipt of such notice or invoice in connection with such dispute; …”

9 (1) After the expiration of ten days from the date of delivery of the notice or invoice requiring payment under subsection (1) of section 8, if the operational creditor does not receive payment from the debtor company or the opinion of dispute under paragraph (2) of Article 8, the operational creditor may file a request with the adjudicating authority to initiate proceedings for the resolution of the insolvency of the enterprise. …”

  1. Reading section 8(2) together with section 9(1) of the IBC, NCLAT observed that the operational creditor may file a claim with NCLT if no payment has been received by the debtor company or if no notice of dispute was received. Neither section 8 nor section 9 of the BAC indicates that in the event that a response to the notice is not filed within 10 days, the debtor company is barred from raising the issue in litigation. He also referred to a judgment in the case Neeraj Jain versus Cloudwalker Streaming Technologies Pvt. ltd.2
  1. NCLAT further observed that the IBC Section 9(5) regime provides that NCLT may reject the application even if no counter notice has been received and there is a counter record in the Information Utility. .

Conclusion :

In view of the above observations, the NCLAT considered that in the event that the response to the notice under Article 8 is given after 10 days of receipt of the notice of application or if it does not If there is no response to the Notice of Demand, this will not prevent the Debtor Company from establishing the pre-existing dispute regarding prior to issuance of the Notice of Demand. Later in the response to the application of article 9, the debtor company can provide elements to show that there are pre-existing disputes. The NCLAT rescinded the contested order and returned the application to the NCLT for reconsideration and made it clear that it expressed no opinion on the merits of the case.

Footnotes

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

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

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

M Nihal SheikhClasis’ law
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Bombay
Bombay – 400,021
INDIA
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Email: [email protected]
URL: www.clasislaw.com

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