CASE DETAILS
CASE NUMBER- Company Appeal (AT) (Insolvency) No. 548 of 2020.
NAME OF THE COURT- National Company Law Appellate Tribunal, New Delhi.
DATE OF JUDGMENT- 19.10.2020.
HON'BLE JUDGE/CORUM- Justice Bansi Lal Bhat (Acting Chairperson); Justice Anant Bijay Singh (Member Judicial) & Kanthi Narahari (Member Technical).
FACTUAL BACKGROUND:
The Appellant/Corporate Debtor was into the business of Hotels, Tourism & Travel Services and was also operating and managing luxury resort at Goa, for which he invited tender to carry out electrical works. The electrical works were assigned to the Respondent/Operational Creditor and an Agreement/Letter of Intent dated 07.06.2016, was executed between the Operational Creditor and the Corporate Debtor. The time limit for completion of the work was 120 days, however, the Operational Creditor utterly failed to complete the work within the due timeline and the Appellant wrote various emails and letters to the Respondent to come and complete the work but all went into vain. Moreover, the work completed by the Respondent suffered from various irregularities and material defects were present in that work. Owing to such circumstances, the Appellant/Corporate Debtor hired a third party to complete the work and as an aftermath of the same, the Respondent/Operational Creditor issued a Demand Notice dated 11.04.2019 under Section 8 of IBC for claiming an amount of Rs. 46, 64, 878/- against 50 invoices.The Appellant//Corporate Debtor was not able to reply to the said demand notice within 10 days and replied to that notice in the form of an email dated 29.04.2019.
PROCEDURAL BACKGROUND:
The Respondent/Opertational Creditor filed a Corporate Insolvency Resolution Process (CIRP) application before the Learned Adjudicating Authority. The Learned Adjudicating Authority was of the view that the Appellant/Corporate Debtor has failed to reply to the Demand Notice dated 11.04.2019 which was received by the Appellant on 16.04.2019. The learned Adjudicating Authority observed that in e-mail dated 29.04.2019 nowhere it has been mentioned that the said e-mail is in the form of Reply to the Demand Notice issued by the Respondent and thus concluded that the Appellant has not complied with the statutory requirement as contemplated under Section 8(2) of IBC. Thus, the Application under Section 9 of IBC filed by the Respondent was admitted on the sole ground that the Appellant has not raised any dispute in pursuance to the Demand Notice dated 11.04.2019. Hence, the Appellant/Corporate Debtor approached NCLAT impugning the order passed by the Adjudicating Authority.
ISSUE RAISED:
Whether in the facts and circumstances of this case which has been described above, an order for admission of an Application under Section 9 of IBC, solely on the ground that the dispute has not been raised by the Appellant and he has not replied to the demand notice within 10 days of statutory period, is valid in the eyes of law or not?
DECISION:
The Hon'ble NCLAT in an unequivocal terms agreed with the contention raised by the Appellant and held that instead of taking technical objections that the email dated 29.04.2019, may not be a Response/Reply to the Demand Notice issued by the Respondent, the contents as raised by the Appellant should have been taken into consideration for the purpose of deciding the issue to elucidate any pre-existing dispute keeping in view of trail of exchange of e-mails regarding deficiency in service.
The Appellate Tribunal held that that the overall material on record has to be analysed to come to a conclusion whether there is a pre-existing dispute between the parties or not and thus concluded that that in view of the email/letters there existed a dispute prior to the Demand Notice.
"Exchange of e-mails/correspondences, as referred above, clearly establishes that there is a pre-existing dispute between the parties regarding completion of the work and the Appellant/Corporate Debtor continuously made complaints regarding non-completion of work and deficiency in services, thereby loss caused to the Appellant/Corporate Debtor."
Hence, the NCLAT held that Adjudicating Authority ought not to have admitted the application under Section 9 of IBC filed by the respondent.
ANALYSIS:
The very short question of law which had been posed before the Hon’ble NCLAT was whether in the facts and circumstances of this case which has been described above call for an order for admission of an application under Section 9 solely on the ground that the dispute has not been raised by the Appellant and he has not replied to the demand notice within 10 days as mentioned under the statute.
The Appellate Tribunal considered few notable judgements passed by the Hon’ble Apex Court before arriving at the decision. The very first relevant authority considered by the Appellate Tribunal was the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353, wherein the Hon’ble Supreme Court has held that:
"Within a period of 10 days of the receipt of such demand notice or copy of invoice, the corporate debtor must bring to the notice of the operational creditor the existence of a dispute and/or the record of the pendency of a suit or arbitration proceeding filed before the receipt of such notice or invoice in relation to such dispute [Section 8(2)(a)]. What is important is that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be.”
Another important judgement which was analysed by the Appellate Triubunal and was considered as 'binding' was the case of Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018)1 SCC 407, wherein the Hon’ble Supreme Court has held that:
"Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in subsection (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.”
From the conspectus of the case laws mentioned above, it becomes very clear that the only pre requisite which is to be followed by the corporate debtor is to raise any dispute before issuance of the demand notice. The code nowhere mentions that that any set criteria or any format has to be followed while raising such dispute. Such dispute can be in the form of a legal notice, a plain letter, a simple notice invoking arbitration or correspondence of emails as well.
Now, in the present case case, the exchange of e-mails/correspondences, clearly establishes that there was a pre-existing dispute between the parties regarding completion of the work and the Appellant/Corporate Debtor continuously made complaints regarding non-completion of work and deficiency in services, thereby loss caused to the Appellant/Corporate Debtor. A bare perusal of the order passed by the Learned Adjudicating Authority shows that there was sufficient material on record through which one can easily conclude that there is a dispute between the parties prior to issuing demand notice. However, an utter disregard to the law laid down by the Hon’ble Apex Court has been shown by the Learned Adjudicating Authority.
Another fact which should be given prime consideration by the Learned Adjudicating Authority is that IBC is considered as a beneficial legislation which is intended to put the Corporate Debtor on its feet and it is not a mere money recovery legislation for the Creditors. The pronouncement by NCLAT in this case gives a sufficient window to many Corporate Debtors who gets entangled themselves within the clutches of this Code once an insolvency application is allowed by the Learned Adjudicating Authority.
One of the basic objectives for which the IBC has been enacted is to bring discipline in the market between the parties entering into different transactions. However, at the same time one must not forget that any corporate body should not be allowed to live on the mercy of their creditors especially when such creditors are trying to take the advantage of their own wrong doings by taking recourse of beneficial legislation like IBC. As mentioned above, the proceedings under IBC affect people at large and it has a significant impact on the market as well, hence, the Adjudicating Authorities should be very careful before allowing such application because while doing so, one must always remember that the basic purpose for which the code was enacted should not be defeated and the substratum of this code should not be attacked by frivolous applications.
However, while concluding this analysis, an important concern which comes the mind of the author is that the overall reading of Section 8(2) of the IBC shows that the demand notice has to be mandatorily be replied by the corporate debtor within 10 days from the receipt of the demand notice, because the word which has been used is “shall”, and the intention of the legislature is that the corporate debtor has to act urgently and reply to that notice and in case there is an pre-existing dispute, then record the existence and pendency of that dispute. This aspect has gone unnoticed in this decision of the Appellate Tribunal and can now it be concluded that even if a Corporate Debtor fails to reply to the demand notice within 10 days ignoring the mandate of Section 8(2) of IBC, then he is allowed to raise such dispute in reply to the insolvency application before the Adjudicating Authority?
(Author: Archit Mishra, Para Legal at S&D Legal Associates)