Plausible dispute raised prior to demand notice mandates dismissal of Section 9 insolvency application.

In brief

The question

1. Whether the allegation of "economic coercion" raised by the Corporate Debtor prior to the issuance of the Section 8 demand notice constitutes a "pre-existing dispute" under the IBC

The court held

The NCLAT affirmed the NCLT’s order, holding that the application under Section 9 was rightly rejected due to a genuine pre-existing dispute

It also directed

The Tribunal concluded that so long as a dispute is raised prior to the Section 8 notice and is not illusory, the Adjudicating Authority must dismiss the petition without examining the merits of the Corporate Debtor's defense

The appeal was dismissed with no order as to costs

01Facts

The Appellant (Operational Creditor) and Respondent (Corporate Debtor) entered into an agreement on January 2, 2018, for the supply of inverter batteries

¶ 2(ii)

Following complaints regarding defective batteries, the Respondent issued a credit note on November 7, 2019, for Rs. 1,02,70,985/-

¶ 3(i)

On December 8, 2022, the Respondent sent an email asserting that the credit note was obtained under "economic coercion" and that warranty obligations had expired

¶ 2(vi)

Subsequently, on December 28, 2022, the Appellant issued a demand notice under Section 8 of the IBC

¶ 2(vii)

The NCLT rejected the Section 9 application on October 13, 2023, citing a pre-existing dispute.

¶ 3(ii)

02Issues

i.1. Whether the allegation of "economic coercion" raised by the Corporate Debtor prior to the issuance of the Section 8 demand notice constitutes a "pre-existing dispute" under the IBC

¶ 9

ii.2. Whether the Adjudicating Authority is required to adjudicate the merits or the probability of success of the defense raised by a Corporate Debtor during Section 9 proceedings

¶ 9(ii)

03Law Applied

Sections 8 and 9 of the Insolvency and Bankruptcy Code (IBC), 2016, regarding the initiation of CIRP by an operational creditor

¶ 1

Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd., which mandates that an application must be rejected if a "plausible contention" of dispute exists that is not a "patently feeble legal argument" or "moonshine"

¶ 9(ii)

Rajratan Babulal Agarwal v. Solartex India (P) Ltd. and Sabarmati Gas Ltd. v. Shah Alloys Ltd., establishing that the court need not be satisfied that the defense will succeed, but only that a dispute truly exists in fact prior to the receipt of the demand notice

¶ 9(iii)-(iv)

Provisions in the judgment · 3 · Linked ones open on LawLens

Insolvency and Bankruptcy Code, 2016. Section 7 Section 8 Section 9

04Reasoning

The Tribunal observed that the Respondent’s email dated December 8, 2022, which raised the defense of economic coercion regarding the credit note, was sent before the Appellant’s Section 8 demand notice dated December 28, 2022

¶ 6

The Respondent contended that the credit note was issued under duress to ensure the Appellant would lift 10,000 other manufactured batteries, which the Appellant allegedly failed to do

¶ 8

The NCLAT reasoned that because this dispute was documented prior to the demand notice, it qualified as "pre-existing."

¶ 9(v)

Following the Mobilox standard, the Tribunal noted it is not a debt collection forum and cannot enter into a mini-trial to determine the "truthfulness" of the coercion claim or the breach of warranty

¶ 9(v), 10

Since the defense was not a "mere bluster" and required further investigation by a competent civil court, it was sufficient to stall the insolvency process

¶ 10