Unrelated contractual disputes with distinct proprietorship concerns do not constitute pre-existing disputes under IBC.

The Appellant, Indu Jain, is the sole proprietor of two distinct concerns: IB Jewels (wholesale diamond supplier) and Brij Ratnam (retail franchisee).

Both entities maintain separate GST registrations and bank accounts.

IB Jewels supplied rough diamonds to the Respondent (Corporate Debtor/CD) via three invoices in June 2019, totaling approximately Rs. 49.8 lakhs.

Simultaneously, Brij Ratnam operated under a Franchisee Agreement dated 05.12.2018 with the CD, which was terminated by the CD on 12.08.2019 due to alleged operational breaches.

Following the CD’s failure to pay the invoices, the Appellant issued a Section 8 demand notice on 26.08.2019.

The CD replied on 05.09.2019, disputing the debt primarily on the ground that a dispute existed between the CD and Brij Ratnam, and that IB Jewels was part of an integrated supply chain.

The Ld. NCLT Mumbai Bench rejected the Appellant’s Section 9 petition on 09.08.2024, citing a lack of proof of delivery, a pre-existing dispute with the sister concern, and the legal non-recognisability of a sole proprietorship to issue a demand notice.

1. Whether a dispute arising from a separate contract with a sister proprietary concern constitutes a "pre-existing dispute" under the IBC to bar a Section 9 application.

2. Whether the non-denial of delivery in the initial reply to a Section 8 notice precludes the Corporate Debtor from raising a defense of non-delivery at the litigation stage.

3. Whether a sole proprietorship is competent to initiate proceedings and issue a demand notice under Section 8 of the IBC.

The court applied Section 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) regarding the initiation of CIRP by operational creditors.

It relied on Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which mandates that a pre-existing dispute must be genuine and not "moonshine" or "hypothetical".

Regarding the legal status of proprietorships, the court invoked Section 2(f) of the IBC, which explicitly includes "proprietorship firms" within the Code’s applicability.

Based on Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., it held that a demand notice issued by a lawyer on behalf of an operational creditor is valid.

The Appellate Tribunal found that the NCLT erred in conflating two distinct business entities. Although owned by the same proprietor, IB Jewels and Brij Ratnam maintained separate tax and legal identities, and the Franchisee Agreement did not mention IB Jewels.

The court observed that the CD’s termination notice and subsequent arbitration invocation against Brij Ratnam were confined strictly to the Franchisee Agreement and made no mention of the diamond supply invoices from IB Jewels.

Applying the Mobilox standard, the Tribunal ruled that a dispute under a separate contract cannot be imported to claim a "pre-existing dispute" for an admitted debt in another transaction; such a defense was characterized as an "afterthought" and "moonshine".

Regarding delivery, the Tribunal noted that the CD failed to deny receipt of goods in its initial reply to the Section 8 notice, making its subsequent denial at the Section 9 stage unsustainable.

The Tribunal corrected the NCLT’s legal error regarding proprietorships, clarifying that Section 2(f) of the IBC specifically empowers proprietorship firms to initiate CIRP.

The Tribunal further held that a sole proprietorship is a valid entity under the IBC and its demand notice, issued through counsel, is legally sound.

The matter was remanded to the Adjudicating Authority (NCLT) for fresh consideration, and C.P. (IB) No. 3626/MB-VI/2019 was revived on the board.