NCLAT Rules: Reflection of Genuine Pre-existing Dispute from Correspondences Between Parties Is Sufficient to Reject Application Under Section 9 of the IBC.
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson), Mr. Arun Baroka (Technical Member), and Mr. Barun Mitra (Technical Member), has held that when a genuine pre-existing dispute between parties is evident from their correspondences, an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") must be rejected. This ruling was delivered in the case of Dilipkumar Lokooram Arora v. KTR Management Services Pvt. Ltd. (Company Appeal (AT) (Insolvency) No. 2183 of 2024).
Background of the Case
A Facility Agreement was executed between Sahara Hospitality Limited (Corporate Debtor) and KTR Management Services Private Limited (Operational Creditor) on April 1, 2018. Under this agreement, the Operational Creditor was to provide manpower services for various activities at the Corporate Debtor's hotel. The Corporate Debtor, through an email dated June 15, 2019, communicated multiple deficiencies in the services provided by the Operational Creditor. Subsequently, on July 1, 2019, the Operational Creditor issued a legal notice demanding Rs. 10,59,78,114/-. This notice was contested by the Corporate Debtor in a reply dated August 21, 2019, in which the debtor denied the claim and highlighted various service deficiencies. Despite a reconciliation meeting on October 16, 2019, the Corporate Debtor terminated the Facility Agreement on December 26, 2019, citing service deficiencies and raising a counter-claim of Rs. 10 crore for financial losses.
On January 3, 2020, the Operational Creditor issued a demand notice under Section 8 of the IBC, claiming Rs. 8,22,82,004/-. The Corporate Debtor, in its reply dated January 28, 2020, reiterated the existence of ongoing disputes. Despite these objections, the Adjudicating Authority (NCLT Mumbai Bench) admitted the Section 9 application on November 21, 2024. This decision was subsequently challenged before the NCLAT.
Appellant's Contentions
Senior Advocate Shri Krishnendu Datta, appearing for the Appellant (Corporate Debtor), argued that:
A bona fide pre-existing dispute existed prior to the issuance of the demand notice.
The Corporate Debtor had consistently raised service deficiencies and disputed the claim through various correspondences.
The termination of the Facility Agreement and the counter-claim of Rs. 10 crore further evidenced the existence of a genuine dispute.
Under the principles laid down by the Hon'ble Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, the Section 9 application should not have been admitted.
Respondent's Contentions
The Respondent argued that any disputes regarding the claim should be adjudicated by the Competent Court as per the arbitration clause in the Facility Agreement dated April 1, 2018.
NCLAT's Observations
The NCLAT, after reviewing the correspondences and evidence, emphasized that a genuine pre-existing dispute between the parties was apparent before the issuance of the demand notice. The Tribunal specifically relied on the Corporate Debtor's reply to the legal notice dated August 21, 2019, which outlined the service deficiencies and the existence of an ongoing dispute.
Key excerpts from the Corporate Debtor's reply included: "In view of all the documents produced, it is clear that a genuine and bona fide dispute exists between you and our Client with respect to the said Claim and this is in existence for a long time, and in any event, much prior to the date of the Notice dated 1st July, 2019."
Additionally, the Corporate Debtor's letter terminating the Facility Agreement on December 26, 2019, explicitly mentioned financial losses exceeding Rs. 10 crore. The demand notice issued by the Operational Creditor on January 3, 2020, was treated as a response to this termination, reinforcing the fact that disputes were already ongoing.
In the reply to the demand notice dated January 28, 2020, the Corporate Debtor unequivocally stated: "Since we have already notified you about the existence of the aforesaid dispute, your threatened action of insolvency proceedings will not be maintainable in view of Section 8(2) r/w Section 9 of the Insolvency and Bankruptcy Code, 2016."
The NCLAT criticized the Adjudicating Authority for disregarding these communications and held that the issues raised in the Corporate Debtor's reply could not be termed as a 'moonshine defence'.
Ruling and Conclusion
Citing the legal principles laid down by the Hon'ble Supreme Court in Mobilox Innovations Pvt. Ltd. (supra), the NCLAT held that the existence of a genuine and bona fide pre-existing dispute was sufficient to reject the Section 9 application. The NCLAT stated: "There being pre-existing dispute which existed much prior to issuance of demand notice which is reflected from correspondences between the parties, legal notice issued by the operational creditor dated 01.07.2019 and reply to the legal notice sent by the corporate debtor on 21.08.2019."
Accordingly, the NCLAT allowed the appeal, set aside the NCLT's order dated November 21, 2024, and rejected the Section 9 application filed by the Operational Creditor. Furthermore, the Tribunal directed the refund of any amounts deposited pursuant to the interim order and allowed the Appellant to pay the IRP's fees and expenses within one month.
Appearance
For Appellant: Shri Krishnendu Datta, Sr. Advocate with Mr. Sandeep Bajaj, Mr. Mayank Biyani, Ms. Alina Marin Mathew, Advocates.
For Respondents: Mr. Rahul Chitnis, Ms. Shwetal Shepal, Mr. Preshit Surshe, Advocates for R-1.
Mr. Ganesh Ramani, Advocate for IRP.
Cause Title: Dilipkumar Lokooram Arora, (Member of Suspended Board of Directors) Sahara Hospitality Ltd. Versus KTR Management Service Pvt. Ltd. & Anr.
Case No: Company Appeal (AT) (Insolvency) No. 2183 of 2024
Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Member (Technical)], Arun Baroka [Member (Technical)]
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