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By Saurabh Gandhi

Case:

M/s. Brand Realty Services Ltd. Versus M/s. Sir John Bakeries India Pvt. Ltd.

Court/Tribunal:

National Company Law Appellate Tribunal (NCLAT), New Delhi

Coram:

Justice Ashok Bhushan, Chairperson
Dr. Alok Srivastava, Member (Technical)

Counsel:

For Appellant: Mr. Pankaj Agarwal, Advocate.
For Respondent: Mr. Nishant Awana, Mr. Devansh Malhotra, Advocates

Date of order:

10.03.2022

Facts of the case:

  1. M/s. Brand Realty Services Ltd. (Appellant) filed an Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) to initiate the Corporate Insolvency Resolution Process against M/s. Sir John Bakeries India Pvt. Ltd. (Respondent/Corporate Debtor) with the Adjudicating Authority (NCLT Delhi).
  2. The Section 9 Application claimed that the debt was due on the Corporate Debtor on the basis of Agreement dated 28th November, 2014 and 15th June, 2018.
  3. Part payments were made by the Corporate Debtor but when he failed to clear outstanding dues, Demand Notice under Section 8 of IBC dated 30th April, 2019 was served.
  4. The Corporate Debtor sent Reply dated 25th May, 2019.
  5. Section 9 Application came to be filed on 03rd June, 2019 claiming operational debt to the tune of Rs.54,94,874/-.
  6. In the Section 9 Application, Notice was issued to the Corporate Debtor and Corporate Debtor filed a Reply to Section 9 Application.
  7. The Adjudicating Authority rejected the Section 9 Application. The Impugned Order rejecting the Application was appealed in the NCLAT by the Appellants.

Question of Law:

The Hon’ble NCLAT observed there are two aspects that need to be noticed in the Impugned Order.

  1. First, reply to notice was not sent within the prescribed time under Section 8(2) of the IBC and hence the Corporate Debtor failed to raise the disputes.
  2. Second, the Adjudicating Authority took the view that default of instalment of settlement agreement does not come within the definition of “Operational Debt”.

Legal Submissions:

The Counsel appearing for the Appellant submitted that the claim of the Appellant flows from the aforesaid agreements and the Agreement cannot be discarded by observing that it was default of instalment of settlement agreement.

The Counsel appearing for the Respondent submitted that the Respondent replied to the notice and also filed a detailed reply to the Section 9 Application, and in the reply to the Section 9 Application raised question regarding execution of Agreement dated 15th June, 2018.  

Provisions analysed:

To adjudicate the issue, the bench examined the following provisions of IBC, 2016:

  1. Section 8: Insolvency resolution by operational creditor
  2. Section 9: Application for initiation of corporate insolvency resolution process by operational creditor [Section 9(1) and 9(5)]

Analysis leading to the conclusion:

  1. The NCLAT observed that a perusal of the Agreement dated 28th November, 2014 indicates that the said Agreement entitled the Appellant to receive certain payment from the Corporate Debtor. The present cannot be said to be case of default in payment of instalment and the agreement was not a kind of settlement agreement as it gave rights and obligations to the parties. Hence, the very basis of rejecting the Application by the Adjudicating Authority was erroneous. The NCLAT was of the view that the Impugned Order deserved to be set aside on this ground alone.
  2. One of the questions considered in the present case was: when Reply submitted by Corporate Debtor was not within 10 days from the receipt of the notice under Section 8, whether the Corporate Debtor is precluded to raise the issue of Pre-Existing Dispute before the Adjudicating Authority.

Held:

    1. The statutory scheme under Section 8 and 9 does not indicate that in an event Reply to Notice is not filed within 10 days by Corporate Debtor or no reply to Notice under Section 8(1) have been given, the Corporate Debtor is precluded from raising the question of dispute.
    2. Referring to Section 9(5)(ii) which provides that the Adjudicating Authority can reject the Application if “notice of dispute has been received by the Operational Creditor or there is a record of dispute in the information utility”, the NCLAT observed that even in absence of notice of dispute, the Adjudicating Authority can reject the Application if there is record of dispute in the Information Utility.
    3. The NCLAT further observed that it goes without saying that the same can very well be pointed out by the Corporate Debtor before the Adjudicating Authority when notice is issued under Section 9. Further in Reply to Section 9 Corporate Debtor can bring the material to indicate that there are pre-existing disputes in existence prior to issuance of demand notice under Section 8.
    4. The NCLAT thus came to the considered opinion that mere fact that Reply to Notice under Section 8(1) having not been given within 10 days or no reply to demand notice having been filed by the Corporate Debtor does not preclude the Corporate Debtor to bring relevant materials before the Adjudicating Authority to establish that there are pre-existing dispute which may lead to rejection of Section 9 application.
    5. The NCLAT relied upon a Judgment of NCLAT in “Neeraj Jain v. Cloudwalker Streaming Technologies Private Limited” (Company Appeal (AT) Ins. No.1354 of 2019) decided on 24th February, 2020 in paragraph 50 of which following observations were made:

“…Even otherwise, mere failure to reply to the demand notice does not extinguish the rights of the Operational Creditor to show the existence of a pre-existing dispute…”

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