The NCLAT, New Delhi Bench enunciated that Section 9 proceedings under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) cannot be commenced for disputed operational debt. Further, it was held that the IBC provisions cannot be turned into debt recovery proceedings. The Corporate Insolvency Resolution Process (“CIRP”) can only be initiated when there are no real disputes existing between the parties.
Brief Facts:
The present appeal has been preferred against the order of NCLT vide which the petition under Section 9 of the IBC was admitted and CIRP was initiated against the Corporate Debtor.
Brief Background:
The Appellant is the erstwhile director of the Corporate Debtor (Respondent No. 2). Respondent No.2 is carrying its business on the premise which has been given on a rental basis by the Operational Creditor (Respondent No. 1). A Leave and License Agreements (“LLA”) was entered into by both the Respondents enabling the Respondent No.2 to take physical possession of the licensed premises. Later, a Service Agreement (“SA”) was also entered into by which Respondent No.2 agreed to certain service and maintenance facilities concerning the premises.
A notice was issued by Respondent No.1 to Respondent No.2 for vacating the premises on account of default on certain payments as envisaged under LLA and SA. Further, the lease was only for 5 years and despite the expiry of 5 years, Respondent No. 2 continued to remain in possession of the premises.
A notice invoking arbitration was sent by Respondent No.1 and in response to this Respondent No.2 informed that he has filed a criminal complaint on grounds of forgery and cheating.
Thereafter, a demand notice was sent, and a Section 9 IBC petition was filed. The petition was admitted by the NCLT and CIRP was commenced. Hence, the present appeal has been filed by the suspended Director of the Corporate Debtor.
Contentions of the Appellant:
It was argued that the physical possession was taken only on the assurances that the Operational Creditor has all sanctions in place for commercial business purposes. However, it was subsequently discovered that approvals such as Fire NOC/Occupancy certificate, etc. were not there. Due to this, the Corporate Debtor could not carry out its business and despite this, a notice was sent to vacate the premise on the ground that rent was not paid.
Further, it was argued that SA was part and parcel of LLA, and both have to be given a conjoint reading and not have to be read in isolation. A counterclaim has been made and it was submitted that the Corporate Debtor had spent on the installation of furniture etc. and has suffered financial loss. It was also asserted that there was a pre-existing dispute between the parties.
Contentions of the Respondents:
It was contended that the Corporate Debtor was a tenant in sufferance having continued to remain in possession for more than 7 years without paying rent. Thus, the operational debt became due and payable. It was argued that there was no pre-existing dispute before the issuance of the demand notice.
Observations of the Tribunal:
The primary issue to be ascertained was whether there was any pre-existing dispute between the parties raised during the Section 8 notice stage.
It was noted that both parties were in dispute regarding the issue of both rental and service charges as per LLA and SA before the Section 8 demand notice was sent. The Corporate Debtor clearly disputed the claim of the Operational Creditor regarding the amount being due and hence in such a case, the application for CIRP must have been rejected.
Further, it was observed that the notice for invoking arbitration was sent twice. The notices themselves show that disputes existed between the parties which could not be solved by negotiations. The notice invoking arbitration was sent before the demand notice under Section 8. Hence, the Tribunal ruled that there were real and substantial disputes between the parties.
Noting that Section 9 proceedings are summary in nature, the Bench ruled that prima facie there was enough evidence to show that the parties were engaged in a long-standing dispute over the issue of NoC/Compliances. Hence, there were pre-existing disputes between the parties.
It was enunciated that Section 9 proceedings cannot be commenced for disputed operational debt. Further, IBC provisions cannot be turned into debt recovery proceedings. CIRP can only be initiated when there are no real disputes existing between the parties.
The decision of the Tribunal:
Based on the reasons, the order of the NCLT was set aside and the NCLAT released the Corporate Debtor from the rigours of CIRP.
Case Title: Yash Nachrani v. Pardesi Construction Pvt. Ltd. & Anr.
Coram: Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member)
Case No: Company Appeal (AT)(Insolvency) No. 625 of 2022
Advocates for Appellant: Advs. Mr. Krishnendu Datta, Mr. Karun Mehta, Ms. Pratiksha Mishra, Ms. Varsha
Advocates for Respondents: Advs. Mr. Sandeep Bajaj, Mr. Vipul Jai, Mr. Mayank Biyani, Mr. Debopriya Moulik
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