NCLT Mumbai: Corporate Debtor Not Barred from Raising Pre-Existing Dispute Despite Failure to Respond to Demand Notice Within 10 Days
Pranav B Prem
The National Company Law Tribunal (NCLT) Mumbai bench, comprising Hon'ble Shri K. R. Saji Kumar (Judicial Member) and Hon'ble Shri Sanjiv Dutt (Technical Member), has ruled that a Corporate Debtor’s failure to respond to a demand notice within 10 days under Section 8 of the Insolvency and Bankruptcy Code, 2016 (the Code), does not prevent it from asserting the existence of a pre-existing dispute, particularly when such a dispute was raised prior to the issuance of the demand notice.
Background of the Case
The case involved an alleged default arising from five unpaid invoices related to the supply of cotton fiber to the Corporate Debtor during the financial year 2021-22. While the date of default was not expressly mentioned in Part IV of the application, the invoices, dated between December 16, 2021, and January 19, 2022, indicated a 30-day payment due period. The Operational Creditor, upon the Corporate Debtor’s failure to clear the outstanding dues, filed an application under Section 9 of the Code, seeking the initiation of the Corporate Insolvency Resolution Process (CIRP).
Arguments of the Parties
Contentions of the Operational Creditor
The Operational Creditor argued that:
The invoices remained undisputed, and the Corporate Debtor had never raised any concerns regarding the quality or quantity of the goods before the demand notice was issued.
Emails dated November 3, 2021, and January 10, 2022, sent by the Corporate Debtor, contradicted its claim of a pre-existing dispute. Instead, these communications indicated an intention to continue the contractual relationship for bulk supplies.
The Corporate Debtor’s attempt to dispute its obligations after accepting the goods without demur was legally untenable. Reliance was placed on the precedent set in Deepak Modi vs. Shalfeyo Industries [(2023) SCC OnLine NCLAT 169], where the Appellate Tribunal held that a debtor cannot evade its payment obligations by raising frivolous claims post facto.
Defence by the Corporate Debtor
On the other hand, the Corporate Debtor contended that:
The Operational Creditor failed to provide evidence establishing that it had fulfilled its duties as a seller, and the veracity of the invoices was questionable.
The Operational Creditor deliberately withheld the Corporate Debtor’s response to the demand notice. However, the Corporate Debtor, in its Additional Affidavit dated June 13, 2023, submitted its reply notice dated June 9, 2022, along with supporting documents, including copies of invoices and multiple email correspondences, indicating the existence of a dispute between the parties.
Observations of the Tribunal
After examining the submissions, the Tribunal made the following key observations:
The emails exchanged between the parties from January 10, 2022, to January 21, 2022, reflected disputes concerning the inferior quality of goods and delayed payments. These concerns were not contested by the Operational Creditor.
A meeting was held on April 6, 2022, attended by both parties, to address these disputes. Though the minutes of the meeting remained unsigned, they were emailed to the Operational Creditor on April 11, 2022. The Operational Creditor did not challenge the content of these minutes.
The Corporate Debtor, in its reply to the demand notice, reiterated these disputes, further establishing that they had arisen before the issuance of the notice.
The Tribunal relied on the precedent set in Brand Realty Services Ltd. vs. Sir John Bakeries India Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 958 of 2020], which held that failure to reply to a demand notice under Section 8(1) within the stipulated 10-day period does not prevent the Corporate Debtor from presenting material evidence before the adjudicating authority to demonstrate the existence of a pre-existing dispute.
Judgment and Conclusion
Based on the above findings, the Tribunal concluded that the applications and emails exchanged between the parties substantiated the existence of a pre-existing dispute. Since these disputes had been raised before the filing of the present petition and the issuance of the demand notice, the Operational Debt could not be considered undisputed. Consequently, the Tribunal dismissed the present petition.
Appearance
Operational Creditor: Adv. Ranjit Shetty a/w. Adv. Yuvraj Choksy and Adv. Arjun Amin i/b Argus Partners
Corporate Debtor: Adv. Avinash Khanolkar a/w. Adv. Yachika Jain & Adv. Surekha Yadav
Cause Title: Himatsingka Seide Limited V. Textile Professional LLP
Case No: CP (IB) No. 886/MB/2022
Coram: Hon’ble Shri K. R. Saji Kumar [Member (Judicial)], Hon’ble Shri Sanjiv Dutt [Member (Technical)]
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