NCLAT: IBC Provisions Cannot be Turned into Debt Recovery Proceedings

NCLAT: IBC Provisions Cannot be Turned into Debt Recovery Proceedings

The National Company Law Appellate Tribunal (NCLAT), reiterated that it is a well settled proposition of law as expressed and explained time and again by the Hon’ble Supreme Court, the provisions of Insolvency and Bankruptcy Code, 2016 cannot be turned into a debt recovery proceeding as the underpinning of this special code is to bring a Corporate Debtor on its feet.

The division member bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) observed that, where operational creditor seeks to initiate insolvency process against a Corporate Debtor, it can only be done in clear cases where no real dispute exists between the two

In the present case an appeal was filed by the appellant- Yash Nachrani, Director of suspended Board of Directors Coppertun Brewing Private Limited. under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ in short) against the order dated 12.05.2022 (hereinafter referred as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Cuttack Bench).

By the impugned order, the Adjudicating Authority had admitted the petition under Section 9 of the IBC and allowed the initiation of Corporate Insolvency Resolution Process (‘CIRP’ in short) of the Corporate Debtor.

The brief factual matrix of the case was that the Appellant was the erstwhile director of the Corporate Debtor/Respondent No.2, namely, Coppertun Brewing Pvt. Limited, which is engaged in the business of restaurant/microbrewery.

The Respondent No.1/Operational Creditor, namely, Pardesi Construction Private Limited is the owner of the premises which had been given on rental basis to the Corporate Debtor/Respondent No.2 for carrying out its business. The Corporate Debtor took physical possession of the licensed premises, hereinafter referred to as the “said premises,” and entered into a Leave and License Agreement (‘LLA’ in short) with the Operational Creditor dated 05.10.2015.

The Corporate Debtor and Operational Creditor also entered into a Service Agreement (‘SA’ in short) dated 03.10.2015 by which the Corporate Debtor had agreed to certain service and maintenance facilities in respect of the said premises as provided by the Operational Creditor. The Operational Creditor had issued a notice to the Corporate Debtor on 12.12.2016 to vacate the said premises on the ground that it had failed to adhere to the terms of LLA and SA and for committing default in making payment of dues.

The lease granted to the licensee/Corporate Debtor had a duration of five years in terms of Clause 4 of LLA, after which the Corporate Debtor was required to hand over vacant possession of the said premises to the Operational Creditor.

However, Corporate Debtor continued to remain in possession of the said premises and over-stayed even after expiry of 5-year term. No rent or service charges was paid by the Corporate Debtor in respect of the said premises to the Operational Creditor and the Corporate Debtor has denied the liability to pay such amounts.

A notice invoking arbitration dated 06.08.2020 in terms of Clause 17 of SA was sent by the Operational Creditor to the Corporate Debtor for adjudication of their disputes, followed by another arbitration notice on 17.04.2021 under Clause 13 of LLA.

A demand notice under Section 8 of the IBC was sent to the Corporate Debtor by the Operational Creditor on 11.08.2021 claiming payment of Rs.7,66,52,157/- towards rental dues and service charges for possession of the said premises by the Corporate Debtor. The Corporate Debtor sent reply to the Demand notice on 24.08.2021 denying liability to pay any amount towards license fee, service charge or any other charges.

The Operational Creditor thereafter filed a Section 9 petition of IBC before the Adjudicating Authority on 10.09.2021 leading to the impugned order dated 12.05.2022 admitting the Corporate Debtor to the rigors of CIRP.

The impugned order was challenged by the suspended Director of the Corporate Debtor on the ground that there was no admitted claim and that there was a genuine pre-existing dispute.

The issue for consideration was whether payment to the Operational Creditor was due from the Corporate Debtor and if so, whether a default has been committed by the Corporate Debtor in respect of payment of such operational debt and whether there was any pre-existing dispute raised during the stage of Section 8 Notice.

The bench opined that this examination would be in line with the test which has been laid down by the Hon’ble Supreme Court in Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Private Limited (2018), which held that what is important is that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e., it must exist before the receipt of the demand notice or invoice.

Next, the NCLAT examined whether there was any dispute regarding dues payable by the Corporate Debtor to the Operational Creditor under the terms of LLA and SA.

The bench noted had noted Respondent’s contention that the Corporate Debtor continued to hold possession of the said premises even beyond the 5-year term of the LLA and that neither outstanding license nor service charges have been paid so far and that there was a default in the payment of operational debt of Rs.7,66,52,157.

The NCLAT found that, “the Adjudicating Authority has noted that since the Corporate Debtor has not produced details of any payment in respect of monthly rent etc., operational debt and default is established and, on this ground, admitted the Section 9 petition. This finding of the Adjudicating Authority is erroneous and one-sided having not taken cognizance of the fact that the operational debt claimed by the Operational Creditor was never admitted at any stage by the Corporate Debtor.”

The bench also noted that the Learned Senior Counsel for the Appellant had asserted that liability to pay the dues claimed by the Operational Creditor had been consistently denied by the Corporate Debtor while furnishing their replies to the notice to vacate the said premises; in their reply to the notice for arbitration as well as in their reply to the Section 8 demand notice.

The NCLAT on pursual of the arbitration notices found that there were serious disputes between the two parties and the Operational Creditor by their own admission stated that failure to get the dispute resolved through mutual negotiation compelled them to resort to arbitration.

Given this factual back-drop, it clearly established that the notice of arbitration had been twice invoked.

The bench observed that these notices unequivocally substantiated that disputes existed between the two parties which could not be ironed out in spite of mutual negotiations. Further, since both the notices of arbitration preceded the issue of Section 8 notice, NCLAT stated that it could not lose sight of the fact that real and substantial disputes were actually in existence.

Therefore, the NCLAT concluded by holding that the Adjudicating Authority had committed error in admitting the Section 9 application while turning a blind eye to this voluminous exchange of correspondence between the Corporate Debtor and Operational Creditor spread over a long period of time on the availability of compliances/certificates from various competent authorities, which clearly established that there were serious differences between them in the nature of real pre-existing disputes.

The moonshine defense raised by the Corporate Debtor was rejected by the NCLAT.

For the foregoing reasons, the NCLAT set aside the Adjudicating Authority’s impugned order and the Corporate Debtor was released from the rigors of CIRP and was allowed to function independently through its board of directors.