Dispute Regarding GST Dues Not A Bar To Section 9 IBC Proceedings: NCLAT

The NCLAT Bench of Justice Rakesh Kumar Jain, Member (Judicial) and Arun Baroka, Member (Technical) has held that the dispute regarding payment of GST dues is not a “pre-existing dispute” between the parties that would preclude the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency & Bankruptcy Code, 2016 (IBC). Brief Facts The Appellant (or “Corporate Debtor”), M/s Ahuja Cotspin Private Limited, incorporated under the Companies Act, 1956, was involved in the manufacturing of cotton yarn. Respondent No. 1 (or “Operational Creditor”), Aggarwal Enterprises, a sole proprietorship engaged in the trading and supply of cotton, raised multiple invoices between August 13, 2018, and September 16, 2018, for goods supplied to the Corporate Debtor. In December 2018, reports surfaced of a scam involving the supply of cotton based on fake bills, leading the Corporate Debtor to halt transactions with Respondent No. 1 and demand original GST documents to verify the authenticity of the transactions. Subsequently, the Directorate General of GST Intelligence (DGGI) conducted searches and seized records from the Corporate Debtor's premises, alleging the supply of cotton without proper GST payments. Respondent No. 1 later issued a demand notice on May 27, 2019, seeking recovery of Rs. 1,91,51,792, including interest, which the Corporate Debtor contested on the grounds of disputed invoices and ongoing GST investigations. Thereafter, Respondent No. 1 filed an application under Section 9 of the IBC, seeking initiation of CIRP against the Corporate Debtor, which was admitted by the National Company Law Tribunal (NCLT) on June 12, 2024. The Corporate Debtor has challenged the NCLT's decision, alleging the existence of a “pre-existing dispute” regarding the invoices and the validity of GST payments, which are still under investigation by the GST authorities and pending adjudication before the Punjab and Haryana High Court. Arguments Appellant/Corporate Debtor: The CIRP should not proceed because the Corporate Debtor is financially stable, and there exists a pre-existing dispute regarding GST dues.The Appellant cited Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353, where the Supreme Court held that if there is a plausible contention requiring further investigation, the existence of a dispute must be recognized without delving into the merits. Respondent/Operational Creditor: There was no pre-existing dispute between the parties before the demand notice was issued under Section 8 of the Code.The proceedings involving the GST department are not relevant to the current dispute between the parties. Analysis The NCLAT observed that the alleged dispute regarding the payment of GST dues is not a pre-existing dispute between the parties that would prevent the initiation of Section 9 proceedings as the alleged pre-existing dispute concerning GST dues was not between the parties (the Operational Creditor and the Corporate Debtor) but between the Corporate Debtor and the Directorate General of GST Intelligence. The Corporate Debtor failed to demonstrate a genuine pre-existing dispute over the payment of invoices prior to the issuance of the demand notice dated 27 May 2019. The NCLAT referred to the Supreme Court's decision in Mobilox Innovations Private Ltd. v. Kirusa Software Private Ltd., which established a three-fold test for the admission of an application under Section 9 of the Code: There must be an “operational debt” exceeding Rs. 1 lakh. The debt must be due and payable and must remain unpaid. There must be no pre-existing dispute between the parties or any record of pending legal proceedings before the receipt of the demand notice for the unpaid operational debt. Applying this test, the NCLAT found that all three conditions were met in this case, and therefore, the application for initiating CIRP under Section 9 was maintainable. The NCLAT found that the claim of the Operational Creditor against the Corporate Debtor is valid and remains unpaid. It recorded its findings as follows: The Corporate Debtor has received goods from Operational Creditor and has an outstanding debt exceeding Rs. 1 lakh.The Corporate Debtor's claims of a pre-existing dispute arising from GST raids and alleged fake invoices are not substantiated with any material evidence on record. The correspondence and proceedings involving the GST authorities do not constitute a genuine pre-existing dispute between the Corporate Debtor and the Operational Creditor regarding the operational debt.The Corporate Debtor's arguments that the company is solvent and that the matter should be resolved through civil proceedings or arbitration are irrelevant to the initiation of CIRP. Thus, the NCLAT held that the debt and default are clearly established and...

Dispute Regarding GST Dues Not A Bar To Section 9 IBC Proceedings: NCLAT

Tazeen Ahmed

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