Disputes Pertaining To Contractual Issues Not To Be Resolved In Section 9 IBC Proceedings: NCLAT Delhi

Background Facts

A'XYKno Capital Services Pvt. Ltd. ("Appellant/Operational Creditor") had provided consultancy services to Rattan India Power Ltd. ("Respondent/Corporate Debtor"). Invoices were issued by the Operational Creditor to the Corporate Debtor in February, 2015. On 18.02.2015 the Corporate Debtor issued a letter to the Operational Creditor, raising various issues regarding quality of consultancy services provided by the latter for for Coal Block and the resultant losses suffered by the Corporate Debtor. The Operational Creditor had issued certain clarification to the issues on 09.03.2015. On 05.03.2015 the Corporate Debtor was communicated that they are qualified and successful in Tara Block. However, the invoices of the Operational Creditor were not paid.

Thereafter on 26.07.2018 the Operational Creditor addressed a Demand Notice to the Corporate Debtor under Section 8 of the Insolvency and Bankruptcy Code, 2016 ("IBC") demanding payment of its unpaid invoices. The Corporate Debtor had responded to the Demand Notice on 02.08.2018, however, the Operational Creditor claimed to have never received the same.

The Operational Creditor filed a petition under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. The Adjudicating Authority concluded that the dispute raised in letter dated 18.02.2015 regarding poor quality and deficiency in service is a pre-existing dispute. It was further observed that the Insolvency Proceedings are not recovery proceedings and disputed questions of fact could be resolved before a Civil Court. The Adjudicating Authority rejected to admit the Section 9 petition vide an order dated 27.01.2022. The Operational Creditor challenged the Order dated 27.01.2022 before the NCLAT.

Contentions Of Appellant

The Operational Creditor contended that it continued to render services even after letter dated 18.02.2015 and the contract was not terminated. There has been no further correspondence in this regard thereafter. The Operational Creditor was following for its payment and in 2018 when nothing transpired, a notice under Section 8 of IBC was issued on 26.07.2018.

Decision Of NCLAT

The Bench observed that the letter dated 18.02.2015 was detailed and had mentioned poor performance of the consultancy service of Operational Creditor and resultant loss of company business. The letter stated that whole process of consultancy was managed in a very chaotic manner with poor end result. The Operational Creditor's submission that payment was never denied and contract continued even after letter dated 18.02.2015 also does not negate the dispute between the parties. Since poor quality of service was explained by Corporate Debtor in letter dated 18.02.2015.

Hence, the dispute existed from 18.02.2015 onwards at least and the Corporate Debtor had also refuted the claims of Operational Creditor raised in the Demand Notice.

"The Adjudicating Authority had come to the conclusion that there being pre-existing dispute application deserves rejection. The disputes pertaining to contractual issues are not to be resolved in Section 9 proceedings. Present is not a case where there is undisputed debt for which insolvency can be asked by the Appellant to be initiated. We are of the view that no error has been committed by the Adjudicating Authority in rejecting Section 9 application, there being a preexisting dispute."

The Bench held that disputes pertaining to contractual issues are not to be resolved in Section 9 proceedings under IBC and hence, the petition was rightly rejected by the Adjudicating Authority. The Bench dismissed the appeal.

Case Title: a'XYKno Capital Services Pvt. Ltd. v Rattan India Power Ltd.

Case No.: Company Appeal (AT) (Insolvency) No. 913 of 2022

Counsel For Appellant: Mr. Nikhil Nayyar, Sr. Advocate with Mr. Vikram Hegde, Mr. Naveen Hegde and Mr. Chitwan Sharma, Advocates.

Counsel For Respondent: Mr. Karan Batura and Mr. Jayant Chawla, Advocates.

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