Saturday, 23 January 2021

Naresh Sevantilal Shah Vs. Malharshanti Enterprises - Only disputes raised prior to the first demand notice are relevant to determine its pre-existence disputes

NCLAT (19.01.2021) in Naresh Sevantilal Shah Vs. Malharshanti Enterprises  [Company Appeal (AT)(Insolvency) No. 415 of 2020] held that;

  • We are of the view that there was no dispute existing prior to the first demand notice and only disputes raised prior to the first demand notice are relevant to determine its pre-existence and disputes raised thereafter are totally irrelevant for the same.


Excerpts of the order;

# 2. The brief facts of the case are that the Respondent No. 1 i.e. Malharshanti Enterprises (hereinafter referred to as ‘Operational Creditor’) filed a Company Petition under section 9 before the Adjudicating Authority seeking initiation of Corporate Insolvency Resolution Process (CIRP) against CAN Enterprises Private Limited (hereinafter referred as ‘Corporate Debtor’) on the grounds that the Corporate Debtor failed to make payment of a sum of Rs. 94,64,770 (Rupees ninety-four lakh sixty-four thousand seven hundred and seventy only) as principal and Rs. 68,66,919 (Rupees sixty-eight lakh sixty-six thousand nine hundred nineteen only) as interest as on 22nd August, 2018.


# 4. It is submitted by the Learned Counsel for the Appellant that the Operational Creditor first sent a demand notice under section 8 of the I&B Code to the Corporate Debtor on 2nd December, 2017. On the basis of the first demand notice, the Operational Creditor filed a petition under section 9 of the I&B Code, being CP (IB) 1823/2017. In the first petition, the Corporate Debtor raised several pre-existing disputes in its affidavit in reply. On 13th August, 2018, the Adjudicating Authority dismissed the first petition with the following finding “On hearing such arguments, the Petitioner Counsel having realized that the petition is defective because damages claim has been included in the petition, he has asked for withdrawal of this petition with a liberty to proceed against the Corporate Debtor with a correct claim as envisaged under this code. In view of this submission made by the Petitioner Counsel, the Company Petition is hereby dismissed giving liberty to the Petitioner to come with the correct claim before this bench.”


# 5. It is further submitted on behalf of the Appellant that on 13th March, 2018, the Corporate Debtor sent a detailed legal notice to the Operational Creditor setting out several pre-existing disputes as to quality of work and delay in completion of work. By this communication, a counter claim was also raised against Operational Creditors. Subsequently on 10th April, 2018, a notice invoking arbitration was sent to the Operational Creditor. Thus arbitral proceedings under section 21 of the Arbitration & Conciliation Act, 1996, were pending from 10th April 2018. Subsequent to this the Operational Creditor sent another demand notice under section 8 of I&B Code on 23rd August, 2018. Corporate Debtor replied to second demand notice within 10 days of receiving it and raised several pre-existing disputes. On the basis of second demand notice, the Operational Creditor filed CP (IB) 3753/MB/C-IV/2018 in which the Impugned Order came to be passed.


# 6. It is contended by the learned counsel for the Appellant that, prior to the second demand notice, Corporate Debtor already invoked arbitration. Therefore, there was a pre-existing dispute in the form of pending arbitral proceedings and for this reason alone, the impugned order ought to be set aside. Reliance is placed by the learned counsel for Appellant on Pramod Yadav & Anr. Vs. Divine Infracon Pvt. Ltd. [Company Appeal (AT) (Ins) 251/2017], particularly paragraphs 9 and 10 which we have reproduced herein under:

  • 9. From the aforesaid letter, it is clear that the ‘Corporate Debtor’ made request under Section 21 of the Arbitration and Conciliation Act, 1996, which reads as follows:

- “21. Commencement of arbitral proceedings. ─ Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular disputed commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.”

  • 10. In view of the fact that the arbitral proceedings commence since the request made under Section 21 of the Arbitration and Conciliation Act, 1996, we hold that on commencement of arbitral proceedings, it is rightly pleaded that there is an existence of dispute and therefore, the petition under Section 9 was not maintainable.


# 32. The Contention of the Appellant that the relevant date for determining whether there was a pre-existing dispute was the date of second demand notice, i.e. 23rd August, 2018 and not the first demand notice dated 2nd December, 2017 as the first petition was dismissed by the Adjudicating Authority as the Petitioner Counsel had asked for withdrawal of the first petition due to incorrect claims made under first application, with a liberty to proceed against the Corporate Debtor with a correct claim as envisaged under I&B Code. The above Contention raised by the Appellant cannot be sustained. The Adjudicating Authority has rightly relied upon the ratio laid down by this Tribunal in the case of Dinesh Gupta vs. Hajura Singh Bhim Singh & another, Company Appeal (AT) (Insolvency) No. 99 of 2018 wherein is was held that:

  • 6. On hearing the parties, as we find that there was no dispute in existence prior to the 1st demand notice issued under Section 8(1) of the I&B Code and the Corporate Debtor disputed the claim about quality only after issuance of 1st demand notice, therefore, after withdrawal of 1st application under Section 9 on technical grounds and issuance of fresh demand notice, the application under Section 9 filed by Respondent was maintainable.”


# 33. The Appellant argued that the Adjudicating Authority misplaced its reliance on the above Judgment as in that case the first petition was dismissed on technical ground. However, in the present case, the first petition was not dismissed on technical ground but because Operational Creditor had made an incorrect claim. This argument of the Appellant is turned down as firstly the above Judgment was mainly pointing out that there should be no dispute in existence prior to the 1st demand notice issued under Section 8(1) of the I&B Code. The Appellant has wrongly emphasized on the word ‘technical ground’ and not the ratio that was laid down under the judgment. Secondly, it is the Adjudicating Authority who shall observe whether the ground on which the first application was dismissed was a technical ground or not.


# 34. It is apparent from the records placed before this tribunal that Corporate Debtor have sent a legal notice on 13th March, 2018 setting out several pre-existing disputes as to quality of work and delay in completion of work and also raised a counter claim against the Operational Creditor. The Corporate Debtor also sent a notice invoking arbitration on 10th April, 2018. These issues were raised after the issuance of the first demand notice. Thus there were no disputes existing prior to the issuance of first demand notice. 


# 35. The arbitration notice was sent after the issuance of the first demand notice but prior to the issuance of second demand notice when the Operational Creditor was busy in removing the defects in its first petition.  This exhibits that the intention of the Appellant behind this was to misuse the provisions under the Code and to intentionally delaying the process of law. There were no objections raised in relation to quality of work prior to the issuance of first demand notice and the work done by the Operational Creditor was in fact certified by the architect appointed by the Corporate Debtor. Moreover, the Municipal Corporation in September, 2016 issued Occupation Certificate to the Appellant. If there were any discrepancies, the appellant could not have obtained Occupation Certificate from municipality. This also shows that all the defects pointed out by the architect have been timely rectified within the appropriate time, so that the Municipal Corporation found it appropriate to issue the Occupation Certificate.


# 36. In the light of the above observations and the records placed before us. We are of the view that there was no dispute existing prior to the first demand notice and only disputes raised prior to the first demand notice are relevant to determine its pre-existence and disputes raised thereafter are totally irrelevant for the same. Also the arbitration was invoked after the first demand notice. Thus the Adjudicating Authority have rightly concluded that there was no dispute existing prior to the demand notice issued under section 8 of I&B Code.


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Disclaimer:

The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.