Henan Boom Gelatin Co. Ltd. Vs. Sunil Healthcare Ltd - The pre-existing dispute which may be ground to thwart an Application under Section 9 has to be real dispute a conflict or controversy, a conflict of claims or rights should be apparent from the reply as contemplated by Section 8(2).

 NCLAT (18.11.2021) In Henan Boom Gelatin Co. Ltd. Vs. Sunil Healthcare Ltd.[Company Appeal (AT) (Insolvency) No. 256 of 2021] held that;

• There is a statutory purpose for requiring a Corporate Debtor to bring into notice of the Operational Creditor about the existence of a dispute in its reply to Section 8(1) notice. The purpose is that if there is a dispute in existence, the same may be immediately communicated to the Operational Creditor so that he may chart his course of action. When no mention of existence of dispute is made by the Corporate Debtor, the Operational Creditor can immediately file Application under Section 9 which has been done in the present case by Operational Creditor.

• The pre-existing dispute which may be ground to thwart an Application under Section 9 has to be real dispute a conflict or controversy, a conflict of claims or rights should be apparent from the reply as contemplated by Section 8(2). 

• The Corporate Debtor is not to raise bogie of disputes but there has to be real substantial dispute. It is true that the Adjudicating Authority has to see the reply and the contents therein and has not to enter into adjudication of the dispute. He is only required to look into the substance of the pleading to find out whether there is a real dispute is decipherable from the reply.

• There being categorical acknowledgment and admission of debt by the Corporate Debtor, it is not open for the Respondent to contend that there was no debt and the Application could not have been filed by the Operational Creditor.

 

Excerpts of the order;

# 4. Learned Counsel for the Appellant submits that the Adjudicating Authority has committed error in rejecting the Application relying on email dated 04.05.2018 sent by the quality control department to the CEO of the Corporate Debtor. The Adjudicating Authority wrongly assumed that there was a pre-existing dispute, hence, the Application under Section 9 deserves to be rejected. Learned Counsel submits that in response to Demand Notice under Section 8 issued by the Operational Creditor, as contemplated under Section 8(2) the Corporate Debtor sent its reply admitting the outstanding amount of USD 3,77,392.00 and has no mention about existence of a dispute. It is submitted that in the three replies filed before the Adjudicating Authority, the Corporate Debtor has now tried to create a dispute which was never in existence. Reliance on the email dated 04.05.2018 is also not relevant since in the meeting dated 27.07.2018 between the parties where the Corporate Debtor himself proposed a plan for repayment no such issue was raised or noticed. Further, even if the emails dated 04.05.2018 and 30.07.2018 are read, it does not indicate that there was existence of a dispute. Insofar as four debit notes dated 27.05.2019, 30.06.2019, 07.11.2019 and 10.12.2019 are concerned, the said debit notes were never acknowledged by the Operational Creditor and the debit notes were created by the Corporate Debtor which were all events subsequent to filing Application under Section 9 by the Operational Creditor. There being no existence of a dispute when Demand Notice under Section 8 was issued, the Adjudicating Authority committed error in rejecting the Application.

# 6. We have considered the submissions of the Learned Counsel for the parties and have perused the record.

# 8. The issue under consideration in Appeal is as to whether there was a pre-existing dispute when Notice under Section 8 was issued.  . . . . 

# 9. Sub-section (2) of Section 8 obliges the Corporate Debtor who has been delivered a Demand Notice under Section 8(1) by Operational Creditor to bring into notice of the Operational Creditor “existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute”.

 

# 11. The above minutes clearly records acknowledgment of debt by the Corporate Debtor and undertaking to make the payment in three instalments. The last instalment to be paid before end of January, 2019. When no payment was made, Demand Notice under Section 8 was issued demanding payment of USD 3,77,392.00. Demand Notice was in Form-3 with all relevant particulars. Reply to the notice was immediately given by the Corporate Debtor vide its letter dated 04.02.2019. For ready reference, it is useful to quote the entire contents of the email which was to the following effect:-

• “Subject- Reply of Notice of under Section 8 of the Insolvency and Bankruptcy Code 2016 read with Rule 8- reg.

• Ref: Your letter no. 4625/32007/CH/19/01 dated 01.02.2019

• This is with reference to above mentioned subject and demand notice received from you in Form no. with respect to demanding of USD 3,77,392.00 on behalf of your client viz. Henan Boom Gelatin Co. Ltd. China, please note as under:

• 1. That we are surprised and shocked to see the demand notice in Form no.3 from you on behalf of your client with respect to Gelatin supplied to our Company viz Sunil Healthcare Limited.

• 2. That we are in discussion with your client for payment of entire dues through email. The schedule of payment has already been shared with your client via email dated 30.01.2019, by Sr. Vice- President of our Company, a copy of the same is enclosed as Annexure-1. We are in constant touch with your client at several points of time, which shows our intention and commitment to make payment. Further, our Company enjoy very amiable and positive relations with your client for the last many years. Both the parties are committed towards perusing this cherished association and remain fully committed in resolving all/ any matter within ambit of free and firm mutually acceptable terms of reference.

• 3. That in view of above, you are requested to take in loop your client and bring its kind attention the schedule of payment as shared above and withdraw the Demand notice in Form no.3 under IBC-2016, as our Company is very much competent to clear its dues as per the commercial terms, agreed between the parties.

• You are requested to take the above intimation in your record and oblige use.”

 

# 12. The reply as required under Section 8(2), it is incumbent on Corporate Debtor to bring into the notice to the Operational Creditor ‘existence of a dispute’. Although notice under Section 8(1) was replied by the Corporate Debtor vide email dated 04.02.2019 as extracted above, but there is no mention of existence of a dispute. Rather the reply dated 04.02.2019 reiterate that the Respondents are ready to make the payment as per their revised plan communicated on 30.01.2019.

# 13. There is a statutory purpose for requiring a Corporate Debtor to bring into notice of the Operational Creditor about the existence of a dispute in its reply to Section 8(1) notice. The purpose is that if there is a dispute in existence, the same may be immediately communicated to the Operational Creditor so that he may chart his course of action. When no mention of existence of dispute is made by the Corporate Debtor, the Operational Creditor can immediately file Application under Section 9 which has been done in the present case by Operational Creditor.

# 15. In para 34, the Hon’ble Supreme Court (Mobilox Innovations Private Limited vs. Kirusa Software Private Limited) laid down what the Adjudicating Authority has to examine in an Application under Section 9. Para 34 is as follows:-

• “34. Therefore, the adjudicating authority, when examining an application under Section 9 of the Act will have to determine:

• (i) Whether there is an “operational debt” as defined exceeding Rs 1 lakh? (See Section 4 of the Act)

• (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? And

• (iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

• If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.”

# 23. The pre-existing dispute which may be ground to thwart an Application under Section 9 has to be real dispute a conflict or controversy, a conflict of claims or rights should be apparent from the reply as contemplated by Section 8(2). The Corporate Debtor is not to raise bogie of disputes but there has to be real substantial dispute. It is true that the Adjudicating Authority has to see the reply and the contents therein and has not to enter into adjudication of the dispute. He is only required to look into the substance of the pleading to find out whether there is a real dispute is decipherable from the reply.

 

# 25. In the present case, no notice of dispute has been received by the Operational Creditor as noted above. There is another expression in clause (d) noted above that ‘there is a record of dispute in the information utility’, the present is also not a case where there is record of any dispute in the information utility nor any such pleading or material has been placed before us. The very basis on which the Adjudicating Authority rejected the Application is not in existence. There being no pre-existing dispute between the parties, the Adjudicating Authority ought to have admitted the Application and proceeded with the Corporate Insolvency Resolution Process.

 

# 26. The Adjudicating Authority has observed that whether the Operational Creditor is entitled to seek recovery of the amount of balance USD 2,28,079 out of the total USD 3,77,392.00 as set off by the Corporate Debtor through issuance of Debit Notes, is not for the consideration of this Bench. However, the Applicant has the option to file a Civil suit before the appropriate forum, for the recovery of the same.

 

# 27. The four debit notes issued by the Corporate Debtor have been strongly denied by the Operational Creditor. It has been submitted that they have been manufactured for the purposes of the case after filing of the Application under Section 9. The receipt or acknowledgment of the said debit notes has also been denied. It is not necessary for us to pronounce as to whether the debit notes are forged or manufactured for the purposes of this case, since the very basis of the decision of Adjudicating Authority was the existence of dispute which we have already dealt above. It is further relevant to notice that there was repeated acknowledgment of debt of USD 3,77,392.00 by the Corporate Debtor which is fully proved by the minutes of meeting dated 27.07.2018 and email dated 30.01.2019 issued by the Corporate Debtor admitting the operational debt and seeking more time for making payment thereof. Further, even in reply dated 04.02.2019 sent in response to Notice under Section 8(1), the Corporate Debtor explicitly showed its willingness and commitment for payment of entire dues. Another reply dated 12.02.2019 was sent by the Corporate Debtor to the statutory notice expressing its commitment to clear debt of the Appellant. There being categorical acknowledgment and admission of debt by the Corporate Debtor, it is not open for the Respondent to contend that there was no debt and the Application could not have been filed by the Operational Creditor.

 

# 28. In view of the aforesaid, the impugned order of the Adjudicating Authority dated 19.02.2021 is set aside. Application of the Operational Creditor filed under Section 9 stands admitted and the Adjudicating Authority is directed to proceed with. The Corporate Insolvency Resolution Process shall be deemed to have commenced from this date. The Adjudicating Authority shall pass an order as contemplated under Section 13 within two weeks from today after hearing both the parties. The copy of this order shall be produced by the Appellant herein within three days  before the Adjudicating Authority. The Appeal is allowed accordingly.

 

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