No Insolvency for Disputes Which Are Not Pre-Existing

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In the case of M/s Allied Silica Ltd. vs. M/s Tata Chemicals Ltd., the appellant filed the case against the judgment passed by National Company Law Tribunal (NCLT), Mumbai which was pronounced on 15th November 2019. The adjudicating authority i.e. NCLT, Mumbai rejected the application of insolvency filed under section 9 of IBC. However, the decision of NCLT was upheld by the appellate tribunal and the application was rejected and also stated that there was no substance in the appeal filed.

Facts of the case

Appellant i.e. operational creditor and respondent i.e. corporate debtor entered into a business transfer agreement on the 7th of April 2018 for the transfer of undertaking on a slump sale basis under section 2(42C) of the Income Tax Act, 1961 at an amount of Rs 123 crores. The appellant claimed that out of the agreed sum of Rs 123 crores only Rs 65 crores was received whereas other Rs 58 crores were unpaid. However, the application of the appellant was rejected by the adjudicating authority based on pre-existing debt.

Arguments

Appellant

  1. Respondent sent an “expression of interest” to acquire the Silica Business. For this, a letter was issued on 21st August 2017 by the respondent to acquire the business for a considerable amount of Rs 123 crores. 
  2. After the due compliance of the condition precedent as stated in clause 4 of the BTA, compliance notice was sent to the respondent on 4th June 2018 and the same was duly acknowledged by them.  
  3. The slump sale was finally consummated on 18th June 2018 and accordingly, ownership was vested on this day. The applicant issued an invoice on the same day of Rs 123 crores but the respondent only paid Rs 65,19,00,000. 
  4. Notice dated 13th May 2019 and 17th May 2019 were issued for the remaining amount after which a demand notice in ‘Form 3’ dated 3rd June 2019. However, the respondent sent a response on 14th June 2019.
  5. The adjudicating authority i.e. NCLT had ignored and went beyond slump sale transactions which were not the subject matter of the claim of the operational creditor.
  6. The NCLT without any proper appreciation of the facts and correct perspective of law accepted the respondent’s plea of a pre-existing dispute as the authority failed to acknowledge that the slump sale transaction has not been paid as per BETA.

Respondent

  1. The appeal filed by the appellant was based on suppression of facts and information, misrepresentation, and misconstruction of the provision of the business transfer agreement dated 7th April 2018.  
  2. To admit or reject a petition under Section 9 of the I&B Code the Adjudicating Authority has to ensure the existence of an operational debt of more than threshold limit of Rupees one lac, is due and payable and to ensure that there is no pre-existence dispute between the parties, before the receipt of the demand notice by the Corporate Debtor.”  Therefore, the adjudicating authority has correctly rejected the application under section 9 of IBC. 
  3. Alleged debt is not an operational debt and the appellant is not an operational creditor as defined under IBC. 
  4. All the requisite amount has been paid by the respondent and there was no outstanding debt due according to the date of the application. Also, the claim of Rs 58 crores was made after one year of the execution of BTA i.e. on 13th May 2019. Thus, the appellant was misinterpreting the BTA to extort money. 

Court’s Analysis

  • Through email communications, it could be inferred that dispute existed before the issuance of demand notice.
  • The appellate tribunal stated that the existence of a dispute and the suit proceeding must be pre-existing i.e. must exist before the receipt of the demand notice or the invoice.
  • The applicant had failed to complete Tranche II conditions precedent as a result of which the respondent exercised its right under the BTA and adjusted the amount of Rs 6 crores. 
  • The respondent replied to the demand notices within 10 days which is under the statutory period. 

Court’s Decision

The appellant tribunal upheld the decision of NCLT and agreed that they had rightly dismissed the application filed under sec 9 of IBC. The appeal was dismissed. 


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