The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) has held that for a CIRP to be initiated under Section 9 of the IBC, the existence of an “operational debt” and a “default” must be beyond doubt and not be embroiled in a pre-existing dispute. The Tribunal explained that where a corporate debtor raises the defence of a pre-existing dispute, the Adjudicating Authority’s duty is limited to a ‘forensic scrutiny’ to determine if the dispute is plausible, not to adjudicate the dispute itself.
The NCLAT held that jurisdiction of the Adjudicating Authority under the IBC does not extend to interpreting or constructing ambiguous contractual terms to discover the real intent of the parties, as that is the function of a civil court. If a plain reading of the contract reveals an ambiguity that makes the dispute raised by the corporate debtor plausible, the petition under Section 9 of the IBC must fail, as the IBC is not a recovery mechanism. Further, a mere right to claim damages for a breach of contract does not constitute a “debt” within the meaning of an “operational debt” under Section 5(21) of the IBC.
The NCLAT agreed that the pre-existing dispute raised by the Respondent concerning the payment obligation under the Endorsement Agreement was reasonably plausible. The Tribunal also found that the differing interpretations of the payment clauses presented a genuine dispute regarding whether the payment was contingent upon the rendering of services for the second day. However, it concluded that such a dispute must be adjudicated by a civil court and not by the Adjudicating Authority in a summary proceeding under the IBC.
The Division Bench comprising Justice N. Seshasayee (Judicial Member) and Indevar Pandey (Technical Member) observed that the core of the controversy was the intent of the parties regarding the payment of consideration, as to whether the Rs 8.10 crores was a consolidated sum for a single service to be rendered over a maximum of two days, or if it was a time-specific payment of Rs. 4.05 crores for each day of service.
The Tribunal noted that its role was not to construct the contract as a civil court would, but merely to ascertain if a plausible pre-existing dispute existed. It analysed the Appellant’s argument that the phrase ‘whichever is earlier’ in Clause 5.1.2 created an unconditional payment obligation by April 15, 2022, but found this interpretation to be ‘a bit farfetched’ and not conclusive.
Conversely, the Tribunal considered the Respondent’s contention, supported by a reading of Clause 5.2 (regarding payment for additional days), that the consideration was structured at Rs. 4.05 crores per day of performance. The Tribunal found this interpretation to be a ‘possibility’, which made the dispute raised by the Respondent ‘reasonably plausible’. While acknowledging the Appellant’s reliance on clauses concerning default (7.2(c) and 7.2(d)), the Tribunal maintained that ‘consideration payable cannot be separated from the purpose for which it was agreed to be paid’.
Briefly, the Appellant, an actor, entered into a tripartite ‘Endorsement Agreement’ on March 8, 2021, with the Respondent and a third party, for a term of two years, which stipulated that the Appellant would make himself available for not more than two days to render services for a total consideration of Rs. 8.10 crores. The payment was structured in two instalments: the first Rs. 4.05 crores were to be paid by March 8, 2021, which was duly paid, and the Appellant’s services were utilized for one day. The second instalment of Rs. 4.05 crores were payable on or before April 15, 2022, or seven days prior to the utilization of the second day, whichever was earlier. The dispute arose when this second instalment was not paid.
The Appellant raised an invoice for the unpaid amount, and after receiving no response, issued a statutory demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Respondent replied, disputing the liability on the grounds that payment was contingent on the confirmation of availability for the second day of service, which had not occurred.
The Appellant subsequently filed a petition under Section 9 of the IBC to initiate a Corporate Insolvency Resolution Process (CIRP), which the Adjudicating Authority (NCLT) dismissed, citing the existence of a pre-existing dispute.
Appearances:
Senior Advocate Krishnendu Datta, along with Advocates Anish Agarwal, Pratik Chakma, Natasha Bagga, Abinav Maurya, Alina Merin Mathew, and Tanisha Chaudhary, for the Appellant
Advocates Prithu Garg, Shivam Singh, and Ashutosh Arvind Kumar, for the Respondent
