The Allahabad Bench of the National Company Law Tribunal (NCLT) has asserted that, at the Section 9 stage, the Adjudicating Authority is only required to see whether there is a real dispute that is prima facie legitimate, plausible and not spurious, hypothetical, illusory or a mere bluster; it is not required to examine the merits of the defence in detail or determine whether the defence is likely to succeed. It also recorded that dispute under Section 5(6) is an inclusive concept and may be demonstrated through prior correspondence, not merely through pending suits or arbitration proceedings.
Applying that test, the NCLT has dismissed an insolvency plea filed by Empire Transport Services Limited (ETSL) against Noida Metro Rail Corporation Limited (NMRC), and held that the material on record sufficiently demonstrated a genuine and substantial pre-existing dispute between the parties regarding the quality of services rendered, deductions and penalties imposed, and the consequent amounts payable under the Bus Operators Agreement, all of which existed before the demand notice. Since such a real and bona fide pre-existing dispute existed within the meaning of Section 5(6), the Section 9 application was not fit for admission.
The Division Bench comprising Praveen Gupta (Judicial Member) and Ashish Verma (Technical Member) identified the principal issue as whether there existed a “pre-existing dispute” before issuance of the demand notice within the meaning of Section 5(6) of the Code. It noted that the examination had to be confined to the position existing prior to the demand notice and reproduced the statutory concept of “dispute” to include disputes relating to the existence of the amount of debt, quality of goods or services, or breach of representation or warranty.
The Tribunal observed that the objections raised by the Corporate Debtor pertained substantially to the quality and standard of services rendered under the Bus Operators Agreement and therefore fell squarely within Section 5(6)(b). It referred to Clauses 12 and 13 and Schedule 5 of the agreement, which required the operator to maintain prescribed service standards and empowered NMRC to inspect, audit, monitor, and impose penalties in case of deficiencies and non-compliance.
On facts, the Tribunal found that prior to the Section 8 notice, the Corporate Debtor had issued multiple show cause notices raising specific deficiencies in operation, maintenance and performance of the bus services. These included allegations such as inadequate fleet availability, defective passenger information systems, malfunctioning GPS, cracked windshields, non-functional stop buttons, torn seats, route deviations, failure to maintain designated stoppages, non-maintenance of staff and statutory registers, non-deposit of EPF and ESI dues, defective air-conditioning systems, and absence of valid public transport licences. The Tribunal further noted that these notices were supported by inspection reports and photographs, and that the Operational Creditor had responded to them from time to time with explanations and assurances regarding rectification.
The Tribunal also observed that the material placed by the Corporate Debtor prima facie showed that invoices were not mechanically accepted in full, but were subjected to scrutiny, verification and certification, with deductions effected towards penalties attributable to service deficiencies before release of payments. It therefore found that the disputes were not a mere bald denial of liability, but arose out of performance-related issues and contractual adjustments. The Tribunal rejected the Operational Creditor’s submission that the show cause notices were an afterthought, noting that correspondence from 2017 and 2018 also reflected concerns regarding deficiencies in service standards and contractual compliance.
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Briefly, a Section 9 application was filed by Empire Transport Services Limited as Operational Creditor seeking initiation of CIRP against Noida Metro Rail Corporation Limited on the basis of alleged unpaid operational dues arising under a Bus Operators Agreement of 2016 for procurement, operation and maintenance of bus services in Noida, Greater Noida and Noida-Greater Noida connectivity. The Operational Creditor stated that although the agreement contemplated operation of 100 low-floor AC CNG buses, only 50 buses were initially run, and invoices raised during the period from Apr 25, 2019 to Mar 16, 2020 remained unpaid despite repeated communications. It claimed an outstanding principal of Rs. 7.09 crores as on Mar 16, 2020, asserted first default on June 01, 2019, and relied on the demand notice under Section 8 of the Code.
The Corporate Debtor opposed the petition on the ground that no default within the meaning of the Code had occurred and that the claim was already disputed much before the Section 8 notice. It relied on several show cause notices issued in January 2020 alleging deficiencies in service, breaches of the contractual standards, and deductions/penalties under the Bus Operators Agreement. It further submitted that disputes between the parties had already spilled into other fora, including proceedings under the Arbitration and Conciliation Act, writ proceedings and arbitral proceedings, and contended that the invoices were subject to verification and certification and that payments were made on a running account basis rather than by automatic acceptance of invoice values.
