Insolvency Code - Section 9 application cannot be defeated on the basis of contrived, improvised, or moonshine disputes

National Company Law Appellate Tribunal Upholds Corporate Insolvency Resolution Process Initiation Against Steel expert Industries, Tribunal Dismisses Appeal, Affirms Operational Creditor's Claim Amidst Disputed Cash Payments and Alleged Pre-Existing Disputes

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, dismissed an appeal by Yusuf Malubhaiwala, ex-Director of Steelexpert Industries, challenging the initiation of the Corporate Insolvency Resolution Process (CIRP) against the company. The appeal contested an earlier order by the National Company Law Tribunal (NCLT), Indore Bench, which admitted the application filed under Section 9 of the Insolvency and Bankruptcy Code (IBC) by the operational creditor, Mr. Abdul Maaz, proprietor of Haji Shahadat & Sons and Maaz Exports.

The core of the dispute revolved around the alleged non-payment of Rs 2,32,98,535/- by Steelexpert Industries to the operational creditor for the supply of iron and steel materials. The appellant argued that the outstanding amount had already been settled through cash payments, supported by cash receipts, and that there existed a pre-existing dispute evidenced by police complaints and civil suits.

The NCLAT, comprising Justice Ashok Bhushan and Member (Technical) Barun Mitra, rejected these contentions. The bench held that the pre-existing disputes claimed by the corporate debtor were not genuine, bonafide, or supported by credible evidence. The Tribunal found the cash receipts presented by the appellant to be unsigned and unverified, and the claims of cash payments were inconsistent with the company’s financial records. Moreover, the police complaints and civil suits cited as evidence of pre-existing disputes were either unrelated to the operational debt or initiated after the demand notice.

The Tribunal also addressed the issue of maintainability of the Section 9 application by a sole proprietor, affirming that such applications are permissible, as established in previous judgments.

The decision underscores the stringent requirements for establishing pre-existing disputes under the IBC, emphasizing that disputes must be genuine and substantiated by credible evidence to invalidate an application for CIRP. The NCLAT’s judgment reaffirms the principle that the insolvency process should not be misused for debt recovery by raising contrived disputes.

With this ruling, the CIRP against Steelexpert Industries will proceed, marking a significant step in the enforcement of operational creditors' rights under the IBC framework. The Tribunal’s decision highlights the importance of adhering to legal and procedural standards in commercial transactions and insolvency proceedings.

Bottom Line:

Insolvency and Bankruptcy Code (IBC) - Section 9 application cannot be defeated on the basis of contrived, improvised, or moonshine disputes. A pre-existing dispute must be genuine, bonafide, and supported by credible evidence.

Statutory provisions: Insolvency and Bankruptcy Code, 2016 - Sections 8, 9, 61

Yusuf Malubhaiwala v. Mr. Anuj Maheshwari, (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc id # 2820089