NCLAT Overturns NCLT Decision: Upholds Section 9 Application in Dispute Between IT Firms

Appellate Tribunal Criticizes Adjudicating Authority's Rejection of Insolvency Application; Emphasizes Admitted Debt and Lack of Genuine Dispute

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has set aside the National Company Law Tribunal's (NCLT) decision that dismissed an insolvency application filed by M/s RMV IT Services Pvt. Ltd. against M/s Red Eye Services Pvt. Ltd. The judgment, pronounced by a bench comprising Justice Ashok Bhushan and Member (Technical) Barun Mitra, underscores the importance of admitted debt and the absence of genuine disputes in insolvency proceedings.

The case revolved around six rental agreements between the two companies for the supply of computer and IT products. The appellant, RMV IT Services, contended that despite the absence of invoices from July 2018, the operational debt was acknowledged by the corporate debtor, Red Eye Services, which had defaulted on payments. The appellate tribunal found that the adjudicating authority had erred in its interpretation, especially in light of the Supreme Court's guidance in the Mobilox Innovations Pvt. Ltd. v. Kirusa Software Private Limited case.

The NCLAT emphasized that the absence of invoices does not negate the existence of debt, particularly when the debt is admitted and exceeds the threshold limit. It also highlighted that the adjudicating authority's focus on the quantum of debt was misplaced, as the operational debt, even before any pre-termination considerations, surpassed the necessary threshold.

Furthermore, the tribunal criticized the adjudicating authority's reliance on procedural aspects, such as the timing of the application fee deposit, as a basis for rejection. It clarified that there is no statutory requirement governing the timing of such deposits relative to demand notices.

The judgment also addressed the issue of pre-existing disputes, determining that the corporate debtor's claims of reconciliation were an afterthought and lacked credibility. The tribunal noted that no genuine dispute existed prior to the issuance of the Section 8 demand notice, thereby affirming the validity of the Section 9 application.

In its order, the NCLAT directed the NCLT to admit the Section 9 application, allowing a one-month period for potential settlement between the parties. This decision underscores the appellate tribunal's commitment to ensuring that insolvency proceedings adhere to statutory provisions and judicial precedents, thereby safeguarding the rights of operational creditors.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Section 9 application cannot be rejected when operational debt exceeding threshold limit is established, default is admitted, and no pre-existing dispute is proven.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 8, 9, 9(3)(b), 61

M/s RMV IT Services Pvt. Ltd. v. M/s Red Eye Services Pvt. Ltd., (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2812636