On February 9, 2023, the National Company Law Appellate Tribunal, New Delhi gave its decision in the case of Greymatter Entertainment Private Limited v. Pro Sportify Private Limited, whereby it confirmed the position that even if the Corporate Debtor does not reply to the statutory demand notice issued by the Operational Creditor under Section 8(1) of the Insolvency and Bankruptcy Code, 2016, it is not precluded from raising the question of pre-existing dispute or establishing by way of a reply to the application under Section 9 that there is a pre-existing dispute between the parties. It also confirmed the position that failure to file a rejoinder by the Operational Creditor cannot be treated as an admission of the plea taken by the Corporate Debtor in its reply.

Brief Facts:

Greymatter Entertainment Private Limited (“Operational Creditor”) filed an appeal [Company Appeal (AT) (Insolvency) No. 1043 of 2021 before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) against Pro Sportify Private Limited (“Corporate Debtor”), challenging the order dated July 27, 2021 passed by the National Company Law Tribunal, Chandigarh (“Impugned Order”) whereby the Operational Creditor’s application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was dismissed with an observation that the Operational Creditor failed to prove the liability of the Corporate Debtor to pay the debt.

The Operational Creditor provided services of Live TV Production of Season 1, Season 2 and Season 3 of the Pro Wrestling League held in India in 2015 to the Corporate Debtor. It was contended by the Operational Creditor that only for the TV Services of Season 2, a Live Production Agreement dated 29 January 2016 was entered into between the parties and that the entire consideration for the three seasons was not paid. Therefore, since there was a ‘debt’ and ‘default’ an application under Section 9 of the IBC was filed before the NCLT by the Operational Creditor.

It was contended that Live TV Production Services for Seasons 1, 2 and 3 were provided to the Corporate Debtor for a total consideration of Rs.2,23,29,790/- for Season 1, Rs.1,20,00,000/- for Season 2 and Rs.1,24,50,000/- for Season 3, respectively. Additionally, out of the total invoices issued by the Operational Creditor for all three seasons, the Corporate Debtor defaulted in payment of Rs.65,41,590/- in addition to interest @12% p.a. and the date of default being 10 January 2017. 

Issues:

1. Whether a Corporate Debtor is precluded from raising the issue of pre-existing dispute before the Adjudicating Authority if it fails to reply to the Demand Notice under Section 8 of the IBC within 10 days?
2. Whether failure to file a rejoinder to the reply filed by the Corporate Debtor can be treated as an admission by the Operational Creditor to the plea by the Corporate Debtor?

Submissions on behalf of the Operational Creditor:

The submissions made on behalf of the Operational Creditor are summarized below:

(i) Section 8 mandates the complete procedure for the initiation of Corporate Insolvency Resolution Process and once 10 days has passed and no payment is received or no notice of dispute is raised under Section 8(2), then the Application enters the jurisdiction realm of the Adjudicating Authority and the wheels of CIRP process start to roll.

(ii) As the Corporate Debtor failed to reply to the notice issued under Section 8, both ‘debt’ and ‘default’ and the question of no ‘Pre-Existing Dispute’, is already crystallized. Reliance was placed on the decision of the Supreme Court in Mobilox Innovations Private Limited’ Vs. ‘Kirusa Software Private Limited [(2018) 1 SCC 353].

(iii) The Adjudicating Authority could not go beyond what is an express mandate of the Statute.

(iv) The law does not compel a party to file a rejoinder and any non-filing of the same cannot be held against it. Reliance was placed on the Judgement of a Division Bench of the Madras High Court in Veerasekhara Varmarayar v. Amirthavalliammal (AIR 1975 Mad 51).

(v) Payment of the outstanding dues was never made in full and final satisfaction and rather it was a part payment of the services rendered.

(vi) The Corporate Debtor paid the TDS for the years 2015–16 and has also paid for the year 2016–17 and 2017–18 and has never disputed the invoices sent to it by email.

Submissions on behalf of the Corporate Debtor:

The submissions made on behalf of the Corporate Debtor are summarized below:

(i) Merely because there was no reply to the Demand Notice issued under Section 8, there is no estoppel for the Corporate Debtor to raise all the relevant issues in its reply to the Application filed under Section 9 of the IBC.

(ii) Some of the documents filed by the Operational Creditor before the NCLAT were not part of the record before the Adjudicating Authority.

(iii) The Operational Creditor did not choose to rebut the submissions made by the Corporate Debtor before the Adjudicating Authority by filing a rejoinder and therefore it must be inferred that there is no dispute regarding the amounts paid in full and final satisfaction.

(iv) No document on record to substantiate that the amount was paid only towards part payment and that the cheque of Rs.34,46,000/- was erroneously issued by the Accounts Department and it cannot be taken as Admission on the part of the Corporate Debtor.

(v) The Operational Creditor did not choose to avail the remedy available to it under Section 138 of the Negotiable Instruments Act, 1881.

(vi) Clause 30 of the Agreement provides for Arbitration for settlement of any disputes.

Observation:

The NCLAT observed that neither Section 8 nor Section 9 of the IBC indicate that if a reply to the Demand Notice is not filed within 10 days, the Corporate Debtor is precluded from raising the question of dispute or pleading that there is no amount ‘due and payable’. Reliance was placed on the Judgement passed by the NCLAT in Brandy Realty Services Ltd. Vs. Sir John Bakeries India Pvt. Ltd. [Comp. App. (AT) (Ins.) No. 958/2020].

The NCLAT also observed that from a perusal of the record there are ‘Claims’ and ‘Counter Claims’ between the parties and there was no communication on record to establish that the Operational Creditor was entitled by some provisions/promise that the amount in default was to be paid by the Corporate Debtor.

Decision:

In view of the above observations, the NCLAT held that though a rejoinder was not filed by the Operational Creditor, it cannot be construed that the pleadings in the Reply have been admitted to by the Operational Creditor. The failure to file a rejoinder cannot be treated as an admission of the pleadings.

The NCLAT dismissed the Appeal and held that it is clear from the material on record that there are ‘Claims’ and ‘Counter Claims’ with respect to the amounts to be paid and the defense is not ‘spurious’ or ‘mere bluster’. It further held that the Operational Creditor has failed to discharge its burden that there was indeed an ‘Operational Debt’ which was ‘due and payable’.

Please find attached a copy of the order.

This update has been contributed by Murtaza Kachwalla (Partner) and Aashdin B. Chivalwala (Principal Associate).

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