Between the Lines | Supreme Court: Application to initiate corporate insolvency resolution process will be rejected so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory September 22, 2021
Published in: Between The Lines
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The Supreme Court (“SC”) has, by an order passed in the matter of Kay Bouvet Engineering Limited v. Overseas Infrastructure Alliance (India) Private Limited [Civil Appeal No. 1137 of 2019], decided on August 10, 2021 (“Judgement”), upheld the order passed by the National Company Law Tribunal (“NCLT”) on July 26, 2018, wherein the SC concluded that the application for corporate insolvency resolution process will be rejected so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory.
The instant case was an appeal filed by Kay Bouvet Engineering Limited (“Appellant”), before the SC, challenging the order dated December 21, 2018, passed by the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT had set aside the order passed by the NCLT, by which the NCLT had rejected the application filed by Overseas Infrastructure (Alliance) Private Limited (“Respondent”) as an operational creditor under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for seeking initiation of corporate insolvency resolution process (“CIRP”) against the Appellant. The NCLAT remitted the matter to the NCLT with a direction to admit the petition filed by the Respondent under Section 9 of the IBC after serving demand notice to the Appellant so as to enable it to settle the claim.
The Government of India (“GoI”) had extended a dollar line credit of USD 150 Million to the Republic of Sudan through Exim Bank of India for carrying out Mashkour Sugar Project in Sudan. On October 11, 2009, Mashkour Sugar Company, Sudan (“Mashkour”), entered into a contract with the Respondent, as per which Mashkour was to nominate a sub-contractor. Subsequently, the Appellant was appointed as a sub-contractor through a tripartite agreement, for executing the whole work of designing, engineering, supply, installation, erection, testing and completion of factory plant for Mashkour for a consideration of USD 106.200 million. For the first tranche of payment, the Respondent transferred an amount of INR 47.12 crores (equivalent to USD 10.62 Million) to the Appellant.
Pursuant to exchange of communications between Ministry of External Affairs, GoI and the Sudan Government, the Ambassador of Sudan to India advised GoI to terminate the contract of Mashkour with the Respondent and to appoint the Appellant as the contractor. However, the contract with the Respondent was terminated by Mashkour for failure on its part to perform the duties.
The Respondent served a demand notice to the Appellant under Section 8 (Insolvency resolution by operational creditor) of the IBC alleging default under the tripartite agreement, claiming the amount of USD 10.62 Million paid by the Respondent to the Appellant. The Appellant denied the claim of the Respondent, specifying that the amount was received from Mashkour and only routed through the Respondent and the same stood adjusted under the new agreement.
The Respondent filed an application for initiation of CIRP against the Appellant as an operational creditor. However, the NCLT dismissed the petition. Aggrieved, the Respondent herein, filed an appeal with the NCLAT, wherein NCLAT set aside the order of NCLT. The instant case is an appeal against the order of the NCLAT, filed by the Appellant.
Whether the allegation of the Appellant with regard to the existence of dispute can be considered to be spurious, illusory or not supported by any evidence.
Contentions raised by the Appellant:
By no stretch of imagination, the claim made by the Respondent could be considered to be an operational debt and as such, the Respondent would not fall under the definition of an operational creditor, enabling it to invoke the jurisdiction of the NCLT under Section 9 of the IBC. It was further submitted that, no amount was receivable by the Respondent from the Appellant in respect of the provisions of goods or services, including employment or a debt in respect of the payment of dues.Hence, the said claimed amount would not be covered under the definition of operational debt as provided under Section 5 (21) of the IBC.
It was argued that the payment, which was made to the Appellant by the Respondent, was from the amount received by the Respondent from Mashkour and only routed through the Respondent and the same stood adjusted under the new agreement.
The demand notice and reply thereto, clarified that there was an “existence of dispute” and hence the NCLT had rightly dismissed the petition. However, the NCLAT, misconstruing the provisions, allowed the appeal and directed the admission of the petition under Section 9 of the IBC.
Contentions raised by the Respondent:
The amount which was paid to the Appellant, was an amount paid from the funds of the Respondent and not from Mashkour. It was submitted that a perusal of material placed on record would reveal that the Appellant had admitted receiving the amount from the Respondent and once the party admits of any claim, the same would come in the definition of operational debt as defined under Section 5(21) of the IBC and enable the party to whom admission is made to file the proceedings under Section 9 of the IBC being an operational creditor. Thus, the NCLAT had rightly considered the provisions and allowed the appeal of the Respondent directing the admission of the petition under Section 9 of the IBC. Therefore, it was submitted that the instant appeal deserved to be dismissed.
Observations of the Supreme Court
The SC noted that an operational creditor, on the occurrence of default, is required to deliver a demand notice of unpaid operational debt or a copy of invoice, demanding payment of the amount involved in the default to the corporate debtor. Within ten days of the receipt of such demand notice or copy of invoice, the corporate debtor is required to either bring to the notice of the operational creditor, the existence of a dispute or to make the payment of unpaid operational debt. Thereafter, as per Section 9 of the IBC, after the expiry of the period of ten days from the date of delivery of notice or invoice demanding payment under Section 8(1) of the IBC, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under Section 8(2) of the IBC, the operational creditor is entitled to file an application before the NCLT for initiating the CIRP.
The SC noted that in the judgement of Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353], it was observed that one of the objects of the IBC qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the CIRP prematurely or initiate the process for extraneous considerations, therefore, it is enough that a dispute exists between the parties.
The SC also explained the scope of the statutory phrase “existence of a dispute” and the role of the NCLT when adjudicating the same under Section 8(2)(a) of the IBC. The SC opined that, once the operational creditor had filed an application which was otherwise complete, the NCLT was required to reject the application under Section 9(5)(ii)(d) of the IBC, if a notice of dispute had been received by operational creditor or if there was a record of dispute in the information utility. The SC noted that, notice by the corporate debtor must intimate the operational creditor about the existence of a dispute or of the pendency of a suit or arbitration proceedings relating to a dispute between the parties.
The SC noted that all that the NCLT was required to see was whether there was a plausible contention which required further investigation and determine that the dispute was not a patently feeble legal argument or an assertion of fact unsupported by evidence, and not whether the defence is likely to succeed or not.
The SC observed that the Appellant had pressed into service the “existence of dispute” for opposing the demand made by the Respondent. Examining whether the dispute raised by the Appellant can be considered as spurious, illusory and unsupported by evidence, the SC noted that the contention of the Appellant that the amount of INR 47.12 crores, which was paid to the Appellant by Respondent, was paid on behalf of Mashkour from the funds released to Respondent on behalf of Mashkour, cannot be said to be a dispute which was spurious, illusory or not supported by the evidence placed on record. Moreover, the SC affirmed that the initial payment which was made to the Appellant as a sub-contractor by the Respondent, who was a contractor, was made on behalf of Mashkour and from the funds received by the Respondent from Mashkour.
The SC agreed with the view taken in Mobilox (supra) and thus concluded that so long as a dispute truly existed in fact and was not spurious, hypothetical or illusory, the adjudicating authority had no other option but to reject the application.
Decision of the Supreme Court
The SC upheld the decision of the NCLT and stated that it had rightly rejected the application of the Respondent on grounds that there existed a dispute, raised by the Appellant. The SC held that the NCLAT had patently misinterpreted the factual as well as the legal position and had erred in reversing the order of the NCLT. Thus, the SC quashed the order passed by the NCLAT.
The SC by this Judgement, has elaborated on the statutory phrase “existence of dispute” and affirmed the view that a genuine dispute must be bona fide and must truly exist in fact, and the grounds for dispute must not be spurious, hypothetical, illusory or misconceived. The defense of “existence of dispute” must be carefully examined and a conclusion as to whether it truly exists in fact should be determined before an application for CIRP is admitted. The SC upheld the legislative intent, which was to prevent premature initiation of CIRP against the corporate debtor.
Further, the SC clarified the limited scope of the adjudicating authority, which was restricted to merely determining whether the dispute was a patently feeble legal argument or not. Emphasizing on the importance of separating the grain from the chaff, so as to reject a spurious defense, which was a mere bluster, the SC, by this Judgement, threw light on the necessity to ascertain that there exists a claim with some substance, rather than it being frivolous and vexatious.
For more information please write to Mr. Bomi Daruwala at [email protected]