2017 (5) TMI 1774 - AT - Insolvency and Bankruptcy

Tribunal overturns ex parte insolvency order, citing lack of natural justice and pre-existing dispute.

The Tribunal set aside the ex parte order passed by the Adjudicating Authority, ruling in favor of the appellant - Corporate Debtor. The Tribunal found a ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of dispute between the parties - impugned ex parte order was passed by 'Adjudicating Authority without prior notice or intimation of hearing to the Appellants-Corporate Debtors against the principles of rules of natural justice - winding up notice under Section 433 of Companies Act 1956 - HELD THAT:- Once the term 'dispute' is given its natural and ordinary meaning, upon reading of the Code as a whole, the width of 'dispute' should cover all disputes on debt, default etc. and not be limited to only two ways of disputing a demand made by the operational creditor, i.e. either by showing a record of pending suit or by showing a record of a pending arbitration - The intent of the Legislature, as evident from the definition of the term 'dispute', is that it wanted the same to the illustrative (and not exhaustive). If the intent of the Legislature was that a demand by an operational creditor can he disputed only by showing a record of a suit or arbitration proceeding, the definition of dispute would have simply said dispute means a dispute pending in Arbitration or a suit. What appears from the present case is that much before enactment of the Insolvency and Bankruptcy Code 2016, in or around 2013, the Appellant-Corporate Debtor' entered with respondent M/s. Essar Projects India Limited and Another Memorandum of Understanding for construction of work at 0.2MTPA Steel Melt Shop Complex at Pithampur, Dist. Dhar, Madhya Pradesh. For one or other reason the outstanding dues in connection with construction work were alleged to have not been paid by appellant to the Respondent - Operational Creditor - the appellants were called upon by Respondent - Operational Creditor to repay the dues of ₹ 6,83,06,077/- along with interest® 18%. It was mentioned that the said notice issue under Section 433(e) read with Section 434 of the Companies Act 1956. In the present case as admittedly a notice was issued by Respondent-Operational Creditor under Section 433(e) and 434 of the Companies Act 1956 in 28th October 2016 which was disputed by Appellant - 'Corporate Debtor' objecting quality of service and non-completion of the work within time which is much prior to enactment of 'I & B Code', 2016, and notice under Section 8 of the I & B code', there is an 'existence of dispute' for which the petition under Section 9 preferred by Respondent - Operational Creditor was not maintainable - as the impugned order dated 6th March 2017 was passed by 'Adjudicating Authority without notice to the Appellant - Corporate debtor in violation of principle of natural justice and the Adjudicating Authority failed to notice the relevant facts that there was a dispute raised and replied by the Corporate Debtor, the impugned order passed by Adjudicating Authority cannot be upheld. Appeal allowed. Issues Involved:1. Whether the ex parte order by the Adjudicating Authority violated the principles of natural justice.2. Whether there was an existence of a dispute between the parties prior to the notice under Section 8 of the Insolvency and Bankruptcy Code, 2016.3. Whether the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 was maintainable.4. Whether the Adjudicating Authority was required to issue a notice to the Corporate Debtor before admitting the application for Corporate Insolvency Resolution Process.Detailed Analysis:1. Violation of Principles of Natural Justice:The appellant contended that the ex parte order passed by the Adjudicating Authority without prior notice or intimation of hearing to the Corporate Debtor violated the principles of natural justice. The Adjudicating Authority did not provide the Corporate Debtor an opportunity to be heard before admitting the application for Corporate Insolvency Resolution Process. The Tribunal emphasized that adherence to the principles of natural justice is mandatory, as established in the case of 'M/s. Innoventive Industries Ltd.' The Tribunal concluded that the impugned order was passed in violation of the principles of natural justice.2. Existence of Dispute:The appellant argued that there was a pre-existing dispute between the parties regarding the quality of construction work and non-completion within the stipulated time frame. The appellant had raised concerns through various correspondences dating back to 2013 and 2014. Additionally, the appellant had replied to a winding-up notice under Section 433 of the Companies Act, 1956, disputing the entire claim. The Tribunal noted that the existence of a dispute is not limited to pending suits or arbitration proceedings but includes any genuine dispute raised prior to the notice under Section 8 of the Insolvency and Bankruptcy Code, 2016. The Tribunal found that there was an 'existence of a dispute' between the parties, making the application under Section 9 not maintainable.3. Maintainability of Application under Section 9:The respondent argued that the appeal was not maintainable as the appellant had no legal authority to initiate proceedings on behalf of the Corporate Debtor after the appointment of an Interim Resolution Professional. The Tribunal, however, focused on the existence of a dispute and the violation of natural justice principles. Given the existence of a dispute and the lack of notice to the Corporate Debtor, the Tribunal held that the application under Section 9 was not maintainable.4. Requirement of Notice Before Admission:The Tribunal referred to the decision in 'M/s. Innoventive Industries Ltd.' and emphasized that the Adjudicating Authority is bound to issue a limited notice to the Corporate Debtor before admitting an application for Corporate Insolvency Resolution Process. This notice is essential to ascertain the existence of default and to ensure adherence to the principles of natural justice. The Tribunal concluded that the Adjudicating Authority failed to issue such a notice, further invalidating the impugned order.Conclusion:The Tribunal set aside the impugned order dated 6th March 2017 passed by the Adjudicating Authority, Mumbai Bench, and made the appellant - Corporate Debtor free from all rigours of the Corporate Insolvency Resolution Process. The order of moratorium, freezing of bank accounts, appointment of Interim Resolution Professional, and public announcements were all set aside. The Board of Directors was allowed to take over the possession and function of the appellant company immediately. The Tribunal directed the closure of proceedings and dismissal of the application, determining the fees of the Interim Resolution Professional to be borne by the respondent - Operational Creditor. The appeal was allowed with no order as to cost.