2022 (9) TMI 377 - SC - Insolvency and Bankruptcy

Supreme Court Upholds NCLAT Decision on CIRP Dispute

M/s S.S. ENGINEERS Versus HINDUSTAN PETROLEUM CORPORATION LTD. & ORS.

The Supreme Court upheld the NCLAT's decision to set aside the NCLT's order admitting the application for Corporate Insolvency Resolution Process (CIRP). ... Initiation of CIRP - Operational Creditors - whether there was existence of any dispute between the parties or the record of pendency of a suit or arbitration proceedings filed before the receipt of demand notice in relation to such dispute? HELD THAT:- This Court finds that there was a pre-existing dispute with regard to the alleged claim of the appellant against HPCL or its subsidiary HBL. The NCLAT rightly allowed the appeal filed on behalf of HBL. It is not for this Court to adjudicate the disputes between the parties and determine whether, in fact, any amount was due from the appellant to the HPCL/HBL or vice-versa. The question is, whether the application of the Operational Creditor under Section 9 of the IBC, should have been admitted by the Adjudicating Authority. The answer to the aforesaid question has to be in the negative. The Adjudicating Authority (NCLT) clearly fell in error in admitting the application. The NCLT, exercising powers under Section 7 or Section 9 of IBC, is not a debt collection forum. The IBC tackles and/or deals with insolvency and bankruptcy. It is not the object of the IBC that CIRP should be initiated to penalize solvent companies for non-payment of disputed dues claimed by an operational creditor. There are noticeable differences in the IBC between the procedure of initiation of CIRP by a financial creditor and initiation of CIRP by an operational creditor. On a reading of Sections 8 and 9 of the IBC, it is patently clear that an Operational Creditor can only trigger the CIRP process, when there is an undisputed debt and a default in payment thereof. If the claim of an operational creditor is undisputed and the operational debt remains unpaid, CIRP must commence, for IBC does not countenance dishonesty or deliberate failure to repay the dues of an Operational Creditor. However, if the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed. Appeal dismissed. Issues Involved:1. Pre-existing disputes between the parties.2. Admissibility of the application under Section 9 of the Insolvency and Bankruptcy Code (IBC).3. Examination of operational debt and default.4. Role of the Adjudicating Authority (NCLT) in insolvency proceedings.5. Differences in the procedure of initiation of CIRP by financial and operational creditors.Issue-wise Detailed Analysis:1. Pre-existing disputes between the parties:The Supreme Court noted that there were pre-existing disputes between the appellant and HBL. The correspondence between the parties, including letters and emails, indicated that HBL had been disputing the claims of the appellant. For instance, HBL sent an email on 29.12.2013 pointing out violations of the terms of the purchase order by the appellant, causing losses to HBL. Further, letters from HBL dated 02.01.2014 and 11.04.2014, and a debit note dated 03.01.2014, highlighted issues such as improper invoices, poor quality of materials, and failure to complete work on time. The Court emphasized that these communications evidenced the existence of a real and genuine dispute.2. Admissibility of the application under Section 9 of the IBC:The Supreme Court held that the Adjudicating Authority (NCLT) committed a grave error in admitting the application for Corporate Insolvency Resolution Process (CIRP) filed by the appellant. The Court referenced the Mobilox Innovations Private Limited v. Kirusa Software Private Limited case, which established that the Adjudicating Authority must reject an application under Section 9(5)(2)(d) if there is a notice of dispute or record of dispute. The existence of a dispute must be plausible and not a patently feeble legal argument. In this case, the NCLAT correctly observed that the communications between the parties and the invocation of arbitration by the appellant substantiated the existence of a dispute.3. Examination of operational debt and default:The Court reiterated that the Adjudicating Authority must examine whether there was an operational debt exceeding Rs. 1,00,000, whether the debt was due and payable, and whether there was any dispute or record of arbitration proceedings before the receipt of the demand notice. The NCLT's detailed examination of the provisional statement prepared by the Corporate Debtor was deemed unnecessary at this stage. The Supreme Court emphasized that the NCLT's role was not to adjudicate the merits of the dispute but to ascertain the existence of a dispute.4. Role of the Adjudicating Authority (NCLT) in insolvency proceedings:The Supreme Court clarified that the NCLT, exercising powers under Section 7 or Section 9 of IBC, is not a debt collection forum. The IBC is designed to address insolvency and bankruptcy issues, not to penalize solvent companies for non-payment of disputed dues claimed by an operational creditor. The Court highlighted that the NCLT's role is to ensure that CIRP is initiated only in clear cases where there is no real dispute regarding the debt.5. Differences in the procedure of initiation of CIRP by financial and operational creditors:The Court noted the differences in the IBC between the procedures for initiation of CIRP by financial creditors and operational creditors. Sections 8 and 9 of the IBC make it clear that an operational creditor can trigger the CIRP process only when there is an undisputed debt and a default in payment. If the debt is disputed, the application for initiation of CIRP must be dismissed. The Court emphasized that the IBC does not support the initiation of CIRP for disputed claims.Conclusion:The Supreme Court upheld the NCLAT's decision to set aside the NCLT's order admitting the application for CIRP. The Court found that there was a pre-existing dispute between the parties, and the NCLT had erred in admitting the application. The appeal was dismissed, and the appellant was advised to pursue other remedies, including arbitration, to realize its dues. The Court reiterated that the IBC is not a tool for debt collection but a mechanism to address insolvency and bankruptcy.