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Supreme Court on tests for existence of dispute

Cause Title : M/s S.S. Engineers & Ors. vs Hindustan Petroleum Corporation Ltd., Civil Appeal No. 4583 Of 2022,  Supreme Court Of India

Date of Judgment/Order : 15/7/2022

Corum : Indira Banerjee; J., V. Ramasubramanian; J.

Citied: 

Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353

K Kishan vs. Vijay Nirman Co. (P) Ltd., (2018) 17 SCC 662

Background

This appeal was against a judgment passed by the NCLAT setting aside the order passed by the NCLT, Kolkata, admitting an application filed by the appellant under Section 9 of the Insolvency and Bankruptcy Code (IBC) as Operational Creditor, for initiation of CIRP against HPCL Biofuels Ltd. (HBL), a wholly owned subsidiary of HPCL.

Disputes arose between the Appellant and the Respondent against some work orders issued by the Respondent. On one side the Appellant demanded payment for work done while the Respondent objected to the quality of work and goods supplied. The matter finally reached the NCLT through a Section 9 application filed by the Appellant and after looking into the documents provided the NCLT admitted the application holding that according to the Tribunal  it cannot be said that any other dispute remains to be considered and apart from that, the fact which is crucial to note is that the Corporate Debtor has awarded new work orders to the Operational Creditor subsequently which means that all the disputes relating to this contract had been considered/resolved and this fact has remained undisputed.

On appeal, the NCLAT disagreed with the NCLT and set aside the order. Hence this appeal.

Judgment

Disagreeing with the NCLT, the Supreme Court observed that a clear the test of existence of a dispute has been laid down by the Supreme Court in Mobilox Innovations (supra) wherein the Court held that the adjudicating authority, when examining an application under Section 9 of the Act will have to determine:
(i) Whether there is an “operational debt” as defined exceeding Rs 1 lakh? (See Section 4 of the Act)
(ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and
(iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.

It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

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.

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