Supreme Court on Insolvency Resolution by Operational Creditors

[Akhil Kumar and Ayushi Singh are Fourth Year and Third Year BA LLB (Hons.) students respectively at NUALS, Kochi]

Petitions filed under section 9 of the Insolvency and Bankruptcy Code, 2016 (the Code) have received scrutiny before the adjudicating authority, being the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) as well as the Supreme Court on various occasions. The most prominent point of dispute in such cases relates to the existence of a dispute under section 9 of the Code. The judgement under analysis is that of the Supreme Court in Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Limited, 2018 SCC OnLine SC 2113. Before going into the relevant facts of the case, it is important to understand the crux of the aforementioned provision. Section 9 of the Code permits an operational creditor to initiate a corporate insolvency resolution process (CIRP) under the Code.

For an application to be admitted under section 9, it must be proved that:

  1. there existed an operational debt (exceeding Rs. 1 Lakh);
  2. the documentary and other modes of evidence presented along with the application show that the particular debt was due and payable; and
  3. there existed no dispute before the receipt of demand notice.

Background and Facts

The Transmission Corporation of Andhra Pradesh had awarded contracts in relation to supply of goods and services to Equipment Conductors and Cables Limited. A dispute arose in the course of the contract and the matter was referred to arbitration. It was held that the claims on invoices (1-57) were barred by limitation but claims on other invoices (58-82) were decided in favour of the Equipment Conductors. Equipment Conductors filed an application under section 34 of the Arbitration and Conciliation Act, 1996 challenging the rejection of its claim in relation to invoices (1-57) as time barred. The matter was referred back to the arbitration council for a fresh decision. Aggrieved by this order, Equipment Conductors approached the High Court of Punjab and Haryana which allowed the appeal. Equipment Conductors further sought to clarify the earlier order of the High Court under section 151 of the Code of Civil Procedure, 1908 which was dismissed by the High Court.

Thereafter, Equipment Conductors filed execution petitions for the execution of judgement rendered by the Punjab and Haryana High Court coupled with the award passed by the arbitral council. Another execution petition was filed by Equipment Conductors with regards to the claim corresponding to invoices (1-57). This application was entertained and Transmission Corporation by way of a revision petition (RP) challenged the same before the High Court of Hyderabad. The High Court allowed the RP and clarified that there was no award in respect to claims under invoices (1-57) as these were time barred and could not be executed.

Equipment Conductors further approached the NCLT under section 9 of the Code read with rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Individuals and Firms) Rules, 2017. It was alleged that there stood a claim of Rs. 45,69,31,233 against Transmission Corporation. The petition was dismissed by the NCLT and an appeal was preferred before the NCLAT.

The subject matter of appeal in the instant case was an order passed by the NCLAT. Through this order the NCLAT gave one last opportunity to Transmission Corporation to settle the claims of Equipment Conductors. The relevant part of the order reads as:

However, taking into consideration the fact that if appeal is allowed and Corporate Insolvency Resolution Process is initiated  against  the  Respondent  –  ‘Transmission Corporate  of  Andhra  Pradesh  Ltd.’,  the  government undertaking may face trouble.  Therefore, by way of last chance we grant one opportunity to respondents to settle the claim with the appellant, failing which this Appellate Tribunal may pass appropriate order on merit.

NCLAT Order

It is important to note that the NCLAT had not even gone to the merits of the case and ignored the findings of NCLT and found the amount payable. Further, it also mentioned that the application would be disposed at the stage of admission itself. This in itself is sufficient to show that the order passed by the appellate tribunal was liable to be struck down.

Difference between the Scheme under sections 7 and 8 of the Code

Under section 8 of the Code, there is a requirement that the operational creditor must send a demand notice. The debtor can, within a period of ten days from the receipt of such notice, bring to the notice of the operational creditor the existence of a dispute or the records of a suit or arbitration proceeding which is pre-existing. However, there is no such prerequisite under section 7 of the Code. In Innoventive Industries Ltd. v. ICICI Bank, A.I.R. 2017 S.C. 4084, the Supreme Court held that “in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred.”

Dispute under the Code

From a bare reading of section 9 of the Code it becomes evidently clear that the non-existence of a dispute is sine qua non for initiating a CIRP. The applicant shall satisfy the adjudicating authority that there exists a debt which is payable and has not been paid. Clause (ii) of sub-section (5) speaks of situations wherein the NCLT can reject an application filed by an applicant. One of the conditions for rejection of an application under the abovementioned clause is when a “notice of dispute has been received by the operational creditor or there is a record of dispute with the information utility”.

 Equipment Conductors primarily relied on the premise that the High Court of Punjab and Haryana in the course of setting aside the remand order of the Additional District Judge did not hold that the claim in invoices (1-57) was time barred. However, it is pertinent to note that there was no award or order of any court in respect to the claim in invoices (1-57) in favour of Equipment Conductors. In Mobilox Innovations Private Limited v. Kirusa Software Private Limited, A.I.R. 2017 S.C. 4532, it was held that the Code is not intended to be a substitute to a recovery forum and, therefore, this argument had to be rejected by the Court.

Reliance shall also be placed to the report of the Insolvency Law Committee which has categorically mentioned in its report that “the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws”.

Conclusion

The judgement effectively ensures that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the other adjudicatory and enforcement mechanisms under various statutes. It also has an effect that the operational creditors having a claim of a significantly lesser amount do not prematurely put the corporate debtors into the insolvency resolution process.

It can also be seen that the Court has indirectly emphasized that a debt can only be considered as an operational debt only in cases where there is no dispute regarding the amount in question. In all other cases, it is only after the final adjudication in case of the disputed amount that a debt can be considered as an operational debt.

Akhil Kumar & Ayushi Singh

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