The Supreme Court while remarking that NCLTs are not suppose to function like Debt Recovery Tribunals, observed that if the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed.
The Division Bench comprising of Justice BV Nagarathna and Justice V. Ramasubramanian in this view noted that 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.
In the present matter, the Court opined that NCLT committed a grave error of law by admitting the application of the Operational Creditor, even though there was a pre-existing dispute.
Referring to Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited, 2017 Latest Caselaw 700 SC and K. Kishan Vs. M/S Vijay Nirman Company Pvt. Ltd., 2018 Latest Caselaw 556 SC, the Court stated:
"When examining an application under Section 9 of the IBC, the Adjudicating Authority would have to examine (i) whether there was an operational debt exceeding Rupees 1,00,000/( Rupees One Lac); (ii) whether the evidence furnished with the application showed that debt exceeding Rupees one lac was due and payable and had not till then been paid; and (ii) 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. If any one of the aforesaid conditions was not fulfilled, the application of the Operational Creditor would have to be rejected."
In this case, NCLT had admitted an application filed by the appellant under Section 9 of the Insolvency and Bankruptcy Code as Operational Creditor for initiation of CIRP against HPCL Biofuels Ltd., a wholly owned subsidiary of Hindustan Petroleum Corporation Ltd. The NCLAT allowed the appeal filed by the HBL and set aside the NCLT order.
In this Case, the correspondence between the parties would show that HBL had been disputing the claims of the Appellant on the contention that the appellant had not been adhering to the time schedules for completion of the contract work, had been violating the terms of Tender documents and the Purchase Orders, and backing out from its commitments thereunder, thereby causing losses to HBL, the Court said. HBL was constrained to procure materials from other vendors incurring losses, it added.
The Court sided with NCLAT's view and noted 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 said.
"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."
Commenting on the function of NCLT, the Court said:
"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 nonpayment of disputed dues claimed by an operational creditor."
The Court stressed that under the IBC there are noticeable differences 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."
CASE TITLE: M/S S.S. ENGINEERS & ORS. versus HINDUSTAN PETROLEUM CORPORATION LTD.
CASE DETAILS: CIVIL APPEAL NO. 4583 OF 2022
CORAM: Justice BV Nagarathna and Justice V. Ramasubramanian
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