India: Recourse To IBC Is Not Maintainable If Existence Of Debt Is Disputed - IBC Is Not A Recovery Forum

IN THE SUPREME COURT OF INDIA

Transmission Corporation of Andhra Pradesh Ltd. v. Equipment Conductors and Cables Limited.
Civil Appeal No. 9597 OF 2018
Judgment on 23.10.2018

FACTS

Transmission Corporation of Andhra Pradesh Ltd. (the "Appellant" herein) is an Andhra Pradesh Government Enterprise, a successor of Andhra Pradesh State Electricity Board (for short, 'APSEB') and is engaged in the activities relating to transmission of electricity.

Certain contracts were awarded to the Respondent by the Appellant for supply of certain goods and services. However, after disputes arose between the parties, arbitration proceedings were initiated by the Respondent.

The proceedings were instituted before Haryana Micro and Small Enterprises Facilitation Council (Arbitration Council) for 82 claims, and the proceedings concluded with award being passed in favor of Respondent for invoice no. 58-82. Moreover, the arbitral council rejected claim for invoice no. 1-57 finding them to be time barred.

In response, Respondent filed an application u/s 34 of the Arbitration and Conciliation Act before the Addl. District Judge, Chandigarh.

The Addl. District Judge ordered remanding of the case back to Arbitral council for fresh decision. However on appeal, Punjab and Haryana High Court set aside the order of the Addl. District Judge.

Further, when the appeal was pending before the High Court, the Respondent had moved an application for clarification/review of the order of Addl. District Judge. The application was, however, dismissed.

Furthermore, as far as order of the Punjab and Haryana HC that set aside the order of the Addl. District Judge was concerned; the Appellant herein had filed an application for clarification of the said order u/s 151 of the Civil Procedure Code.

That application too was, however, dismissed by the HC.

The Respondent then filed an execution petition under Order XXI Rule 21 of the CPC for execution of the judgment passed by the Arbitral Council.

The Respondent's claim pertaining to invoice nos. 58-82 was allowed and the execution thereof was sought. The Respondent, however, filed another execution petition seeking execution of amount in respect of claims of invoices nos. 1-57 also.

This application was entertained and both the petitions were directed to be dealt with simultaneous orders.

The above order was challenged by the Appellant by filing a Revision Petition before the Hyderabad High Court. The Honorable High Court allowed the Revision Petition holding that there was no award in respect of claim towards invoices 1-57 and, thus, it was not permissible for the Respondent to seek the execution since even the Arbitral Council had also very clearly rejected the claims towards invoices nos. 1-57 for being barred by limitation.

To further its claims under the rejected invoices, the Respondent approached the NCLT by means of a Company Petition under Section 9 of IBC, 2016 read with Rule 6 of Insolvency and Bankruptcy (AAA) Rules, 2016.

The Respondent stated that it had served the demand notice dated October 14, 2017 upon the Appellant under the provisions of the IBC, thereby claiming the amount of Rs. 45,69,31,233/- which was not paid by the Appellant. As mentioned above, this petition was dismissed by the NCLT vide its order dated April 09, 2018. Against this order, the Respondent had filed an appeal before the NCLAT.

The Honorable NCLAT observed that a prima facie case has been made out by the Petitioner (the Respondent herein) and held that if the appeal is allowed and corporate insolvency resolution process is initiated against the Appellant, they may face trouble.

While posting the case for 'admission', the NCLAT stated:

"......Therefore, by way of last chance we grant one opportunity to Respondent to settle the claim with the Appellant, failing which this Appellate Tribunal may pass appropriate order on merit."

Aggrieved by the order of the NCLAT, the Appellant has approached the Honorable Apex Court.

ISSUES BEFORE SC

Whether recourse to IBC is maintainable if existence of debt is disputed.

OBSERVATION

A very detailed reference has been made by the Supreme Court in case of Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, wherein it was held that:

"......IBC is not intended to be substitute to a recovery forum. It is also laid down that whenever there is existence of real dispute, the IBC provisions cannot be invoked."

The Court also gave due reference to the previous orders by the Honorable NCLT, Hyderabad High Court, Punjab & Haryana High Court and the Arbitral Council order and also gave due deliberation to the provisions of Sec. 9 of IBC.

CONCLUDING VIEW

While setting aside the order of National Company Law Appellate Tribunal (NCLAT), the Supreme Court reiterated that

"From the aforesaid, it follows that existence of an undisputed debt is sine qua non of initiating CIRP. It also follows that the adjudicating authority shall satisfy itself that there is a debt payable and there is operational debt and the corporate debtor has not repaid the same."

The Supreme Court also stated that since the NCLAT had already dealt with the merits of the case and the Arbitral Award, therefore, it would serve no object to send the matter back to the NCLAT and hence, the Supreme Court went on to quashing the order of the NCLAT and allow the appeal.

REASON OF JURISPRUDENCE

The Court based the order on following point of reasoning:–

Firstly, that NCLAT has not appreciated the merits of the case, and has also not stated how exactly the amount is payable to the Respondent in spite of the aforesaid events which were noted by the NCLT as well.

and Secondly, the argument advanced by the Respondent that the High Court of Punjab and Haryana while setting aside the remand order passed by the Addl. District Judge did not hold that Invoice Nos. 1-57 as time barred is erroneous and baseless.

This is because the Respondent never had a valid claim under those invoices. There is neither any award of the Arbitral Council with respect to invoice no. 1-57 nor was there an order of any other court concerning these invoices. In fact, the Arbitral Council specifically rejected the claim of the Respondent as time barred.

AMLEGALS REMARKS

From this judgment of the Apex court, read with Mobilox supra, it can be inferred that IBC cannot be a substitute of a recovery forum and the sine qua non of a debt and acid test of a dispute has got to be satisfied at the first instance itself.

The intent of the Court is that the provisions of IBC are not to be used in a handheld manner and IBC is not to be used for recovery of monies of any kind but rather only particularly mentioned debts.

Moreover, the use of the phrase 'wielded threat' by the Court speaks volume. The pre-requisite of "dispute" under IBC remained to be appreciated at the end of the NCLAT.

The NCLAT could have appreciated the factum of presence of a dispute before proceeding further.

Be that as it may, IBC has flooded with a new and interesting mode of litigation in the country.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.