Insolvency & Bankruptcy Code – Operational Creditor Can’t Use Code as Substitute for Debt Enforcement Procedure

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August 21, 2018

Case name: K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd.

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The seminal issue that fell for consideration before the Apex Court was whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon?

In the case, the parties had entered into an Agreement for a Project and during the course of project, disputes arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award, whereby the Tribunal allowed the claims of the Respondent. Accordingly, three cross claims were made by the Respondent and subsequently were rejected by the Appellant.

On rejection of claim, the Respondent sent a notice to the appellant to pay the stipulated amount under Section 8 of the Insolvency and Bankruptcy Code, 2016 i.e. notice for insolvency resolution by the operational creditor. In the meanwhile, aggrieved by the Arbitral Award, Appellant also filed application to set aside award under Section 34 of the Arbitration and Conciliation Act, 1996. The NCLT (National Company Law Tribunal) admitted the Respondent’s petition for insolvency under the Code.

Bench’s Verdict

The Supreme Court Bench in the case allowed the appeal and set aside NCLT’s order on the following grounds:

 

  • To arrive at its decisions, the Two-Judge Bench of the Supreme Court made reference to Section 9 of the Code and noted that the Adjudicating Authority, when examining an application under Section 9 of the Act, will have inter alia determine 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?

 

    • The Apex Court observed that according to Section 9 of the Code, if any one of the aforesaid conditions is lacking, the application would have to be rejected.

 

  • The Supreme Court also noted that the operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The Court opined that the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award.
  • With reference to operation debt, the Apex Court noted that it has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.

 

The entire case can be accessed here.