Introduction
On July 15, 2022, the Hon’ble Supreme Court of India in the Special Leave Petition [C] No. 4583 of 2022, between M/S S.S. Engineers versus Hindustan Petroleum Corporation Ltd & Ors., held that Corporate Insolvency Resolution Process (CIRP) shall not be initiated by operational creditor when there is an existence of dispute between the parties before issuance of demand notice under section 8 of Insolvency and Bankruptcy Code 2016 (Code). The Coram presided by Hon’ble Justices Indira Banerjee and Hon’ble Justice V. Ramasubramanian observed that the object of the Code is to initiate CIRP against insolvent companies and not to consider it as a recovery mechanism.
Brief Facts
- The Respondent for enhancing the capacity of its Boiler Houses at Lauryia and Sugauli on turnkey basis from 1750 TCD to 3500 TCD has floated various tenders between June 27, 2012, to August 30, 2012. Pursuant to acceptance of Appellant offer by Respondent, Appellant issued purchase orders on August 15, 2012, and November 01, 2012, for enhancing the capacity of the Boiler Houses, Juice Heater, Evaporator Section and Crystallization Section of Sugauli Plant.
- Subsequently, Appellant raised several invoices against the aforesaid purchase orders between November 21, 2012, to March 25, 2013, and thereafter dispute emerged between the parties against the aforesaid invoices wherein on July 09, 2016, Appellant through legal notice demanded payment for the services rendered and also to refer the dispute between the parties for arbitration.
- On August 30, 2017, Appellant initiated insolvency proceedings against the Respondent through demand notice under Section 8 of the Code for a defaulted amount of INR 18,12,21,452 (Indian Rupees Eighteen Crores Twelve Lakhs Twenty-One Thousand Four Hundred and Fifty-Two only) along with interest. Thereafter, on February 15, 2018, Appellant filed insolvency application against Respondent under section 9 of the Code wherein the NCLT Kolkata Bench (Authority) admitted the said Application of the Appellant and initiated CIRP against Respondent.
- Respondent being aggrieved by the said order of Authority moved an appeal before National Company Law Appellate Tribunal (NCLAT) wherein NCLAT set aside the CIRP against the Respondent. Therefore, Appellant has challenged NCLAT order dated January 10, 2022, by filing an appeal before the Hon’ble Supreme Court of India.
Issues
Whether NCLAT order can be appealed?
Whether insolvency proceeding by Appellant against Respondent is maintainable?
Decision of Supreme Court
Supreme Court dismissed the Appeal of Appellant and held that Authority has committed a grave error of law by admitting the application of the Appellant even though the Authority was well aware of the fact that there is a pre-existing dispute between the parties, and it was not for the Authority to make a detailed examination of the respective contentions and adjudicate the merits of the dispute at this stage. The Supreme Court has upheld the ruling of NCLAT for setting aside the CIRP under the code against Respondent by relying on Section 8 of the Code and observed that there being a pre-existing dispute between the parties on the basis of correspondence exchanges against each other liabilities along with a legal notice by Appellant dated July 09, 2016, referring the dispute for arbitration.
In para 16 of the Judgment, Supreme Court held that before admitting an application for insolvency proceeding the Authority will have to examine (i) whether there was an operational debt exceeding INR 1,00,000/- (Indian Rupees One Lakh only); (ii) whether the evidence furnished with the application showed that debt exceeding INR 1,00,000/- (Indian Rupees One Lakh only)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.
Conclusion
The Hon’ble Supreme Court has time and again emphasized on the objective of the Code. In the matter of M/s S.S. Engineers versus Hindustan Petroleum Corporation Ltd & Ors. the Court has made observation that Authority cannot be a debt collection forum. It has clearly defined as to when can an application of insolvency be initiated before the Authority. This judgment is a welcoming step towards resolving the conflicting interpretation relating to pre-existing dispute under the Code. The Judgement will act as a precedent in tackling pre-existing disputes related claim between the disputing parties and eventually will help in achieving the main objectives of the Code.
By Anil Dubey