TRANSMISSION CORPORATION OF ANDHRA PRADESH LIMITED versus EQUIPMENT CONDUCTORS AND CABLES LIMITED on 23 October 2018

TRANSMISSION CORPORATION OF ANDHRA PRADESHLIMITED

v.

EQUIPMENT CONDUCTORS AND CABLES LIMITED

(Civil Appeal No. 9597 of 2018)

OCTOBER 23, 2018

[A. K. SIKRI AND ASHOK BHUSHAN, JJ.]

Insolvency and Bankruptcy Code, 2016 – ss.8 and 9 –Insolvency and Bankruptcy (AAA) Rules, 2016 – r.6 – Appellant-Transmission Corporation awarded certain contracts to therespondent for supply of goods and services – Some dispute aroseand the respondent initiated arbitration proceedings – Respondentfiled 82 claims before Arbitral Council – Arbitral Council held thatclaims made on the basis of Invoice Nos.1-57 were barred by law oflimitation and, therefore, no amount could be awarded against thesaid claims – In respect of Invoice Nos.58-82, the award was passedin favour of the respondent – Respondent filed execution petitionseeking execution of amount in respect of Invoice Nos.1-57 andapplication was entertained – That order was challenged by theappellant by filing Revision petition before the High Court – HighCourt held that there was no award in respect of claim towardsInvoice Nos.1-57 and, therefore, it was not permissible for therespondent to seek execution – Thereafter, respondent filed CompanyPetition u/s. 9 of IBC r/w. r.6 of Insolvency and Bankruptcy Rulesagainst the Appellant – Petition was dismissed by the NationalCompany Law Tribunal (NCLT) – However, National Company LawAppellate Tribunal (NCLAT) ordered one opportunity to the appellantto settle the claim of the respondent, failing which an order wouldbe passed to initiate Corporate Insolvency Resolution Process(CIRP) against the appellant – On appeal, held: Existence of anundisputed debt is sine qua non of initiating CIRP – Adjudicatingauthority is required to satisfy itself that there is a debt payable andthere is operational debt and the corporate debtor has not paid thesame – In instant case, NCLAT had not discussed the merits of thecase and also not stated how the amount was payable to the

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Arespondent – There was no award of the Arbitral Council or orderof any other Court with respect to invoice Nos.1-57 – Further, IBCis not intended to be substitute to a recovery forum and wheneverthere is existence of real dispute, the IBC provisions cannot beinvoked – Therefore, order of the NCLT justified and order of theNCLAT set aside.B

Allowing the appeal, the Court

HELD: 1. Section 9 of the Insolvency and Bankruptcy Code,2016 provides for initiation of corporate insolvency resolutionprocess by operating creditor on the basis of application filed byCsuch a creditor. It, inter alia, states that whenever a notice,demanding the payment as per notice or invoice, under sub-section(1) of Section 8 of IBC and the operational creditor does notreceive payment from the corporate debtor, after the expiry of aperiod of 10 days from the date of delivery of such notice or invoicedemanding payment operational creditor may file an obligationDbefore the adjudicating authority for initiating CIRP. Section 8deals with insolvency resolution. Sub-section (1) thereof stipulatesthat an operational creditor may, on the occurrence of a default,deliver a demand notice of unpaid operational debtor copy of aninvoice demanding payment of the amount involved in the defaultEto the corporate debtor in such form and manner as may beprescribed. Sub-section (2) puts an obligation upon the corporatedebtor to respond to the said demand notice or copy of invoicewithin a period of 10 days of the receipt thereof by stating thatdispute qua the said demand exists between the parties or byrepayment of unpaid operational debt and sending proof thereofFto the operational creditor. [Para 9][1074-E-G]

2. From the aforesaid, it follows that existence of anundisputed debt is sine qua non of initiating CIRP. It also followsthat the adjudicating authority shall satisfy itself that there is adebt payable and there is operational debt and the corporateGdebtor has not repaid the same. [Para 10][1074-H; 1075-A]

3. Clause (ii) of sub-section (5) of s.9 stipulates thecircumstances under which the application filed by the operationalcreditor can be rejected. Sub-clause (d) thereof stipulates the H

TRANSMISSION CORPORATION OF A.P. LTD. v. EQUIPMENTCONDUCTORS AND CABLES LTD.

eventuality where there is a notice of dispute sent by the corporatedebtor to the operational creditor. [Para 11][1076-G-H]

4. Here, the matter was taken up before the Arbitral Councilinsofar as claim under Invoice Nos. 1-57 is concerned, the samewas specifically rejected by the Arbitral Council on the groundthat it had become time barred. The respondent challenged thesaid part of the award of the Arbitral Council, but was notsuccessful. Thereafter, the respondent attempted to recover theamount by filing execution petition before the Civil Court,Hyderabad. However, that attempt of the respondent was alsounsuccessful inasmuch as the High Court of Judicature atHyderabad categorically held that since that particular amountwas not payable under the award, execution was not maintainable.After failing to recover the amount in the aforesaid manner, therespondent issued notice to the appellant under Section 8 of theIBC treating itself as the operational creditor and appellant asthe corporate debtor. The appellant specifically refuted this claim.In spite thereof, application under Section 9 was filed before theNCLT, Hyderabad which was dismissed. The NCLAT has notdiscussed the merits of the case and also not stated how theamount is payable to the respondent in spite of the aforesaidevents which were noted by the NCLT as well. Notwithstanding,it has given wielded threat to the appellant by giving a one chance,‘to settle the claim with the appellant (respondent herein), failingwhich this Appellate Tribunal may pass appropriate orders onmerit’. It has also stated that though the matter is posted foradmission on the next date, the appeal would be disposed of atthe stage of admission itself. There is a clear message in theaforesaid order directing the appellant to pay the amount to therespondent, failing which CIRP shall be initiated against theappellant.[Paras 12, 13][1077-A-F]

5. IBC is not intended to be substitute to a recovery forum.Whenever there is existence of real dispute, the IBC provisionscannot be invoked. On merits, the order of the NCLT is justified.[Paras 15 and 16][1078-B-C; 1083-D]

Mobilox Innovations Private Limited v. Kirusa SoftwarePrivate Limited (2018) 1 SCC 353 – held applicable.

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CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9597of 2018.

From the Judgment and Order dated 04.09.2018 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Insolvency) No. 366 of 2018.

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Basava Prabhu S. Patil, Sr. Adv., Nishant, Rakesh K. Sharma,Geet Ahuja, Advs. for the Appellant.

CS. Hari Haran, Sriram P., Advs. for the Respondent.

The Judgment of the Court was delivered by

A. K. SIKRI, J. 1. The order of the National Company LawAppellate Tribunal, New Delhi (for short, ‘NCLAT) dated September04, 2018 is the subject matter of challenge in the present proceedings. ItDis a short order, which is reproduced herein its entirety.

“Having heard learned counsel for the parties and being satisfiedof the grounds shown, six days delay in preferring the appeal iscondoned. I.A. No. 973 of 2018 stands disposed of.

Prima facie case has been made out by the Appellant in view ofthe part decree awarded by the competent court under Section34 of the Arbitration and Conciliation Act, 1996 and the reviewapplication under Section 37 preferred by the Respondent havingrejected on 29[th] January, 2016.

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FHowever, taking into consideration the fact that if appeal is allowedand Corporate Insolvency Resolution Process is initiated againstthe Respondent – “Transmission Corporate of Andhra PradeshLtd.’, the government undertaking may face trouble. Therefore,by way of last chance we grant one opportunity to respondents tosettle the claim with the appellant, failing which this AppellateGTribunal may pass appropriate order on merit.

Post the case ‘for admission’ on 4[th] October, 2018. Appeal maybe disposed of at the stage of admission.”

2. Though, in the first brush, it appears that matter is still at thestage of admission and the aforesaid order is an interim order, a careful H

reading thereof would clearly bring out that the NCLAT perceives thatthe appellant herein owes money to the respondent and for this reason achance is given to the appellant to settle the claim of the respondent,otherwise order would be passed initiating Corporate InsolvencyResolution Process (for short, ‘CIRP’). According to the appellant, noamount is payable and the order in question is causing serious prejudiceto the appellant which is asked to settle the purported claim, failing which,to face insolvency proceedings. It may also be recorded at this stageitself that the appeal pending before NCLAT is filed by the respondentherein which is against the Orders dated April 09, 2018 passed by theNational Company Law Tribunal (for short, ‘NCLT’), Hyderabad. Bythe said order, the NCLT has dismissed the petition filed by the respondentherein under Section 9 of the Insolvency and Bankruptcy Code, 2016(hereinafter referred to as the ‘IBC’). To put it briefly at this stage, theNCLT, after detailed deliberations, has come to the conclusion that theCompany Petition filed by the respondent was not maintainable as theclaims which were preferred by the respondent against the appellantand on the basis of which respondent asserts that it has to receive moniesfrom the appellant are not tenable and in any case these are not disputedclaims. This assertion is based on the fact that these very claims of therespondent were subject matter of arbitration and the award was passedrejecting these claims as time barred. Moreover, the company petitionitself suffers various fundamental defects. On that basis, NCLT heldthat there is a valid dispute, rather no dispute as issue in question wassubstantially dealt with by various courts as mentioned in the order passedby NCLT.

3. Before going into the details of the said order passed by NCLTit would be appropriate to refer to some important events in chronologicalorder, which have a bearing on the present case.

4. The appellant is a Transmission Corporation of Andhra PradeshGovernment and is successor of Andhra Pradesh State Electricity Board(for short, ‘APSEB’) and is in the activities relating to transmission ofelectricity. It had awarded certain contracts to the respondent hereinfor supply of goods and services. Some disputes arose and the respondentinitiated arbitration proceedings. As many as 82 claims were filed bythe respondent before Haryana Micro and Small Enterprises FacilitationCouncil (hereinafter referred to as ‘Arbitral Council’). Theseproceedings culminated into Award dated June 21, 2010. The Arbitral AB

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ACouncil came to the conclusion that the claims made on the basis ofInvoice Nos. 1-57 were barred by law of limitation and, therefore, noamount could be awarded against the said claims. In respect of InvoiceNos. 58-82, the award was passed in favour of the respondent. In theseproceedings, we are not concerned with the award in respect of InvoiceNos. 58-82.

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5. Against the aforesaid award rejecting claims in respect ofInvoice Nos. 1-57 as time barred, the respondent herein filed anapplication under Section 34 of the Arbitration and Conciliation Act beforethe Additional District Judge, Chandigarh. The Additional District Judgepassed the order dated August 28, 2014 in the said application therebyCremanding the case back to the Arbitral Council for fresh decision.Against this order, the appellant filed the appeal before the High Courtof Punjab and Haryana at Chandigarh. This appeal was allowed by theHigh Court by its order dated January 29, 2016 thereby setting aside thedirection of the Additional District Judge remanding the matter to ArbitralDCouncil for fresh consideration.

6. It may be mentioned at this stage that when the appeal waspending before the High Court, the respondent had moved an applicationfor clarification/review of order dated August 28, 2014. This applicationwas, however, dismissed on August 27, 2015. It may also be mentionedEthat insofar as order dated January 29, 2016 of the Punjab and HaryanaHigh Court setting aside the order of the Additional District Judgeremanding back the matter to the Arbitral Council is concerned, theappellant herein had filed an application for clarification of the said orderunder Section 151 of the Civil Procedure Code. That application was,however, dismissed by the High Court.F

7. The respondent herein filed execution petition under Order XXIRule 21 of the CPC for execution of judgment dated January 29, 2016passed by the High Court of Punjab and Haryana as well as the awarddated June 21, 2010 passed by the Arbitral Council. Insofar as award ofArbitral Council is concerned, as noted above the respondent’s claimGpertaining to Invoice Nos. 58-82 was allowed and the execution thereofwas sought. The respondent, however, filed another execution petitionseeking execution of amount in respect of Invoice Nos. 1-57 also. Thisapplication was entertained and both the petitions were directed to bedealt with simultaneously vide orders dated August 17, 2016. That order H

was challenged by the appellant herein by filing Revision Petition beforethe High Court of Judicature at Hyderabad. The High Court vide itsorder dated November 08, 2016 allowed the said Revision Petition holdingthat there was no award in respect of claim towards Invoice Nos. 1-57and, therefore, it was not permissible for the respondent to seek theexecution. The relevant portion of the orders passed by the High Courtof Judicature at Hyderabad is reproduced hereinbelow:

“17. From the above, once there is no re-determination of thedisallowed claim, much less by allowing the claim in respect ofItem Nos. 1 to 57 of annexure-1 by the Arbitration Court-cum-Additional District Judge Chandigarh under Section 34 of the Actin the Arbitration Case No. 361 of 2010 for review also ended indismissal and appeal only set-aside to the extent of remand inpractically directing instead of remanding for determination onlyby the arbitration court. Once it requires determination and thereis no determination, then there is no final award for executionmuch less to enforce under Section 36 of the Act.

18. Once such is the case, the objection filed by APTRANSCObefore executing Court for numbering as unsustainable for noenforceable award, so far as item Nos. 1 to 57 are concerned andbefore the executing Court, even filed objections by theAPTRANSCO, the executing Court did not discuss and evenignored the submissions, simply from the impugned order referredsupra perused only the execution petition and considered only thesubmissions of the D.Hr, in passing the order, which is uncalledfor, for not a judicial adjudication in passing the order in the eye oflaw and thereby same is unsustainable and prone to revisionjurisdiction of this Court to sit against and to set-aside.

19. It is made clear from the above, thereby that there is noenforceable award to execute under Section 36 of the ArbitrationAct from the arbitration proceeding so far as the claim of Items 1to 57 is concerned for what arbitrator held the claim as barred bylaw and the objecting Court-cum-arbitration Court in A.C. No.361 of 2010 even held not barred by law, did not determine, butfor remanded to re-determine in tis regard and same was evenquestioned in review, the review petition was dismissed and otherside when questioned what was held by the High Court is that A

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Aremand is not correct for lack of jurisdiction, thereby practicallyfor re-determination and once it is not re-determined, there is noaward and when there is no award, there is no question ofexecution and where there is no question of execution, there isnot question of entertaining the unnumbered E.P. much less tonumber the same or even to pass any consequential pro-orderBthat are impugned in the revision.”

8. When the things rested at that, the respondent approached theNCLT by means of a Company Petition under Section 9 of IBC, 2016read with Rule 6 of Insolvency and Bankruptcy (AAA) Rules, 2016. Inthis petition, the respondent stated that it had served demand notice datedCOctober 14, 2017 upon the appellant under the provisions of the IBC,thereby claiming the amount of Rs. 45,69,31,233/- which was not paidby the appellant. As mentioned above, this petition was dismissed by theNCLT vide its order dated April 09, 2018. Against this order, therespondent has filed appeal before the NCLAT in which impugned ordersDdated September 04, 2018 have been passed.

9. Section 9 provides for initiation of corporate insolvencyresolution process by operating creditor on the basis of application filedby such a creditor. It, inter alia, states that whenever a notice, demandingthe payment as per notice or invoice, under sub-section (1) of Section 8Eof IBC and the operational creditor does not receive payment from thecorporate debtor, after the expiry of a period of 10 days from the date ofdelivery of such notice or invoice demanding payment operational creditormay file an obligation before the adjudicating authority for initiating CIRP.Section 8 deals with insolvency resolution. Sub-section (1) thereofstipulates that an operational creditor may, on the occurrence of a default,Fdeliver a demand notice of unpaid operational debtor copy of an invoicedemanding payment of the amount involved in the default to the corporatedebtor in such form and manner as may be prescribed. Sub-section (2)puts an obligation upon the corporate debtor to respond to the said demandnotice or copy of invoice within a period of 10 days of the receipt thereofGby stating that dispute qua the said demand exists between the parties orby repayment of unpaid operational debt and sending proof thereof tothe operational creditor.

10. From the aforesaid, it follows that existence of an undisputeddebt is sine qua non of initiating CIRP. It also follows that the adjudicatingHauthority shall satisfy itself that there is a debt payable and there is

operational debt and the corporate debtor has not repaid the same. Forthe purpose of clarity, it would be apt to reproduce Section 9 in its entirety.

“9. Application for initiation of corporate insolvency resolutionprocess by operational creditor.—(1) After the expiry of the periodof ten days from the date of delivery of the notice or invoicedemanding payment under sub-section (1) of section 8, if theoperational creditor does not receive payment from the corporatedebtor or notice of the dispute under sub-section (2) of section 8,the operational creditor may file an application before theAdjudicating Authority for initiating a corporate insolvencyresolution process.

(2) The application under sub-section (1) shall be filed in suchform and manner and accompanied with such fee as may beprescribed.

(3) The operational creditor shall, along with the applicationfurnish—

(a) a copy of the invoice demanding payment or demandnotice delivered by the operational creditor to the corporate debtor; (b) an affidavit to the effect that there is no notice givenby the corporate debtor relating to a dispute of the unpaidoperational debt;

(c) a copy of the certificate from the financial institutionsmaintaining accounts of the operational creditor confirming thatthere is no payment of an unpaid operational debt by the corporatedebtor; and (d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvencyresolution process under this section, may propose a resolutionprofessional to act as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of thereceipt of the application under sub-section (2), by an order—

(i) admit the application and communicate such decisionto the operational creditor and the corporate debtor if,—

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(a) the application made under sub-section (2) is complete; (b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtorhas been delivered by the operational creditor; (d) no notice of dispute has been received by the operationalcreditor or there is no record of dispute in the information utility;and (e) there is no disciplinary proceeding pending against anyresolution professional proposed under sub-section (4), if any;

(ii) reject the application and communicate such decision tothe operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) is incomplete; (b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice forpayment to the corporate debtor; (d) notice of dispute has been received by the operationalcreditor or there is a record of dispute in the information utility;or (e) any disciplinary proceeding is pending against any proposedresolution professional:

Provided that Adjudicating Authority, shall before rejecting anapplication under sub-clause (a) of clause (ii) give a notice to theapplicant to rectify the defect in his application within seven daysof the date of receipt of such notice from the AdjudicatingAuthority.

(6) The corporate insolvency resolution process shall commencefrom the date of admission of the application under sub-section(5) of this section.”

11. Clause (ii) of sub-section (5) stipulates the circumstances underwhich the application filed by the operational creditor can be rejected.Sub-clause (d) thereof stipulates the eventuality where there is a noticeof dispute sent by the corporate debtor to the operational creditor.

12. Here, the matter was taken up before the Arbitral Councilinsofar as claim under Invoice Nos. 1-53 is concerned, the same wasspecifically rejected by the Arbitral Council on the ground that it hadbecome time barred. The respondent challenged the said part of theaward of the Arbitral Council, but was not successful. On the basis ofcertain observations made by the High Court of Punjab and Haryana inits decision dated January 29, 2016, the respondent attempted to recoverthe amount by filing execution petition before the Civil Court, Hyderabad.However, that attempt of the respondent was also unsuccessful inasmuchas the High Court of Judicature at Hyderabad categorically held thatsince that particular amount was not payable under the award, executionwas not maintainable. After failing to recover the amount in the aforesaidmanner, the respondent issued notice to the appellant under Section 8 ofthe IBC treating itself as the operational creditor and appellant as thecorporate debtor. The appellant specifically refuted this claim. In spitethereof, application under Section 9 was filed before the NCLT,Hyderabad which was dismissed by it vide order dated April 09, 2018.It is in appeal against the said order, the NCLAT has now passed theimpugned order.

13. The NCLAT has not discussed the merits of the case and alsonot stated how the amount is payable to the respondent in spite of theaforesaid events which were noted by the NCLT as well.Notwithstanding, it has given wielded threat to the appellant by giving aone chance, ‘to settle the claim with the appellant (respondent herein),failing which this Appellate Tribunal may pass appropriate orders onmerit’. It has also stated that though the matter is posted for admissionon the next date, the appeal would be disposed of at the stage of admissionitself. There is a clear message in the aforesaid order directing theappellant to pay the amount to the respondent, failing which CIRP shallbe initiated against the appellant.

14. The only argument advanced by learned counsel for therespondent before this Court was that the High Court of Punjab andHaryana while setting aside the remand order passed by the AdditionalDistrict Judge did not hold that Invoice Nos. 1-57 are time barred.Therefore, the respondent had a valid claim under those invoices. Thisargument cannot be countenanced. As of today, there is no award ofthe Arbitral Council with respect to invoices at Sl. Nos. 1-57. There isno order of any other court as well qua these invoices. In fact, Arbitral AB

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ACouncil specifically rejected the claim of the respondent as time barred.It is pertinent to mention that respondent had moved an application beforethe Arbitral Council for determination of amount to be paid by theappellant. However, this application was specifically dismissed by theArbitral Council as not maintainable.

15. In a recent judgment of this Court in Mobilox InnovationsPrivate Limited vs. Kirusa Software Private Limited[1], this Court hascategorically laid down that IBC is not intended to be substitute to arecovery forum. It is also laid down that whenever there is existence ofreal dispute, the IBC provisions cannot be invoked. We would like toreproduce the following discussion from the said judgment:

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“33. The scheme under Sections 8 and 9 of the Code, appears tobe that an operational creditor, as defined, may, on the occurrenceof a default (i.e. on non-payment of a debt, any part whereof hasbecome due and payable and has not been repaid), deliver ademand notice of such unpaid operational debt or deliver the copyDof an invoice demanding payment of such amount to the corporatedebtor in the form set out in Rule 5 of the Insolvency andBankruptcy (Application to Adjudicating Authority) Rules, 2016read with Form 3 or 4, as the case may be [Section 8(1)]. Withina period of 10 days of the receipt of such demand notice or copyEof invoice, the corporate debtor must bring to the notice of theoperational creditor the existence of a dispute and/or the recordof the pendency of a suit or arbitration proceeding filed before thereceipt of such notice or invoice in relation to such dispute [Section8(2)(a)]. What is important is that the existence of the disputeand/or the suit or arbitration proceeding must be pre-existing i.e.Fit must exist before the receipt of the demand notice or invoice, asthe case may be. In case the unpaid operational debt has beenrepaid, the corporate debtor shall within a period of the self-same10 days send an attested copy of the record of the electronictransfer of the unpaid amount from the bank account of theGcorporate debtor or send an attested copy of the record that theoperational creditor has encashed a cheque or otherwise receivedpayment from the corporate debtor [Section 8(2)(b)]. It is only if,after the expiry of the period of the said 10 days, the operationalcreditor does not either receive payment from the corporate debtor H1 (2018) 1 SCC 353

or notice of dispute, that the operational creditor may trigger theinsolvency process by filing an application before the adjudicatingauthority under Sections 9(1) and 9(2). This application is to befiled under Rule 6 of the Insolvency and Bankruptcy (Applicationto Adjudicating Authority) Rules, 2016 in Form 5, accompaniedwith documents and records that are required under the said form.Under Rule 6(2), the applicant is to dispatch by registered post orspeed post, a copy of the application to the registered office ofthe corporate debtor. Under Section 9(3), along with the application,the statutory requirement is to furnish a copy of the invoice ordemand notice, an affidavit to the effect that there is no noticegiven by the corporate debtor relating to a dispute of the unpaidoperational debt and a copy of the certificate from the financialinstitution maintaining accounts of the operational creditorconfirming that there is no payment of an unpaid operational debtby the corporate debtor. Apart from this information, the otherinformation required under Form 5 is also to be given. Once this isdone, the adjudicating authority may either admit the applicationor reject it. If the application made under sub-section (2) isincomplete, the adjudicating authority, under the proviso to sub-section (5), may give a notice to the applicant to rectify defectswithin 7 days of the receipt of the notice from the adjudicatingauthority to make the application complete. Once this is done, andthe adjudicating authority finds that either there is no repaymentof the unpaid operational debt after the invoice [Section 9(5)(i)(b)]or the invoice or notice of payment to the corporate debtor hasbeen delivered by the operational creditor [Section 9(5)(i)(c)], orthat no notice of dispute has been received by the operationalcreditor from the corporate debtor or that there is no record ofsuch dispute in the information utility [Section 9(5)(i)(d)], or thatthere is no disciplinary proceeding pending against any resolutionprofessional proposed by the operational creditor [Section9(5)(i)(e)], it shall admit the application within 14 days of the receiptof the application, after which the corporate insolvency resolutionprocess gets triggered. On the other hand, the adjudicatingauthority shall, within 14 days of the receipt of an application bythe operational creditor, reject such application if the applicationis incomplete and has not been completed within the period of 7

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days granted by the proviso [Section 9(5)(ii)(a)]. It may also rejectthe application where there has been repayment of the operationaldebt [Section 9(5)(ii)(b)], or the creditor has not delivered theinvoice or notice for payment to the corporate debtor [Section9(5)(ii)(c)]. It may also reject the application if the notice of disputehas been received by the operational creditor or there is a recordof dispute in the information utility [Section 9(5)(ii)(d)]. Section9(5)(ii)(d) refers to the notice of an existing dispute that has sobeen received, as it must be read with Section 8(2)(a). Also, ifany disciplinary proceeding is pending against any proposedresolution professional, the application may be rejected [Section9(5)(ii)(e)].

34. Therefore, the adjudicating authority, when examining anapplication under Section 9 of the Act will have to determine:

(i) Whether there is an “operational debt” as defined exceedingRs 1 lakh? (See Section 4 of the Act)

(ii) Whether the documentary evidence furnished with theapplication shows that the aforesaid debt is due and payable andhas not yet been paid? and

(iii) Whether there is existence of a dispute between the partiesor the record of the pendency of a suit or arbitration proceedingfiled before the receipt of the demand notice of the unpaidoperational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the applicationwould have to be rejected. Apart from the above, the adjudicatingauthority must follow the mandate of Section 9, as outlined above,and in particular the mandate of Section 9(5) of the Act, and admitor reject the application, as the case may be, depending upon thefactors mentioned in Section 9(5) of the Act.

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37. It is now important to construe Section 8 of the Code. Theoperational creditors are those creditors to whom an operationaldebt is owed, and an operational debt, in turn, means a claim inrespect of the provision of goods or services, including employment,or a debt in respect of repayment of dues arising under any law

for the time being in force and payable to the Government or to alocal authority. This has to be contrasted with financial debts thatmay be owed to financial creditors, which was the subject-matterof the judgment delivered by this Court on 31-8-2017 inInnoventive Industries Ltd. v. ICICI Bank (Civil Appeals Nos.8337-38 of 2017). In this judgment, we had held that theadjudicating authority under Section 7 of the Code has to ascertainthe existence of a default from the records of the informationutility or on the basis of evidence furnished by the financial creditorwithin 14 days. The corporate debtor is entitled to point out to theadjudicating authority that a default has not occurred; in the sensethat a debt, which may also include a disputed claim, is not duei.e. it is not payable in law or in fact. This Court then went on tostate: (SCC p. 440, paras 29-30)

“29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on the occurrenceof a default, to first deliver a demand notice of the unpaid debt tothe operational debtor in the manner provided in Section 8(1) ofthe Code. Under Section 8(2), the corporate debtor can, within aperiod of 10 days of receipt of the demand notice or copy of theinvoice mentioned in sub-section (1), bring to the notice of theoperational creditor the existence of a dispute or the record of thependency of a suit or arbitration proceedings, which is pre-existing— i.e. before such notice or invoice was received by the corporatedebtor. The moment there is existence of such a dispute, theoperational creditor gets out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a corporatedebtor who commits a default of a financial debt, the adjudicatingauthority has merely to see the records of the information utilityor other evidence produced by the financial creditor to satisfyitself that a default has occurred. It is of no matter that the debt isdisputed so long as the debt is “due” i.e. payable unless interdictedby some law or has not yet become due in the sense that it ispayable at some future date. It is only when this is proved to thesatisfaction of the adjudicating authority that the adjudicatingauthority may reject an application and not otherwise.”

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A42. This being the case, is it not open to the adjudicating authorityto then go into whether a dispute does or does not exist?

43. It is important to notice that Section 255 read with the EleventhSchedule of the Code has amended Section 271 of the CompaniesAct, 2013 so that a company being unable to pay its debts is nolonger a ground for winding up a company. The old law containedinMadhusudan has, therefore, disappeared with thedisappearance of this ground in Section 271 of the CompaniesAct.

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44. We have already noticed that in the first Insolvency andBankruptcy Bill, 2015 that was annexed to the Bankruptcy LawReforms Committee Report, Section 5(4) defined “dispute” asmeaning a “bona fide suit or arbitration proceedings…”. In itspresent avatar, Section 5(6) excludes the expression “bona fide”which is of significance. Therefore, it is difficult to import theexpression “bona fide” into Section 8(2)(a) in order to judgewhether a dispute exists or not.

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45. The expression “existence” has been understood as follows:

“Shorter Oxford English Dictionary gives the following meaningof the word “existence”:

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(a) Reality, as opp. to appearance.

(b) The fact or state of existing; actual possession of being.Continued being as a living creature, life, esp. under adverseconditions.

Something that exists; an entity, a being. All that exists. (P.894, Oxford English Dictionary)”

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51. It is clear, therefore, that once the operational creditor hasfiled an application, which is otherwise complete, the adjudicatingauthority must reject the application under Section 9(5)(2)(d) ifnotice of dispute has been received by the operational creditor orthere is a record of dispute in the information utility. It is clear thatsuch notice must bring to the notice of the operational creditor the“existence” of a dispute or the fact that a suit or arbitrationproceeding relating to a dispute is pending between the parties.

G

H

Therefore, all that the adjudicating authority is to see at this stageis whether there is a plausible contention which requires furtherinvestigation and that the “dispute” is not a patently feeble legalargument or an assertion of fact unsupported by evidence. It isimportant to separate the grain from the chaff and to reject aspurious defence which is mere bluster. However, in doing so, theCourt does not need to be satisfied that the defence is likely tosucceed. The Court does not at this stage examine the merits ofthe dispute except to the extent indicated above. So long as adispute truly exists in fact and is not spurious, hypothetical orillusory, the adjudicating authority has to reject the application.”

The aforesaid principle squarely applied to the present case.

16. As a result, we allow this appeal and set aside the impugnedorder dated September 04, 2018 passed by the NCLAT. In a normalcourse, the matter should have been remanded back to the NCLAT fordeciding the appeal of the respondent herein filed before the NCLAT, onmerits. However, as this Court has gone into merits and found thatorder of the NCLT is justified, no purpose would be served in remandingthe case back to the NCLAT. Consequence would be to dismiss theCompany Appeal (80) (Insolvency) No. 366 of 2018 and miscellaneousapplications filed by the respondent before the NCLAT. No order as tocosts.

Ankit Gyan

Appeal allowed.

A

B

C

D

E

F

G

H