K. KISHAN versus M/S VIJAY NIRMAN COMPANY PVT. LTD. on 14 August 2018

[2018] 10 S.C.R. 959

K. KISHAN

v.

M/S VIJAY NIRMAN COMPANY PVT. LTD.

(Civil Appeal No. 21824 of 2017)

AUGUST 14, 2018

[R.F. NARIMAN AND INDU MALHOTRA, JJ.]

Insolvency and Bankruptcy Code, 2016: s.9 – Invocation ofthe Code in respect of an operational debt where an arbitral awardhas been passed against the operational debtor which has not yetbeen finally adjudicated upon – Arbitration award in favour ofrespondent – Notice under s.8 of the Code sent to KCPL to pay theaward amount – Within 10 days, KCPL disputed the invoice andfiled s.34 petition – Thereafter, respondent filed petition under s.9of the Code – Held: Under the Code, insofar as an operationaldebt is concerned, all that has to be seen is whether the said debtcan be said to be disputed – Filing of s.34 petition against an ArbitralAward shows that a pre-existing dispute which culminates at thefirst stage of the proceedings in an Award, continues even after theAward, at least till the final adjudicatory process under ss.34 and37 has taken place – Operational creditors cannot use theInsolvency Code either prematurely or for extraneousconsiderations or as a substitute for debt enforcement procedures –The Code cannot be used in terrorem to extract an amount eventhough it may not be finally payable as adjudication proceedingsin respect thereto are still pending – The object of the Code, at leastinsofar as operational creditors are concerned, is to put theinsolvency process against a corporate debtor only in clear caseswhere a real dispute between the parties as to the debt owed doesnot exist – A reading of s.9(5)(ii)(d) of the Code shows that anapplication under s.8 must be rejected if notice of a dispute hasbeen received by the operational creditor – In the instant case, theentire basis for the notice under s.8 of the Code was the fact that anArbitral Award was passed against the appellant and reply to thenotice was given within 10 days, raising the existence of a dispute –The counter claims were rejected by the Arbitral Tribunal, whichrejection was also the subject-matter of challenge in s.34 petition –Unlike counter claim nos. 1 and 2, which were rejected by the

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AArbitral Tribunal for lack of evidence, counter claim no.3 whichraised huge amount was rejected on the basis of a price adjustmentclause on merits – Therefore, it cannot be said at this stage of theproceedings, that no dispute existed between the parties.

Insolvency and Bankruptcy Code, 2016: s.238 – Non-obstanteBclause – Held: s.238 of the Code would apply in case there is aninconsistency between the Code and the Arbitration Act – In theinstant case, there is no such inconsistency – On the contrary, theaward passed under the Arbitration Act together with the steps takenfor its challenge would only make it clear that the operational debthappens to be a disputed one – Appellate Tribunal, when it reliedCupon Form V Part 5 of the 2016 Rules to state that the operationaldebt would, therefore, be said to have been proved, missed the vitalsub-clause (iii) in para 34 of Mobilox Innovations case – Arbitrationand Conciliation Act, 1996.

Allowing the appeal, the CourtD

HELD: 1. Operational creditors cannot use the InsolvencyCode either prematurely or for extraneous considerations or asa substitute for debt enforcement procedures. The alarming resultof an operational debt contained in an arbitral award for a smallamount of say, two lakhs of rupees, cannot possibly jeopardize anEotherwise solvent company worth several crores of rupees. Sucha company would be well within its rights to state that it ischallenging the Arbitral Award passed against it, and the merefactum of challenge would be sufficient to state that it disputesthe Award. The object of the Code, at least insofar as operationalFcreditors are concerned, is to put the insolvency process againsta corporate debtor only in clear cases where a real disputebetween the parties as to the debt owed does not exist. [Para 13][969-G-H; 970-B]

Mobilox Innovations Private Limited v. Kirusa SoftwareGPrivate Limited (2018) 1 SCC 353 – relied on.

Re A Company - Victory House General Partner Ltd. v.RGB P & C Ltd. [2018] EWHC 1143 (Ch) ; Re BayoilSA [1999] 1 WLR 147; Lim PohYeoh (alias Lim Aster)and TS Ong Construction Pte Ltd. [2016] SGHC 179;LKM Investment Holdings Pte Ltd. v. Cathay TheatresH

Pte Ltd. [2000] SGHC 13; Ramsay Health Care AustraliaPty Ltd v. Adrian John Compton [2017] HCA 28 –referred to.

2. Under the Code, insofar as an operational debt isconcerned, all that has to be seen is whether the said debt can besaid to be disputed and the filing of a Section 34 petition againstan Arbitral Award shows that a pre-existing dispute whichculminates at the first stage of the proceedings in an Award,continues even after the Award, at least till the final adjudicatoryprocess under Sections 34 and 37 has taken place. There maybe cases where a Section 34 petition challenging an Arbitral Awardmay clearly and unequivocally be barred by limitation, in that itcan be demonstrated to the Court that the period of 90 days plusthe discretionary period of 30 days has clearly expired, after whicheither no petition under Section 34 has been filed or a belatedpetition under Section 34 has been filed. It is only in such clearcases that the insolvency process may then be put into operation.There may also be other cases where a Section 34 petition mayhave been instituted in the wrong court, as a result of which thepetitioner may claim the application of Section 14 of the LimitationAct to get over the bar of limitation laid down in Section 34(3) ofthe Arbitration Act. In such cases also, it is obvious that theinsolvency process cannot be put into operation without anadjudication on the applicability of Section 14 of the LimitationAct. [Paras 18, 19, 20] [972-E-H; 973-A]

3. The Appellate Tribunal was in error in referring to Section238 of the Code. The Appellate Tribunal, when it relied uponForm V Part 5 of the 2016 Rules to state that the operationaldebt would, therefore, be said to have been proved, missed thevital sub-clause (iii) in para 34 of Mobilox Innovations case. Evenif it be clear that there be a record of an operational debt, it isimportant that the said debt be not disputed. If disputed withinthe parameters laid down in Mobilox Innovations case, aninsolvency petition cannot be proceeded with further. [Paras 22,23] [973-C-D, E-F]

Case Law Reference(2018) 1 SCC 353relied onPara 3

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ACIVIL APPELLATE JURISDICTION : Civil Appeal No. 21824

of 2017

From the Judgment and Order dated 20.11.2017 of the NationalCompany Law Appellate Tribunal in Company Appeal (AT) (Insolvency)No. 211 of 2017

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C.A. No. 21825 of 2017

Gourab Banerji, Sr. Adv., Sushanth Reddy, Gautam Singh, S. P.Mukherjee, Raka Chatterjee, Mohit Pandey, Sahil Tagotra, Ms. ManishaCSingh, Mrs. D. Bharathi Reddy, Harsha Peechara, Ms. Priyanka Tyagi,Advs. for the Appellant.

Dr. P. V. Amarnadha Prasad, Sanjay Kumar Chhetry, VijayshreePattnaik, Sadineni Ravi Kumar, Advs. for the Respondent.

The Judgment of the Court was delivered byD

R. F. NARIMAN, J. 1. The present appeals raise an importantquestion as to whether the Insolvency and Bankruptcy Code, 2016(hereinafter referred to as “the Code”) can be invoked in respect of anoperational debt where an Arbitral Award has been passed against theoperational debtor, which has not yet been finally adjudicated upon.

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2. The brief facts necessary to appreciate the controversy athand are as follows:-

i) In the present case, M/s Vijay Nirman Company Pvt. Ltd. (theRespondent) entered into a sub-Contract Agreement with one M/sKsheerabad Constructions Pvt. Ltd. (for short ‘KCPL’) on 01.02.2008,Fto undertake 50% of Section 2 work of ‘Construction and widening ofthe existing two lane highway to four lanes on NH 67 at KM 190000 toKM 218215 admeasuring a total of 28.215 KM for and on behalf ofKCPL.’

ii) Apart from this Agreement, a separate agreement of the same dateGwas entered into between the said KPCL and one M/s SDM ProjectsPrivate Limited, Bangalore, as a result of which, a tripartite Memorandumof Understanding was entered into on 09.05.2008 between KCPL, M/sSDM Projects Pvt. Ltd. and the Respondent.

iii) During the course of the project, disputes and differences arosebetween the parties and the same were referred to an Arbitral Tribunal,which delivered its Award on 21.01.2017. One of the claims that wasallowed by the said Award was in favour of the respondent for a sum ofRs.1,71,98,302/- which arises out of certain interim payment certificates.Another claim that was allowed related to higher rates of payment inwhich a sum of Rs.13,56,98,624/- was awarded. Three cross claimsthat were made by the Respondent were rejected.

iv) It is pertinent to note that, at this stage, a notice dated 06.02.2017was sent by the Respondent to KCPL to pay an amount ofRs. 1,79,00,166/-. This notice was stated to be a notice under Section 8of the Code. Within 10 days, by a letter dated 16.02.2017, KCPL disputedthe invoice that was referred to in the said notice, stating that the saidamount was, in fact, the subject-matter of an arbitration proceeding, andas per KCPL’s accounts, the Respondent was liable to pay larger amountsto them.

v) It may be noted that after the notice and reply, on 20.04.2017, aSection 34 petition was filed by KCPL under the Arbitration andConciliation Act, 1996 (hereinafter referred to as “the Act”) challengingthe aforesaid Award. Needless to add, this petition was filed within theperiod of limitation set down in Section 34(3) of the Act.

vi) It is only thereafter that a petition was filed under Section 9 of theCode, on 14.07.2017. In the gist of the case presented to the NationalCompany Law Tribunal (‘NCLT’), it was clearly stated as follows:- “The above amount was included in the Statement of Claimsfiled before the Arbitral Tribunal duly constituted on 17.8.2014along with other claims. The Tribunal gave its award on 21.1.2017and upheld the above claim of VNCPL and awarded the aboveamount in favour of VNCPL and against KCPL. (Award copyenclosed)

Thus, the above amount has become an ‘Operational Debt’ tobe paid by the corporate debtor M/s KCPL as defined u/Sec.3(11) of the I&B Code 2016.

A notice in Form-3 U/Sec. 8(1) of the I&B Code 2016 has alreadybeen served on the Corporate Debtor, M/s KCPL and a reply A

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Areceived from KCPL is also enclosed herewith for readyreference.”

In the Counter Affidavit before the NCLT, it was stated:

“10. I respectfully submit that the case of the petitioner in shortis that since an award has been passed against the respondentBhere in an arbitration proceeding, though a petition U/Sec 34 ofthe Arbitration and Conciliation Act, has been filed by therespondent before the competent court challenging the awardthe present application is maintainable U/Sec. 9 of the code thoughthe respondent had raised a dispute in its replies datedC06-02-2017 & 05-06-2017 to the notice issued U/Sec.8(2) of thecode by the applicant.

11. I respectfully submit that a dispute had been raised by therespondent company even before the present application hasbeen filed, in the arbitration proceedings by way of a counterDclaim and presently the same is sub judice before the Hon’bleCommercial Court cum XXIV Additional Chief Judge, City CivilCourt at Hyderabad in petition filed U/Sec. 34 of the Act. Copyof the section 34 application filed and pending before the Hon’bleCourt is enclosed herewith as Annexure R-6.”

Evii) The NCLT, by its order dated 29.08.2017, referred to the aforestatedfacts, and also referred to the fact that the Award which was challengedunder Section 34 specifically stated that learned counsel for the firstRespondent (i.e. the corporate debtor) was fair enough to admit that theclaimant is entitled to the said sum of Rs.1,71,98,302/-. According to theNCLT, the fact that a Section 34 petition was pending was irrelevant forFthe reason that the claim stood admitted, and there was no stay of theAward. For these reasons, therefore, the Section 9 petition was admitted.

viii) An appeal filed to the Appellate Tribunal met with the same fate, asaccording to the Appellate Tribunal, the non-obstante clause containedin Section 238 of the Code would override the Arbitration Act. Also,Gaccording to the Appellate Tribunal, since Form V of Part 5 of theInsolvency & Bankruptcy (Application to Adjudicating Authority) Rules,2016 requires particulars of an order of an arbitral panel adjudicating onthe default, this would have to be treated as “a record of an operationaldebt”, as a result of which the petition would have to be admitted, aswas correctly done by the NCLT. The appeal was, accordingly, dismissed.H

3. Mr. Gourab Banerji, learned Senior Advocate, appearing onbehalf of the appellant has relied upon certain observations made in ourjudgment in Mobilox Innovations Private Limited vs. Kirusa SoftwarePrivate Limited, (2018) 1 SCC 353 and argued that the object of theCode is not to replace debt adjudication and enforcement under otherActs including the Arbitration Act, 1996. He has relied, in particular, onpara 51 under which, according to him, the moment there is a real disputebetween the parties, which need not be a “bona fide dispute” which islikely to succeed in point of law, the Insolvency Code cannot be applied.In the present case, according to him, the very fact that a Section 34petition is pending is reflective of a real dispute between the parties,which was pre-existing, and which culminated in an Arbitral Award whichhas yet to attain finality. Also, according to the learned Senior Advocate,the cross-claims that were rejected by the learned Arbitral Tribunal farexceeded the amounts awarded against his client, and if any one ofthem were to be held to be wrongly dismissed, in particular, counterclaim No.3 of Rs. 19,88,20,475/-, it is obvious that his client would notowe any sum of money to the operational creditor. He also relied uponcertain judgments, which we will discuss later. To further buttress hissubmissions, he argued that all that is necessary is that there be a disputein some form which would include cross claims made by the corporatedebtor against the operational creditor. According to him, the AppellateTribunal was wholly in error in applying Section 238 of the Code as,according to Mr. Banerji, there is nothing inconsistent between theadjudication and enforcement process under the Arbitration Act and theapplication of Sections 8 & 9 of the Code. In fact, according to thelearned Senior Advocate, the fact of pending proceedings, whether theybe proceedings culminating in an Award, or challenge proceedingsthereafter, would, in fact, show that there is a dispute insofar as anoperational debt that is stated to be owed, and that therefore, theArbitration Act can be relied upon for this purpose, there being nothinginconsistent between it and the Code.

4. Dr. P.V. Amarnadha Prasad, learned Advocate, appearing onbehalf of the respondent has argued in reply that according to the law inthe United Kingdom, and Practice Directions thereunder, an insolvencyprocess does not get stultified because an application to set aside thejudgment, order or decision is pending in an appeal or otherwise. Healso referred to the law in Singapore, and relied upon a judgment of theSingapore High Court to the effect that once it is found that there is a A

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Aprimary adjudication between the parties which indicates the existenceof a debt, any further dispute which may be pending in appeal or otherwiseover the debt could not be said to be bona fide disputed by the debtor.According to him, the Appellate Tribunal was absolutely correct inapplying Section 238 of the Code, as there would be a direct inconsistencybetween the application of the Code and a Section 34 proceeding whichBwas said to be pending, and which, according to him, was not relevant inview of the law that he has cited.

5. Having heard learned counsel for both parties, it is importantto first advert to Section 9(5) of the Code which states as follows:-C“9(5) The Adjudicating Authority shall, within fourteen days ofthe receipt of the application under sub-section (2), by an order-(i) admit the application and communicate such decision to theoperational creditor and the corporate debtor if,- (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

(d) no notice of dispute has been received by the operationalcreditor or there is no record of dispute in the information utility;Eand (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 to theoperational creditor and the corporate debtor, if- (a) the application made under sub-section (2) is incomplete; F

(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 operationalGcreditor 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 anHapplication under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven daysof the date of receipt of such notice from the adjudicatingAuthority.”

A reading of Section 9(5)(ii)(d) would show that an application underSection 8 must be rejected if notice of a dispute has been received bythe operational creditor. In the present case, it is clear on facts that theentire basis for the notice under Section 8 of the Code is the fact that anArbitral Award was passed on 21.07.2017 against the Appellant. Ashas been pointed out by us, this clearly appears from the gist of the casethat was filed along with the insolvency petition. The fact that the replyof 16.02.2017 to the notice given under Section 8 was within 10 days,and raised the existence of a dispute, also cannot be doubted.

6. However, learned counsel appearing on behalf of theRespondent strongly relied on the fact that this is not an ordinary caseinasmuch as the amount of Rs.1.71 Crores which was awarded wasadmitted by Mr. Banerji’s client in the arbitral proceedings to be a debtdue, and that this being so, there can be no dispute regarding the same.We are afraid that we are unable to agree. As was correctly pointed outby Mr. Banerji, counter claims for amounts far exceeding this wererejected by the learned Arbitral Tribunal, which rejection is also thesubject-matter of challenge in a petition under Section 34 of the Act. Itis important to note that unlike counter claim Nos. 1 and 2, which wererejected by the Arbitral Tribunal for lack of evidence, counter claimNo.3 which amounts to Rs.19,88,20,475/- was rejected on the basis of aprice adjustment clause on merits. Therefore, it is difficult to say at thisstage of the proceedings, that no dispute would exist between the parties.

7. Our recent judgment in Mobilox Innovations (supra) throwsconsiderable light on the issue at hand. While referring to the legislativehistory of the Code, this Court referred to the Legislative Guide onInsolvency Law of the United Nations Commission on International TradeLaw. One of the things the Legislative Guide spoke about was whetherthe debt is subject to a legitimate dispute or set-off, in an amount equalto or greater than the amount of the debt. Another thing spoken of wasthat improper use of the insolvency process would occur in cases wherea creditor uses insolvency as an inappropriate substitute for debtenforcement procedures, even though they may not be well developed.(see para 13 of the judgment)

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A8.The Notes on Clauses annexed to the Bill of the InsolvencyCode were also referred to by this Court in para 27 of the judgment.The important sentence in these Notes on Clauses needs to bereproduced, which is done herein below:- “This ensures that operational creditors, whose debt claims areBusually smaller, are not able to put the corporate debtor into theinsolvency resolution process prematurely or initiate the process for extraneous considerations.”

9. This Court also noticed that the original Bill which ultimatelybecame the Code had the expression “bona fide dispute” contained inCan inclusive definition. It is significant to note that by the time the Codewas enacted the expression “bona fide” was dropped. (See para 32 ofthe judgment)

10. After referring to Section 8, the judgment went on to hold thatwhat is important is that the existence of the dispute and/or a suit orDarbitration proceeding must be pre-existing i.e. it must exist before thereceipt of the demand notice or invoice, as the case may be.

11. The Adjudicating Authority, therefore, when examining anapplication under Section 9 of the Act, will have to determine thefollowing:-E(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?

Fand(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?

GIf any one of the aforesaid conditions is lacking, the application wouldhave to be rejected. Apart from the above, the adjudicating authoritymust follow the mandate of Section 9, as outlined above, and in particularthe mandate of Section 9(5) of the Act, and admit or reject the application,as the case may be, depending upon the factors mentioned in Section9(5) of the Act. (Para 34).H

12. In para 38, this Court cautioned:

“We have also seen that one of the objects of the Code quaoperational debts is to ensure that the amount of such debts,which is usually smaller than that of financial debts, does notenable operational creditors to put the corporate debtor into theinsolvency resolution process prematurely or initiate the processfor extraneous considerations. It is for this reason that it is enoughthat a dispute exists between the parties.

Finally, the law was summed up as follows:- “51.It is clear, therefore, that once the operational creditorhas filed an application, which is otherwise complete, theadjudicating authority must reject the application under Section9 (5)(2)(d) if notice of dispute has been received by theoperational creditor or there is a record of dispute in theinformation utility. It is clear that such notice must bring to thenotice of the operational creditor the “existence” of a dispute orthe fact that a suit or arbitration proceeding relating to a disputeis pending between the parties. Therefore, all that the adjudicatingauthority is to see at this stage is whether there is a plausiblecontention which requires further investigation and that the“dispute” is not a patently feeble legal argument or an assertionof fact unsupported by evidence. It is important to separate thegrain from the chaff and to reject a spurious defence which ismere bluster. However, in doing so, the Court does not need tobe satisfied that the defence is likely to succeed. The Court doesnot at this stage examine the merits of the dispute except to theextent indicated above. So long as a dispute truly exists in factand is not spurious, hypothetical or illusory, the adjudicatingauthority has to reject the application.”

13. Following this judgment, it becomes clear that operationalcreditors cannot use the Insolvency Code either prematurely or forextraneous considerations or as a substitute for debt enforcementprocedures. The alarming result of an operational debt contained in anarbitral award for a small amount of say, two lakhs of rupees, cannotpossibly jeopardize an otherwise solvent company worth several croresof rupees. Such a company would be well within its rights to state thatit is challenging the Arbitral Award passed against it, and the mere factumof challenge would be sufficient to state that it disputes the Award. Such A

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Aa case would clearly come within para 38 of Mobilox Innovations(supra), being a case of a pre-existing ongoingdispute between theparties. The Code cannot be used in terrorem to extract this sum ofmoney of Rs. two lakhs even though it may not be finally payable asadjudication proceedings in respect thereto are still pending. We repeatthat the object of the Code, at least insofar as operational creditors areBconcerned, is to put the insolvency process against a corporate debtoronly in clear cases where a real dispute between the parties as to thedebt owed does not exist.

14. Mr. Banerji referred us to certain judgments of the Englishand Singapore Courts. In Re A Company - Victory House GeneralCPartner Ltd. vs. RGB P & C Ltd. [2018] EWHC 1143 (Ch), theChancery Division of the High Court, in a situation where a debt has tobe “bona fide” disputed in order to attract the winding up jurisdiction ofthe Courts in the UK, made it clear that even in a case where a judgmentdebt is no longer a disputed debt, as it has been finally adjudicated upon,Dyet if there be a cross-claim which is being adjudicated upon, or whichmay not even have reached the adjudicatory process at all, would besufficient to stave off a winding up order. The learned Judge referred tothe judgment in Re Bayoil SA [1999] 1 WLR 147 as follows, andconcluded:- E“27.This, of course, is not a case of a disputed debt. Thereis a judgment debt and it can be enforced immediately. However,Mr. Chivers draws attention to Re Bayoil SA [1999] 1 WLR147, which deals with a case not involving a disputed debt butinvolving a cross-claim by the company, the subject of the petitionor the intended petition, where the amount of the cross-claimFexceeds the petition debt. The headnote to Re Bayoil recites theessential facts. The petitioner claimed for freight. The establishedlaw is there is no defence of set-off available in relation to aclaim to freight. The claim went to arbitration and the arbitratorsmade an award in favour of the petitioner. The petitioner thenGpresented a petition on the basis of the sum determined by thearbitration award. The company applied for the petition to bedismissed or stayed on the ground that it had a genuine and seriouscounterclaim in an amount which exceeded the petition debt. Itwas a matter of detail in that case, which the company putforward to advance its case, that it had not been able to litigate H

that counterclaim. Later cases discussing Re Bayoil make itclear that the ability, or inability, to litigate the counterclaim is notof the essence of the principle in this case. So I put that on oneside……”

“32. I therefore have to ask whether the nascent cross-claim,the claim in restitution which MrChivers has explained to me, isa bona fide cross-claim on substantial grounds. I have no doubtit is a bona fide claim. I have also no doubt it is on substantialgrounds. At the moment it seems to me that it is a claim thatwould succeed but I need not go that far……”

“34. Nothing which I have said detracts in any way from thebinding character of the judgment which has been made. It mayappear to be a strong thing to say that the employer, having failedto comply with a judgment against it, should nonetheless escapethe consequences involved in a winding up, but it seems to methat that is the very thing which was considered to be appropriatein the Bayoil case and, on the facts of this case, I also considerit is a more just result that the alternative contended for by thepetitioner.”

15. A recent judgment of the Singapore High Court, contained inLim PohYeoh (alias Lim Aster) and TS Ong Construction Pte Ltd.[2016] SGHC 179, was also referred to by Mr. Banerji. Again, in asituation which demands a far higher threshold that has to be crossedbefore the Insolvency Law can be said not to apply, the Singapore HighCourt referred to Rule 98(2)(a) of the Rules made under the BankruptcyAct. The said Rule states that where a debtor appearsto have a validcounter claim or cross-demand which is equivalent to or exceeds theamount of debt, the insolvency process will not be put against such debtor.It also referred to the Supreme Court Practice Directions to the sameeffect. (see paras 43 & 45 of the said judgment)

16. We now come to some of the judgments referred to by learnedcounsel for the respondent. It is important to note that both the PracticeDirections referred to in the U.K. judgment and the Singapore HighCourt judgment, referred to in LKM Investment Holdings Pte Ltd. vs.Cathay Theatres Pte Ltd. [2000] SGHC 13, are in situations where thedebt needs to bebona fidedisputed, which is not the situation under ourCode. For this reason, it is not possible to agree with learned counsel forthe Respondent that a pending proceeding challenging an award or decree A

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Aof a tribunal or Court would not make the debt contained therein a debtthat is disputed.

17. The Australian High Court judgment also relied upon by therespondent in Ramsay Health Care Australia Pty Ltd vs. Adrian JohnCompton [2017] HCA 28 was relied upon to show, in para 111 thereof,Bthat where a judgment debt has been obtained after testing of the meritsin adversarial litigation, then in the absence of some evidence of fraud,collusion, or miscarriage of justice, a court exercising bankruptcyjurisdiction will rarely have substantial reasons to investigate whetherthe debt which emerged in the judgment was truly owed. With respectto the High Court of Australia, we may only state that following MobiloxCInnovations (supra), it would be very difficult to incorporate theAustralian law into our law. This is for the reason that our judgment inMobilox Innovations (supra) has made it clear that the insolvencyprocess, particularly in relation to operational creditors, cannot be usedto bypass the adjudicatory and enforcement process of a debt containedDin other statutes. We are, therefore, of the view that the higher thresholdof fraud, collusion, or miscarriage of justice laid down by the AustralianHigh Court will have no application to the situation under our Code.

18. We repeat with emphasis that under our Code, insofar as anoperational debt is concerned, all that has to be seen is whether the saidEdebt can be said to be disputed, and we have no doubt in stating that thefiling of a Section 34 petition against an Arbitral Award shows that apre-existing dispute which culminates at the first stage of the proceedingsin an Award, continues even after the Award, at least till the finaladjudicatory process under Sections 34 & 37 has taken place.

F19. We may hasten to add that there may be cases where a Section34 petition challenging an Arbitral Award may clearly and unequivocallybe barred by limitation, in that it can be demonstrated to the Court thatthe period of 90 days plus the discretionary period of 30 days has clearlyexpired, after which either no petition under Section 34 has been filed ora belated petition under Section 34 has been filed. It is only in such clearGcases that the insolvency process may then be put into operation.

20. We may hasten to add that there may also be other caseswhere a Section 34 petition may have been instituted in the wrong court,as a result of which the petitioner may claim the application of Section14 of the Limitation Act to get over the bar of limitation laid down inH

Section 34(3) of the Arbitration Act. In such cases also, it is obviousthat the insolvency process cannot be put into operation without anadjudication on the applicability of Section 14 of the Limitation Act.

21. With regard to the submission of learned counsel for therespondent, that the amount of Rs.1.71 Crores stood admitted byMr. Banerji’s client, as was recorded in the Arbitral Award, suffice it tosay that cross-claims of sums much above this amount has been turneddown by the Arbitral Tribunal, which are pending in a Section 34 petitionchallenging the said Award. The very fact that there is a possibility thatMr. Banerji’s client may succeed on these cross-claims is sufficient tostate that the operational debt, in the present case, cannot be said to bean undisputed debt.

22. We also accept Mr. Banerji’s submission that the AppellateTribunal was in error in referring to Section 238 of the Code. Section238 of the Code would apply in case there is an inconsistency betweenthe Code and the Arbitration Act in the present case. We see no suchinconsistency. On the contrary, the Award passed under the ArbitrationAct together with the steps taken for its challenge would only make itclear that the operational debt, in the present case, happens to be adisputed one.

23. We are also of the view that the Appellate Tribunal, when itrelied upon Form V Part 5 of the 2016 Rules to state that the operationaldebt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations (supra). Even if it beclear that there be a record of an operational debt, it is important that thesaid debt be not disputed. If disputed within the parameters laid down inMobilox Innovations (supra), an insolvency petition cannot beproceeded with further.

24. For all these reasons, we are of the view that the judgment ofthe Appellate Tribunal needs to be set aside and is therefore reversed.

25. The appeals are, accordingly, allowed in the aforesaid terms.

26. Consequently, the bank guarantees that have been furnished,pursuant to our order dated 15.12.2017, stand discharged.

Devika Gujral Appeals allowed.

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