M/S. JAI BALAJI INDUSTRIES versus D.K. MOHANTY & ANR. on 1 October 2021

ORDER

1. By way of these appeals under Section 62 of Insolvency andBankruptcy Code, 2016,[1] the appellant, said to be an operational creditorof the respondent No. 2 company, seeks to question the common orderBdated 17.08.2021 passed by the National Company Law AppellateTribunal, Principal Bench, New Delhi,[2] in Company Appeal (AT)(Insolvency) No. 888/2020 and Company Appeal (AT) (Insolvency) No.889/2020, whereby the Appellate Tribunal, after holding that theoperational debt claimed by the appellant was not free from pre-existingCdispute, set aside the orders dated 30.09.2020 passed by the NationalCompany Law Tribunal, Kolkata Bench, Kolkata,[3] in admitting theapplication made by the appellant for initiation of Corporate InsolvencyResolution Process[4] concerning the respondent No. 2 company.

2. Having regard to the questions sought to be raised, elaborationDon all the factual aspects pertaining to the claim of the appellant and thedispute raised by the respondents is not necessary. Only a brief referenceto the relevant background would suffice.

3. The appellant M/s. Jai Balaji Industries is engaged in thebusiness of manufacturing and supply of iron and steel products, havingEits plants in the States of West Bengal and Chhattisgarh.[5] The respondentNo. 2 Orissa Minerals Development Company Limited is a companyengaged in the business of selling iron ore, having its mines in the Stateof Orissa.[6] The respondent No. 1 is the Managing Director of thiscompany.

F3.1. The appellant and the respondents entered into twoMemorandums of Understanding[7] on 13.08.2003 and 11.03.2004, wherebythe respondent No. 2 agreed to supply, respectively, 1 lakh and 7 lakhmetric tons of iron ore per month to the appellant. A dispute ensued 1 Hereinafter also referred to as ‘IBC’ or ‘the Code’.

2 Hereinafter also referred to as ‘NCLAT’ or ‘the Appellate Tribunal’.G3 Hereinafter also referred to as ‘NCLT’ or ‘the Tribunal’.

3 Hereinafter also referred to as ‘NCLT’ or ‘the Tribunal’.

4 ‘CIRP’ for short.

5 The appellant is also referred hereinafter as ‘the operational creditor’, as per thecontext.

6 The respondent No. 2 company is also referred hereinafter as ‘the respondent company’or ‘the corporate debtor’, as per the context.H7 ‘MOU’ for short.

between the parties, as regards the requisite supply and payment, leadingthe appellant to invoke the arbitration clause and the matter was takenup in arbitration proceedings.

4. Two separate arbitral awards dated 22.02.2010 and 15.02.2010were passed in relation to the respective MOUs in favour of the appellantwhereunder the respondent company was held liable to make paymentof Rs. 4.44 crores and Rs. 2.79 crores respectively.

4.1. The respondent company challenged the legality and validityof the awards so made by way of petitions under Section 34 of theArbitration and Conciliation Act, 1996.[8] These petitions were, however,dismissed by the District Court, Barasat by its orders dated 27.02.2012[9]and 29.02.2012[10] respectively. These orders were challenged by therespondent company by way of two appeals[11] under Section 37 of theAct of 1996 before the High Court of Calcutta on 07.08.2012. The appealsremained pending for long but, on 22.11.2019, the same were dismissedin default because of non-appearance of the appellant therein (i.e., therespondent company).

4.2. On 17.12.2019, the respondent company moved respectiveapplications for restoration of appeals;[12] and these applications wereallowed by the High Court on 02.03.2020, after finding sufficient causefor non-appearance on the date of hearing. Consequently, both the appealsunder Section 37 of the Act of 1996 stood revived and are said to bepending yet.

5. In the meantime and before such restoration of appeals, theappellant sent two separate demand notices under Section 8 of the Code[read with Rule 5 of the Insolvency and Bankruptcy Code (Applicationto Adjudicating Authority) Rules, 2016] to the respondent company on14.02.2020, claiming operational debts to the tune of Rs. 7,75,13,684/-and Rs. 5,62,01,258/- under the respective arbitral awards, for the appealshaving been dismissed by the High Court.

8 Hereinafter also referred to as ‘the Act of 1996’.

9 In Miscellaneous Case No. 159 of 2010 pertaining to MOU dated 13.08.2003.

10 In Miscellaneous Case No. 173 of 2010 pertaining to MOU dated 11.03.2004.

11 Being FMA 941 of 2012 pertaining to MOU dated 13.08.2003 and FMA 939 of 2012pertaining to MOU dated 11.03.2004.

12 Being CAN No. 12338 of 2019 in FMA 941 of 2012 and CAN No. 12333 of 2019 inFMA 939 of 2012.

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A5.1. In terms of Section 8(2)(a) of the Code, the respondentcompany sent its replies to the demand notices on 25.02.2020, asserting,inter alia, that there existed a dispute and the matter was pending inarbitration proceedings, which pre-dated the receipt of demand notice.Substantiating this assertion, the respondent company stated that theapplications for restoration of appeals were pending in the High Court,Bwhich werefiled much before the receipt of demand notices and withadvance notice to the appellant. Thus, the respondent company asserted,within 10 days of service of the demand notices, that the matter of debtowed was sub judice and no operational debt was payable to the appellant.

6. Notwithstanding the replies so sent by the respondent company,Cthe appellant proceeded to move the National Company Law Tribunal,Kolkata Bench, Kolkata, seeking initiation of Corporate InsolvencyResolution Process against the respondent company for non-paymentof the aforementioned operational debts and filed two applications underSection 9 of the Code.[13] It would be apposite to indicate at this stageDitself that NCLAT took note of the fact that such applications, thoughsworn on 29.02.2020, were filed only on 02.03.2020; however, NCLThad proceeded on the assumption that the applications were filed on29.02.2020. As would be noticed hereafter later, the date of filing ofsuch applications under Section 9 of the Code has its own bearing in thematter because the aforesaid appeals of the respondent company underESection 37 of the Act of 1996 were restored by the High Court on02.03.2020.7. The Adjudicating Authority, i.e., NCLT, dealt with theapplications so made by the appellant under Section 9 of the Code by itscommon order dated 30.09.2020; and proceeded to examine the questionFas to whether the appeals under Section 37 of the Act of 1996 werepending on the day the operational debt owed to the appellant becamedue.

7.1. The NCLT took the view that on the day the appellant serveddemand notices to the respondent company under Section 8 of the CodeGand on the date of filing of applications under Section 9 of the Code, noproceedings were pending in challenge to the arbitral awards and hence,no dispute as to the debt owed to the appellant was existing on therelevant dates. The NCLT further observed that although the High Court H13 Being CP (IB) No. 676/KB/2020 and CP (IB) No. 688/KB/2020 respectively.

allowed the applications for restoration of appeals under Section 37 ofthe Act of 1996, this was belatedly done, only on 02.03.2020. The relevantobservations of NCLT could be usefully extracted as under: -

“7…..On 14.02.2020, the Operational Creditor sent CorporateDebtor notice under Section 8 of Insolvency and Bankruptcy Code,2016. It was received by the Corporate Debtor on 18/2/2020 andCorporate Debtor replied vide letter dated 25.02.2020. Thisapplication to initiate CIRP of the Corporate Debtor has beenfiled by the Operational Creditor on 29.02.2020. On that day, noAppeal under Section 37 of A & C Act, 1996 was pending becausethe Hon’ble High Court restored the Appeal on 02.03.2020.”

7.2. The NCLT, thereafter, referred to the requirements of Section9(5)(ii)(d) of the Code and meaning of the expression “dispute” as perSection 5(6) of the Code, and observed as under: - “8….From the plain reading of un-disputed facts in this proceeding,it is clear that on the date on which the Corporate Debtor wasserved with demand notice under Section 8 of the Insolvency andBankruptcy Code, 2016 or on the date on which the application isfiled against the Corporate Debtor, no arbitration proceedings waspending challenging the award.”

7.3. The NCLT also referred to the decision of this Court in thecase of K. Kishan v. Vijay Nirman Company Pvt. Ltd.: (2018) 17SCC 662 and observed that the enunciations therein rather operated infavour of the operational creditor, because the operational debt becamedue and payable when the award was confirmed by the District Judge;and even though an appeal was filed by the corporate debtor, the samewas dismissed in default; and notice was given by the creditor only 90days after dismissal of the appeal. The NCLT even sensed mala fide inthe corporate debtor’s application for restoration and observed that itsofficers were using the proceedings in law either to delay or to avoid thelegitimate dues. The NCLT, inter alia, observed as under: - “10. It has been held by the Apex Court that if it is shown that theapplication under Section 34 of A & C Act, 1996 is pending orAppeal under Section 37 of the Act is pending, then insolvencyproceedings cannot be initiated. In this case, on the date of filingof this application under Section 9 of Insolvency and BankruptcyCode, 2016 i.e on 29.02.2020, no proceeding under Section 34 or AB

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AAppeal under Section 37 of the Act was then pending against theOperational Creditor (although restoration application of Appealwas pending). So on the facts, we hold that above ruling is infavour of the Operational Creditor rather than the CorporateDebtor. In short, Operational debt become due and payable on29.02.2012 i.e on the date of which the Learned District JudgeBconfirmed the award under Section 34 of A & C Act. The CorporateDebtor filed Appeal under Section 37 of the Act. It was dismissedin default. 90 days thereafter, on 14.02.2020, Operational Creditorgave the Corporate Debtor notice under Section 9 of the Insolvencyand Bankruptcy Code, 2016. On 28.02.2020 (sic).

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11. What we gathered from the above facts is that the operationalcreditor sent a demand notice three months after the Corporatedebtor’s appeal was dismissed by Hon’ble high Court. As soon asthe Corporate Debtor received the demand notice, its officersswung into action and get the appeal restored. Meantime, theDoperational creditor had filed this application. It appears from recordthat the officers of the Corporate Debtor using the proceedingsunder the law either to delay or to avoid the legitimate dues of theCorporate Debtor on one or the other ground.”

7.4. In view of the above, the NCLT held that the corporate debtorEhad committed default in payment of operational debts in spite of thereceipt of demand notice; and that there was no dispute pending, by wayof arbitral proceedings or otherwise, on the date on which default occurredor the date on which application was filed to initiate CIRP of the corporatedebtor. With these observations, the NCLT admitted the applicationsmade by the appellant under Section 9 of the Code in its capacity as anFoperational creditor; initiated CIRP in relation to the respondent company;declared moratorium; appointed Interim Resolution Professional; andissued further consequential directions.

8. Being aggrieved by the orders so passed by the AdjudicatingAuthority (NCLT), the present respondents preferred respective appealsGbefore the Appellate Tribunal (NCLAT) under Section 61 of the Codecontending, inter alia, that the applications under Section 9 of the Codewere actually filed only on 02.03.2020 but, on that date, the appeals hadbeen restored by the High Court and such restoration related back to thedate of filing of appeals. On the other hand, it was contended on behalfHof the appellant that on the date of issuance of the demand notice (14.02.2020), no arbitration proceedings were pending as the appealswere restored only on 02.03.2020 and, therefore, the AdjudicatingAuthority had rightly admitted the applications for CIRP in the presentcase.

8.1. The core of rival contentions came to be noticed by theAppellate Tribunal in the following words: - “6. Subsequently, the Application for restoration, filed on 17.12.2019was restored on 02.03.2020. It is the case of the ‘OperationalCreditor’ that ‘as on the date of the issuance of the DemandNotice’ under Section 8 of the Code i.e. on 14.02.2020 there wasno Arbitration proceeding pending, as the Appeal under Section37 was restored only on 02.03.2020. As against these submissions,Learned Solicitor General representing the ‘Corporate Debtor’submitted that once the Application for restoration is allowed, itrelates back to the original date of filing. It is also submitted thatthe Section 9 Application was affirmed on 29.02.2020 but wasactually filed on 02.03.2020 and therefore as on the date of filingof the Application, the Appeal was already restored.”

8.2. The NCLAT referred to the decision of this Court in the caseof Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.:(2018)1 SCC 353 and, in keeping with the principles enunciated therein,proceeded to examine as to whether there was a pre-existing disputeconcerning the debt in question on the date of receipt of demand notice.Thereafter, NCLAT referred to the decision of this Court in the case ofVareed Jacob v. Sosamma Geevarghese & Ors.: (2004) 6 SCC 378,toobserve that as per the view of the majority therein, once an appeal isrestored to its original number, the interlocutory orders therein standrevived unless otherwise directed. By applying these principles, theNCLAT held that once the appeal under Section 37 of the Act of 1996was restored, it related back to the original date of filing in the followingwords: - “9. What can be gleaned from the majority decision is that uponrestoration of Appeal to its original number, the Appellant is restoredto the position when the Court has initially dismissed the Appealfor default, unless the Court expressly or by implication excludesthe operation of any Orders passed during the period between thedismissal of the restoration.

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A10. The minority view relied upon by the Learned Counselappearing for ‘Operational Creditor’ is not applicable to this case.The binding Judicial Precedent is the view taken by the majority.That constitutes the Rule of the Court. Having regard to theinterpretation of the ratio laid down in the aforenoted Judgementthat once an Appeal is restored to its original number, the fact thatBInterlocutory Orders would stand revived unless otherwisedirected, further strengthens the case of the Appellant herein. Weare of the considered view that the ratio of majority view of ‘VareedJacob’ (Supra) is applicable to the facts of this case and hence,we hold that once an Appeal under Section 37 of the A&C Act,C1996, is restored it relates back to the original date of filing.”8.3. A question regarding effect of pendency of the proceedingsfor execution of award also cropped up, to which, the NCLAT observedthat the execution would come into picture if the appeals under Section37 had been decided; and ‘money recovery’ and ‘triggering of insolvency’Dwere not parallel proceedings. The NCLAT also observed that, in fact,IBC discourages recovery proceedings; and the practice of using thisCode towards execution of decree or money recovery is ratherdeprecated.

8.4. Moving on, the Appellate Tribunal referred to Section 8 ofEthe Code and observed that the requirement was to see as to whetherthere existed a dispute or record of pendency of the suit or arbitrationproceedings; and with reference to the facts of the present case,construed that a dispute was in existence prior to the issuance of demandnotices. It was also observed that the applications for restoration werefiled with advance notice to the operational creditor. Having said that,Fthe Appellate Tribunal referred to the enunciations of this Court in thecase of Mobilox Innovations and K. Kishan (supra) and held that itwas a clear case of a pre-existing dispute between the parties prior tothe issuance of demand notice and hence, the operational debt cannotbe said to be an undisputed one. The relevant part of observations andGfindings of the Appellate Tribunal (NCLAT) in its impugned commonorder dated 17.08.2021 could be usefully extracted as under: - “15. Section 8(2)(a) provides that Existence of a Dispute, [ifany, or] record of the pendency of the suit or ArbitrationProceedings filed before the receipt of such Notice or invoiceHin relation to such Dispute. At the outset, what has to be seen

is ‘whether there is any Existence of Dispute’, ‘if any or’record of the pendency of the suit or Arbitration Proceedings.In the instant case, it is an admitted fact by both the partiesthat disputes arose way back in the year 2003 and 2004, andbased on the terms of MoU entered into, the ‘OperationalCreditor’ themselves invoked the Arbitration Proceedings. Boththe Arbitral Awards were assailed by the ‘Corporate Debtor’under Section 34 of A&C Act, 1996 and were dismissed byseparate Orders dated 27.02.2012 and 29.02.2012 respectively.The Appeals preferred by the ‘Corporate Debtor’ under Section37 of A&C Act, 1996, stood pending till 22.11.2019 on whichdate they were dismissed for non-prosecution. So even if22.11.2019 is taken as the date of NPA as contended by theLearned Counsel for the ‘Operational Creditor’, the factremains that till that date there is an ongoing Dispute. It can besafely construed that there was a‘Dispute’ in Existence priorto the issuance of the Demand Notice. Subsequently, theAppeal under Section 37 was restored on 02.03.2020. TheApplication for restoration CAN No. 12333 of 2019 was filedby the ‘Corporate Debtor’ on 17.12.2019 with an advanceNotice to the ‘Operational Creditor’. Thereafter the DemandNotice was issued on 14.02.2020. The Application was filedon 02.03.2020. We have already observed that upon restoration,the Appeal relates back to the original date of filing and thereforewe note that there was a Pre-Existing Dispute priorto thedate of issuance of the Demand Notice.

16. To view it in a narrow compass and interpret Section8(2) (a) that an Arbitral Award ought to be pending as on theexact date of the issuance of the Demand Notice, amounts tomistaking/misconstruing the said Section. The Hon’bleSupreme Court in ‘Mobilox Innovations Pvt. Ltd.’ (Supra) hasclearly laid down that ‘the test for determination for theAdjudicating Authority is to see at the stage of Admitting/rejecting the Application is whether there is a plausiblecontention which requires further investigation and that the‘Dispute’ is not a patently feeble legal argument or anassertion of fact unsupported by evidence. It is important toseparate the grain from the chaff and to reject a spuriousdefence which is mere bluster’. It is observed that the ABCDE

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AAdjudicating Authority does not need to be satisfied whether thedefence is likely to succeed so long as a Dispute truly Exists infact and is not spurious, hypothetical or illusory. In the instantcase, the Existence of a ‘Dispute’ is evident in the ArbitrationProceedings pending from 2004 till 29.11.2019…

B17. The ratio in the aforenoted Judgement is squarely applicableto the fact of the instant case as it can be seen from the recordthat the entire basis for the Section 8 Notice is that the Appealspreferred by the ‘Corporate Debtor’ under Section 37 of the A&CAct, 1996 were dismissed for default on 22.11.2019…

C18. There is a possibility that the ‘Corporate Debtor’ may succeedon any claim or part of the claim. Hence, it is apposite to observethat the ‘Operational Debt’ herein, could not be said to be an‘undisputed debt’. Following the ratio in ‘Mobilox InnovationsPvt. Ltd.’ (Supra) wherein it was inter alia held that so long asa dispute truly exists in fact and is not spurious, the AdjudicatingDAuthority ought to have dismissed the Application. Hence, for allthe aforenoted reasons these Appeals are allowed and theImpugned Order is set aside. No Order as to costs.”

(emphasis in the original)

E9. Seeking to question the aforesaid common order dated17.08.2021, the appellant (operational creditor) has preferred theseappeals under Section 62 of the Code.

9.1. It is strenuously contended on behalf of the appellant that tooperate against maintainability of an application by the operational creditorFfor initiation of CIRP under Section 9 of the Code, there ought to be adispute existing prior to the service of demand notice. It is submitted thatas per the plain language of Section 8(2)(a) of the Code, the dispute, asdefined in Section 5(6) of the Code, must strictly be existing as a matterof fact on the date of service of demand notice, as explained and laiddown in Mobilox Innovations (supra). The contention is that any laterGdevelopment in relation to the claim under the demand notice cannothave a bearing on an adjudication of the application filed under Section 9of the Code. While emphasising on the phraseology of Section 8(2)(a)of the Code, it is contended that the provision specifically seeks to negateand nullify the effect of any post-facto development with respect to thedefault amount for which demand notice had been issued. It is submittedH

that in the present case, subsequent restoration of appeal under Section37 of the Act of 1996, post service of demand notice, cannot have anybearing on the maintainability of the application filed under Section 9 ofthe Code.

9.2. As regards the doctrine of ‘relation back’, it is contended thatthis doctrine cannot be applied universally and, in any case, cannot beapplied in adjudication of an application filed under Section 9 of the Code.It is also contended that NCLAT has wrongly relied upon the majorityjudgment in the case of Vareed Jacob (supra), wherein it was held onthe facts of the case that the interim order was revived automaticallyupon restoration of the suit; and has failed to appreciate the otherobservations in the majority judgment itself, positing that all interim orderscannot be put on the same pedestal. It is further submitted that the minorityview in Vareed Jacob (supra), dealing with the issue pertaining to thelegal treatment of rights accrued in the interregnum, i.e., between dismissalof proceedings in default and restoration, could not have been ignoredfor the reason that such an issue was not dealt with by the majorityjudgment. Further, a decision of this Court in the case of AddagadaRaghavamma & Anr. v.Addagada Chenchamma & Anr.: AIR 1964SC 136 has also been referred, to submit that the doctrine of relationback cannot be invoked without limitations, and retroactivity must notaffect any vested rights.

10. Having given thoughtful consideration to the submissions madeon behalf of the appellant and having examined the record with referenceto the law applicable, we are clearly of the view that these appealsremain totally bereft of substance and do not merit admission.

11. In comprehension of the relevant background aspects of thepresent case, it is clear that the appellant asserts itself to be an operationalcreditor, for the reason of having a claim against the respondent company,which was the subject matter of arbitration proceedings and led to thearbitral awards in its favour. According to the appellant, challenge toarbitral awards came to an end with dismissal of appeals filed underSection 37 of the Act of 1996 and hence, the notices were sent demandingpayment of the amount due, for which the corporate debtor was in default;and any event occurring post issuance of demand notices cannot haveany bearing on adjudication of the applications moved for initiation ofCIRP.

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A12. We are impelled to observe at the outset that the entire approachof the appellant seems to be founded on a basic misconception that theCode has provided another avenue for enforcing money recovery by acreditor against the corporate debtor; and the submissions on behalf ofthe appellant, seeking to maintain its application under Section 9 of theCode for initiation of CIRP against the respondent company, proceedBsquarely contrary to the elementary principles concerning the object andpurpose of the Insolvency and Bankruptcy Code, 2016. In the case ofSwiss Ribbons Private Limited & Anr. v. Union of India & Ors.:(2019)4 SCC 17, this Court has highlighted the fact that in its scheme andframework, the Code is a beneficial legislation to put the corporate debtorCon its feet, and not a mere recovery legislation for the creditors. ThisCourt has observed, - A

“28.It can thus be seen that the primary focus of the legislation isto ensure revival and continuation of the corporate debtor byprotecting the corporate debtor from its own management andDfrom a corporate death by liquidation. The Code is thus a beneficiallegislation which puts the corporate debtor back on its feet, notbeing a mere recovery legislation for creditors. The interests ofthe corporate debtor have, therefore, been bifurcated andseparated from that of its promoters/those who are in management.Thus, the resolution process is not adversarial to the corporateEdebtor but, in fact, protective of its interests…..”

12.1. Moreover, as we shall see in necessary details a little later,this Court has consistently made it clear that an operational creditorcannot use the Code for extraneous considerations or as a substitute forFdebt enforcement procedures; and the object of the Code is to allow theinsolvency process against the corporate debtor to be taken up at theinstance of an operational creditor only in the clear case, where a realdispute between the parties as to the alleged debt does not exist.G13. As regards legal principles applicable to the questions at hand,we may usefully refer to the relevant provisions of law before advertingto the decisions of this Court.

13.1. Part II of the Code deals with insolvency resolution andliquidation of corporate persons and Chapter II thereof deals withCorporate Insolvency Resolution Process. The root provisions relatingH

to insolvency resolution by operational creditor are contained in Sections8 and 9 of the Code.

The inclusive definition of the expression “dispute”, for the purposeof Part II, as contained in Section 5(6) of the Code, reads as under: - “5(6). “dispute” includes a suit or arbitration proceedings relatingto —

(a) the existence of the amount of debt; (b) the quality of goods or service; or

(c) the breach of a representation or warranty;”

The relevant provisions concerning insolvency resolution by anoperational creditor, as contained in Sections 8 and 9 of the Code, readas under: - “8. Insolvency resolution by operational creditor. – (1) Anoperational creditor may, on the occurrence of a default, deliver ademand notice of unpaid operational debtor copy of an invoicedemanding payment of the amount involved in the default to thecorporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of thereceipt of the demand notice or copy of the invoice mentioned insub-section (1) bring to the notice of the operational creditor- (a)existence of a dispute, [if any, or][14] record of the pendencyof the suit or arbitration proceedings filed before the receiptof such notice or invoice in relation to such dispute; (b)the payment of unpaid operational debt-

(i) by sending an attested copy of the record ofelectronic transfer of the unpaid amount from thebank account of the corporate debtor; or

(ii) by sending an attested copy of record that theoperational creditor has encashed a cheque issuedby the corporate debtor.

14 The expression ‘if any, or” as now occurring in Section 8 (2) (a) of the Code wassubstituted by Act 26 of 2018 w.r.e.f. 06.06.2018 for the earlier expression “if any,and”. However, even before this amendment, this Court, in the case of MobiloxInnovations (supra) read down “and” as “or”, keeping in mind the legislative intentbehind this provision.

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Explanation.- For the purposes of this section, a “demand notice”means a notice served by an operational creditor to the corporatedebtor demanding payment of the operational debt in respect ofwhich the default has occurred.

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9. Application for initiation of corporate insolvencyBresolution process by operational creditor. – (1) After theexpiry of the period of ten days from the date of delivery of thenotice or invoice demanding payment under sub-section (1) ofsection 8, if the operational creditor does not receive paymentfrom the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file anCapplication before the Adjudicating Authority for initiating acorporate insolvency resolution process.

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

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(3) The operational creditor shall, along with the application furnish- (a)a copy of the invoice demanding payment or demand noticedelivered by the operational creditor to the corporate debtor; (b)an affidavit to the effect that there is no notice given by thecorporate debtor relating to a dispute of the unpaidoperational debt; E

(c) a copy of the certificate from the financial institutionsmaintaining accounts of the operational creditor confirmingthat there is no payment of an unpaid operational debt bythe corporate debtor, if available; F

(d) a copy of any record with information utility confirming thatthere is no payment of an unpaid operational debt by thecorporate debtor, if available; and (e)any other proof confirming that there is no payment of anunpaid operational debt by the corporate debtor or suchother information, as may be prescribed.

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(4) An operational creditor initiating a corporate insolvencyresolution process under this section, may propose a resolutionHprofessional 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- A

(i) admit the application and communicate such decision to theoperational creditor and the corporate debtor if,- (a)the application made under sub-section (2) isBcomplete; (b)there is no payment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporatedebtor has been delivered by the operational creditor; C

(d) no notice of dispute has been received by theoperational creditor or there is no record of disputein the information utility; and (e)there is no disciplinary proceeding pending againstany resolution professional proposed under sub-Dsection (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) isincomplete; E

(b) there has been payment of the unpaid operationaldebt;

(c) the creditor has not delivered the invoice or noticefor payment to the corporate debtor; F

(d) notice of dispute has been received by the operationalcreditor or there is a record of dispute in theinformation utility; or

(e) any disciplinary proceeding is pending against anyproposed resolution professional:

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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.

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

14. The entire scheme of the Code in relation to the insolvencyresolution by an operational creditor initially came up for exposition byBthis Court in the case of Mobilox Innovations (supra), decided on21.09.2017.

14.1. In that case, the appellant had sub-contracted certain workto the respondent and entered into a non-disclosure agreement. Theappellant withheld certain payments against invoices raised by theCrespondent while alleging that certain actions of the respondent were inbreach of the non-disclosure agreement. A demand notice was sent bythe respondent under Section 8 of the Code and in response thereto, theappellant maintained that there existed serious and bonafide disputesand the notice was issued as a pressure tactic. Thereafter, the respondentfiled an application before the Adjudicating Authority under Section 9 ofDthe Code, stating that operational debt was owed by the appellant. TheAdjudicating Authority dismissed this application by holding that the claimof the operational creditor was hit by Section 9(5)(ii)(d) of the Codesince the payment was being disputed by the corporate debtor. However,the Appellate Tribunal allowed the appeal preferred by the operationalcreditor and remitted the matter to the Adjudicating Authority to considerEadmission of the application if it was otherwise complete. The order sopassed by the Appellate Tribunal was challenged in appeal before thisCourt.

14.2. In the backdrop as aforesaid, this Court traversed throughthe scheme of the Code and particularly, the provisions relating toFinsolvency resolution by an operational creditor, including the history ofmaking of such provisions. Thereafter, this Court summarised the courseof action by the Adjudicating Authority on receiving an application underSection 9 of the Code and the questions to be determined as follows: - “34. Therefore, the adjudicating authority, when examining anGapplication 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 andHhas 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...”

14.3. As indicated hereinbefore, at the relevant time of decision inMobilox Innovations, the expression occurring in Section 8(2)(a) ofthe Code was “and”, which was required to be read as “or” looking tothe object of the Code and purpose of the provision. This reading downwas later on duly incorporated by the legislature by way of the necessaryamendment. This Court, while holding that “and” must be read as “or”to prevent an anomalous situation, laid down that the objective of theCode with regards to operational debts was to ensure that these debtsdid not enable operational creditors to initiate insolvency resolution processagainst the corporate debtors prematurely, since debts owed to operationalcreditors were generally smaller than those owed to financial creditors.Therefore, it was held by this Court that to stave off the initiation ofinsolvency resolution process for extraneous consideration, it was enoughto be noticed that a dispute existed between the parties. This Courtsaid,- “38…We have also seen that one of the objects of the Code quaoperational debts is to ensure that the amount of such debts, whichis usually smaller than that of financial debts, does not enableoperational creditors to put the corporate debtor into the insolvencyresolution process prematurely or initiate the process for extraneousconsiderations. It is for this reason that it is enough that a disputeexists between the parties.”

14.4. This Court further held that the Adjudicating Authority wasnot required to examine the merits of the dispute but it was supposed toexamine only prima facie if a dispute truly existed between the parties,and that the same was not patently feeble or imaginary. If the answer tothe aforementioned was in the affirmative, the Adjudicating Authoritywas required to reject the application. This Court, inter alia, held andlaid down as under: - “51. It is clear, therefore, that once the operational creditor hasfiled an application, which is otherwise complete, the adjudicating A

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Aauthority 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.BTherefore, 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 aCspurious 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.”D

14.5. This Court, thereafter, examined the facts of the case beforeit and while setting aside the order of the Appellate Tribunal, said asfollows: -E“56. Going by the aforesaid test of “existence of a dispute”, it isclear that without going into the merits of the dispute, the appellanthas raised a plausible contention requiring further investigationwhich is not a patently feeble legal argument or an assertion offacts unsupported by evidence. The defence is not spurious, mereFbluster, plainly frivolous or vexatious. A dispute does truly exist infact between the parties, which may or may not ultimately succeed,and the Appellate Tribunal was wholly incorrect in characterisingthe defence as vague, got up and motivated to evade liability.”

15. The issue, as to whether the provisions of the Code could beGinvoked in respect of operational debt where an arbitral award has beenpassed against the operational debtor but which has not been finallyadjudicated upon, came up for fuller exposition in the case of K. Kishan(supra), decided on 14.08.2018.

15.1. In that case, the disputes between the parties were referredto arbitration; and the Arbitral Tribunal delivered its award on 21.01.2017,H

inter alia, allowing certain claims in favour of the respondent but rejectingthree of its cross-claims. A notice dated 06.02.2017 under Section 8 ofthe Code was sent by the respondent to the corporate debtor, demandingpayment which was replied by the corporate debtor on 16.02.2017,disputing the demand since the amount was subject matter of pendingarbitration proceedings, while also asserting that as per their accounts,rather, the respondent was to pay a larger amount to them. A petitionunder Section 34 of the Act of 1996 challenging the award was filed bythe corporate debtor on 20.04.2017. Thereafter, a petition under Section9 of the Code was filed by the respondent on 14.07.2017. The AdjudicatingAuthority, by its order dated 29.08.2017, admitted the petition on thegrounds that the amount was admitted by counsel for the respondent,which rendered the factum of pendency of Section 34 petition irrelevant;and that the award had not been stayed. These findings of the AdjudicatingAuthority were affirmed by the Appellate Tribunal while additionallyholding that the non-obstante clause in Section 238 of the Code wouldoverride the Act of 1996. Being aggrieved, the corporate debtor preferredan appeal before this Court.

15.2. It was observed by this Court that one of the counterclaimswas rejected on merits and the same was pending adjudication in thepetition filed under Section 34 of the Act of 1996 and hence, it could notbe said that no dispute existed between the parties. While iterating theenunciations in Mobilox Innovations (supra) that the dispute must pre-exist the date of receipt of demand notice, it was emphasised by thisCourt that on its objectives, the Code was not a substitute of recoveryproceedings; and an operational debt in an arbitral award could not beallowed to jeopardise a solvent company, which could state that the awardwas being challenged. This Court further observed that mere factum ofchallenge would be sufficient to state that the award was in dispute,rendering it to be a case of a pre-existing ongoing dispute; and that theobject of the Code, insofar as operational creditors are concerned, is toput the insolvency process against a corporate debtor only in clear caseswhere a real dispute between the parties as to the debt owed does notexist. This Court exposited in clear terms as follows: - “22…it becomes clear that operational creditors cannot use theInsolvency Code either prematurely or for extraneousconsiderations or as a substitute for debt enforcement procedures.The alarming result of an operational debt contained in an arbitral AB

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Aaward for a small amount of say, two lakhs of rupees, cannotpossibly jeopardize an otherwise solvent company worth severalcrores of rupees. Such a company would be well within its rightsto state that it is challenging the arbitral award passed against it,and the mere factum of challenge would be sufficient to state thatit disputes the award.Such a case would clearly come withinBpara 38 of Mobilox Innovations, being a case of a pre-existingongoing dispute between the parties. The Code cannot be used interrorem to extract this sum of money of rupees two lakhs eventhough it may not be finally payable as adjudication proceeding inrespect thereto are still pending. We repeat that the object of theCCode, at least insofar as operational creditors are concerned, is toput the insolvency process against a corporate debtor only in clearcases where a real dispute between the parties as to the debtowed does not exist.”

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15.3. While re-emphasising that in the scheme of IBC, as regardsoperational debt, all that has to be seen is whether the debt could be saidto be disputed, this Court stated in no uncertain terms that challenge tothe arbitral award shows a pre-existing dispute, which continues at leastuntil final adjudicatory process has taken place in terms of Sections 34Eand 37 of the Act of 1996. This Court also indicated two diverseeventualities in regard to the challenge to the arbitral award and pointedout as to when the insolvency process may be put into operation andwhen it cannot be. We may profitably reproduce the relevant passagesof the decision in K. Kishan (supra) as follows: - F“27. We repeat with emphasis that under our Code, insofar as anoperational debt is concerned, all that has to be seen is whetherthe said debt can be said to be disputed, and we have no doubt instating that the filing of a Section 34 petition against an arbitral-award shows that a preexisting dispute which culminates at thefirst stage of the proceedings in an award, continues even afterGthe award, at least till the final adjudicatory process under Sections34 and 37 has taken place.

28. We may hasten to add that there may be cases where a Section34 petition challenging an arbitral award may clearly andunequivocally be barred by limitation, in that it can be demonstratedHto the court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition underSection 34 has been filed or a belated petition under Section 34has been filed. It is only in such clear cases that the insolvencyprocess may then be put into operation.

29. We may hasten to add that there may also be other caseswhere a Section 34 petition may have been instituted in the wrongcourt, as a result of which the petitioner may claim the applicationof Section 14 of the Limitation Act to get over the bar of limitationlaid down in Section 34(3) of the Arbitration Act. In such casesalso, it is obvious that the insolvency process cannot be put intooperation without an adjudication on the applicability of Section14 of the Limitation Act.”

16. We are clearly of the view that the aforesaid enunciations aresquarely applicable to the facts of the present case. As noticed, on thedate when the appellant chose to serve the notices under Section 8 ofthe Code (i.e., on 14.02.2020), the arbitral awards in the present casehad not attained finality and rejection of petitions under Section 34 of theAct of 1996 had been in challenge in appeals under Section 37 thereof.Even if the said appeals were dismissed in default, the respondentcompany had moved for restoration with advance notice to the appellant.It had not been a clear case of the corporate debtor being in default withno pre-existing dispute.

17. The appellant, however seeks to suggest that the appeals havingbeen dismissed in default and having not been restored as on the date ofnotice, the law requiring pre-existing dispute is of no application. In thatregard, restoration of the appeals is sought to be termed by the appellantas a ‘later development’ or a ‘post-facto event’. The submissions areneither in conformity with the relevant facts nor compatible with the lawapplicable.

17.1. On the factual aspect, it remains rather indisputable thateven if the appeals were dismissed in default on 22.11.2019, therespondent company indeed moved the applications for restoration on17.12.2019 with advance notice to the appellant. Thus, on the date ofissuance of the notices (i.e., 14.02.2020), the appellant was aware ofthe fact that the appeals under Section 37 of the Act of 1996 had notbeen decided on merits and the applications for restoration had been A

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Amoved within 30 days of such default dismissal. It would be interestingto draw a parallel with the illustration stated by this Court in the abovequoted paragraph 29 of K. Kishan (supra), that even if a Section 34petition had been instituted in a wrong Court and application under Section14 of the Limitation Act to get over the bar of limitation was being pursued,the insolvency process cannot be put into operation without anBadjudication on the applicability of Section 14 of the Limitation Act. Thesame analogy would apply, rather with more emphasis and force, inrelation to a default dismissal where there had not been any adjudicationon merits and where the prayer for restoration is pending consideration.We have no hesitation in saying that in such a case, without a finalCdecision on the prayer for restoration, the insolvency process at theinstance of an operational creditor cannot be put into operation.

18. For what has been discussed hereinabove, other aspectsrelating to the principles that restoration would revive the proceeding tothe original status are not even required to be gone into, because the factDof moving an application for restoration of appeal under Section 37 ofthe Act of 1996 and bringing it to the notice of the operational creditor is,in our view, sufficient to bring the matter within the four corners of “pre-existing dispute”, so as to effectively negate any attempt by the operationalcreditor to seek insolvency resolution. However, having regard to theissues sought to be raised, we deem it appropriate to also deal with theEancillary submissions of the appellant.

19. In order to counter the reasoning of NCLAT that restorationof appeal relates back to the date of its filing, reference is made onbehalf of the appellant to a decision of this Court in AddagadaRaghavamma (supra). The question of applying the doctrine of relationFback arose in the said case in the wake of a question as to the date fromwhich severance in status would be deemed to have taken place in theevent of declaration by a member of Joint Hindu Family of his intentionto live separate. The Court found that there were two ingredients ofsuch a declaration: one being expression of intention and other being ofGbringing such expression to the knowledge of the persons affected; andit was found that once the knowledge was brought home (depending onthe facts of each case), it would relate back to the date when the intentionwas found and expressed. However, this Court observed that betweenthese two dates, that is, of expression of intention and of bringing it tothe knowledge of the persons affected, several eventualities were possibleHwhereby, vested rights might be created in other persons; and if the doctrine of relation back was invoked without any limitation, the vestedrights so created would be affected. In that context, this Court held thatthe doctrine should not affect the vested rights and such a limitation wasbeing placed to meet with the given contingency.

19.1. It is difficult to find any application of the aforesaid enunciationto the question at hand. It remains trite that when a suit or appeal isdismissed in default and is restored after the Court is satisfied on thecause shown for default, such restoration would revive the proceedingsto their status before default dismissal; and the doctrine of relation backwould come into play in the manner that the proceedings shall continuein their original status, unless otherwise stated in the order of restorationor coming out by necessary implication. The principles stated inAddagada Raghavamma (supra) do not apply to the present case;and the reference to this decision remains entirely inapposite for thepresent case.

20. Similarly, reliance on certain observations in the minority opinionin the case of Vareed Jacob (supra), could only be disapproved as beingrather misdirected.

20.1. In that case, the relevant background aspects were that in asuit for partition (Civil Suit No. 332/1122), the final decree was passedon 21.05.1964 whereunder, defendant No. 6 was granted recovery ofcertain items. On 25.06.1969, the defendant No. 3 in the said suit filedanother suit, being Suit No. 209 of 1969, for setting aside the decreedated 21.05.1964. In the later suit, on 25.06.1969, the Court issued atemporary injunction restraining the decree-holder from executing thedecree dated 21.05.1964. On 02.04.1973, the said Suit No. 209 of 1969was dismissed in default. However, it was restored on 20.12.1974 andthen, was dismissed on merits on 21.03.1975. The appeals there againstwere also dismissed by the first Appellate Court and by the High Court.Then, on 18.03.1981, an execution petition was filed, seeking executionof the decree dated 21.05.1964 in Suit No. 332/1122 wherein, thejudgment-debtor raised the objection of limitation with the submissionsthat the execution petition was not filed within 12 years from the date ofdecree, i.e., 21.05.1964. The Executing Court as also the High Courtheld that the decree-holder was precluded from executing the decreeduring the period 25.06.1969 to 21.03.1975, i.e., the date when temporaryinjunction was granted in Suit No. 209 of 1969 and until that suit wasfinally dismissed on merits; and if that period was excluded, the execution A

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Apetition was well within time. The question that arose in appeal before a3-Judge Bench of this Court was as to whether there was an automaticrevival of interlocutory orders with the restoration of the suit.

20.2. In relation to the aforesaid question, the learned Judgesforming majority referred to several decisions to hold that the question,Bas to whether restoration revives ancillary orders passed before dismissalof the suit, would depend upon the terms in which order of dismissal ispassed and the terms in which the suit is restored. It was noticed that inprevious decisions, it had been held that interlocutory orders passed beforedismissal would stand revived along with the suit when dismissal is setaside and the suit is restored, unless the Court expressly or by implicationCexcludes the operation of such interlocutory orders; or if there was anyalienation in favour of a third party during the interregnum betweendismissal and restoration. In the given case, the majority held that incomputing the period of limitation for execution of the decree, the decree-holder was entitled to exclude the period between the date of passing ofDan order of temporary injunction, that is, 25.06.1969 and final date ofdismissal of the suit, that is, 21.03.1975. On the other hand, the learnedJudge expressing minority opinion pointed out the distinction betweensupplemental proceedings and incidental proceedings in the scheme ofthe Code of Civil Procedure and opined that a construction preservingthe rights of the parties pending adjudication must be allowed to operateEand an interlocutory order which loses its force by dismissal of the suitmay not revive on restoration, unless expressly directed.

20.3. Much emphasis is laid on behalf of the appellant on theobservations in the minority opinion as regards the issue pertaining tolegal treatment of the rights accrued in the interregnum. In our view, anyFattempt to read the minority opinion as laying down independently adistinct principle of law would not be a correct application of the lawgoverning precedents. The submissions are not correct factually either,when we read the separate opinions holistically. The majority opinion isclear and categorical where the principles stated in several decisions ofGHigh Courts have been noticed with approval, while holding that thedecree-holder was entitled to exclude the entire period during whichtemporary injunction was in operation; and it was obviously taken thatwhen a suit, which had been dismissed in default, stood restored, theinterlocutory order of temporary injunction was also restored becausenothing to the contrary was indicated in the order of default dismissal orHthe order of restoration.

20.4. We need not elaborate that in the matters relating todivergence of views in the Bench, it is the view of the majority thatprevails and is to be taken as laying down binding principles anddeclaration of law by this Court in terms of Article 141 of the Constitutionof India. It is too far stretched to contend, as attempted on behalf of theappellant, that any observation occurring in the minority opinion as regardsany question or issue which has not been dealt with by the majority, maybe read as having force of law or persuasive value. The submissions arenot correct and deserve to be rejected.

21. We may also observe that the substance of the submissionsought to be based on the aforesaid decisions in AddagadaRaghavamma and Vareed Jacob is that vested rights are required tobe protected. This submission proceeds on a fundamental fallacy that ondefault dismissal of the appeals filed by the respondent company underSection 37 of the Act of 1996, some vested right was created in theappellant in its capacity as an operational creditor. The real issue in thepresent case is about the “pre-existing dispute” as regards the moneysought to be claimed by the operational creditor; and when pendency ofthe appeal is admittedly answering to the description of pre-existingdispute, its default dismissal could only be regarded as a partial eclipse,which momentarily puts the dispute in hibernation. Of course, there couldbe a case where restoration is not applied for and there could also be acase where restoration is declined, which might put an effective end tothe dispute but, when restoration of the appeal is granted, it definitely re-activates the dispute. In fact, for the purpose and in the scheme of theCode, even pendency of an application for restoration is sufficient tobring the matter within the four corners of “pre-existing dispute”.

22. We are further clearly of the view that the applications movedby the appellant for initiation of CIRP were required to be rejected interms of Section 9(5)(ii)(d) of the Code which mandates such rejectionif a notice of dispute had been received by the operational creditor orthere is record of dispute in the information utility. Both the features arepresent in this case. The respondent company had unambiguouslyresponded to the notices sent by the appellant within 10 days with theassertions that the applications for restoration of appeals were pendingin the High Court, which were filed much before the receipt of demandnotices and with advance notice to the appellant.

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A23. It is also significant to notice that as on the very day of filingof the applications under Section 9 by the appellant, i.e., 02.03.2020, theappeals were indeed restored by the High Court. The NCLAT took noteof the fact that the applications, though sworn on 29.02.2020, were filedonly on 02.03.2020. Thus, a wishful attempt of the appellant to use thedefault dismissal of appeals for initiation of CIRP had also lost its groundBon the date of filing of the applications under Section 9 of the Code. TheNCLT had proceeded from an altogether wrong angle and even whilepassing the order on 30.09.2020, did not pause to consider that the appealsstood restored on the date of filing of the applications under Section 9and therefore, even the hyper-technical stance of the appellant was alsoCknocked out. The NCLT had, in fact, totally misconstrued the clear andemphatic expositions in K. Kishan (supra).

24. For what has been observed and discussed hereinabove, weare satisfied that the Appellate Tribunal (NCLAT) has rightly set asidethe orders passed by the Adjudicating Authority (NCLT) and has rightlyDclosed the proceedings against the respondent company. There isabsolutely no reason to consider any interference at the instance of theappellant.

25. Accordingly, these appeals fail and are dismissed. All pendingapplications also stand disposed of.

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Ankit Gyan

Appeals dismissed.

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