On July 15, 2022, a two-judge Bench of the Supreme Court, in S.S. Engineers v. Hindustan Petroleum Corporation Limited, considered the issue of pre-existence of a dispute as a ground for rejection of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). 

Facts: 

HPCL Biofuels Limited (“HBL”) had issued certain purchase orders to S.S. Engineers (“Operational Creditor”) for tender work in connection with its plants. It was alleged that the Operational Creditor had violated the terms of the purchase order and backed out from its commitments thereunder, thereby causing huge losses to HBL. Further, it was alleged that the Operational Creditor had violated the terms of the purchase order by raising improper invoices for materials not supplied, not renewing bank guarantees, failing to effect supplies, complete work within the stipulated period, and providing service/ materials of poor quality. In view of the above, HBL had withheld payments to the Operational Creditor. 

The Operational Creditor sent a demand notice to HBL under Section 8 of the IBC, however, HBL replied to same disputing the claim. Further, it was noted that a request had been made by the Operational Creditor to HBL to refer the disputes to arbitration. 

Subsequently, the Operational Creditor filed an application under Section 9 of the IBC for initiation of corporate insolvency resolution process (“CIRP”) against HBL. 

The application was admitted by the National Company Law Tribunal, Kolkata (“NCLT”), rejecting the contention that there were pre-existing disputes between the parties. The National Company Law Appellate Tribunal (“NCLAT”) allowed the appeal filed by Hindustan Petroleum Corporation Limited (“HPCL”) against the admission order of the NCLT and set aside the order of the NCLT.

The Operational Creditor filed an appeal before the Supreme Court against the aforesaid order of the NCLAT. 

Supreme Court’s findings: 

Relying on its judgments in Mobilox Innovations Private Limited v. Kirusa Software Limited (Civil Appeal No. 9405 of 2017) and K Kishan v. Vijay Nirman Company Private Limited (Civil Appeal No. 21824 of 2017), the Supreme Court highlighted the conditions which need to be fulfilled for an application under Section 9 of the IBC to be admitted. Reference may be made to the following observations of the Supreme Court:

“15. In our considered view, the Adjudicating Authority (NCLT) committed a grave error of law by admitting the application of the Operational Creditor, even though there was a pre-existing dispute as noted by the Adjudicating Authority. 

16. When examining an application under Section 9 of the IBC, the Adjudicating Authority would have to examine (i) whether there was an operational debt exceeding Rupees 1,00,000/- (Rupees One Lac); (ii) whether the evidence furnished with the application showed that debt exceeding Rupees one lac was due and payable and had not till then been paid; and (ii) whether there was existence of any dispute between the parties or the record of pendency of a suit or arbitration proceedings filed before the receipt of demand notice in relation to such dispute. If any one of the aforesaid conditions was not fulfilled, the application of the Operational Creditor would have to be rejected.” (emphasis supplied)

The Supreme Court observed that in the instant case the correspondence between the parties would show that HBL had been disputing the claims of the Operational Creditor on the contention that the Operational Creditor had violated the terms of the tender documents and purchase orders. The Supreme Court found that there was enough evidence to show that a real dispute existed between the parties, and that the NCLT did not have the jurisdiction to make a detailed examination of the respective contentions and adjudicate on the merits of the dispute. Accordingly, the Supreme Court held as follows:

“30. This Court finds that there was a pre-existing dispute with regard to the alleged claim of the appellant against HPCL or its subsidiary HBL. The NCLAT rightly allowed the appeal filed on behalf of HBL. It is not for this Court to adjudicate the disputes between the parties and determine whether, in fact, any amount was due from the appellant to the HPCL/HBL or vice-versa. The question is, whether the application of the Operational Creditor under Section 9 of the IBC, should have been admitted by the Adjudicating Authority. The answer to the aforesaid question has to be in the negative. The Adjudicating Authority (NCLT) clearly fell in error in admitting the application.

31. The NCLT, exercising powers under Section 7 or Section 9 of IBC, is not a debt collection forum. The IBC tackles and/or deals with insolvency and bankruptcy. It is not the object of the IBC that CIRP should be initiated to penalize solvent companies for non-payment of disputed dues claimed by an operational creditor.” (emphasis supplied)

Accordingly, the Supreme Court dismissed the appeal while holding that, if the debt is disputed, the application of the Operational Creditor must be dismissed. 

Please find a copy of the judgment here.

This update has been contributed by Aastha (Partner) and Tweesha Gosar (Associate).

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