Supreme Court of India
K. KISHANversusM/S VIJAY NIRMAN COMPANY PVT. LTD.
- Citation
- 2018 INSC 710
- Decided
- 14 August 2018
- Disposal
- Appeal(s) allowed
- Bench
- R F NARIMAN
Holding
If a pre‑existing dispute exists, as shown by a pending Section 34 petition, the IBC’s Section 9 application must be rejected and the insolvency process cannot be used to enforce the disputed operational debt.
Summary
The appellant (KCPL) challenged a Section 9 petition filed by the respondent (Vijay Nirman) which sought to treat an arbitral award as an undisputed operational debt. The award, favouring the respondent, was under challenge in a Section 34 petition under the Arbitration and Conciliation Act. The Supreme Court held that the existence of a pending Section 34 petition demonstrates a pre‑existing dispute, and under Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code the application must be rejected. Consequently, operational creditors cannot invoke the IBC to press a debt that is still contested in arbitration. The Court set aside the Appellate Tribunal’s order and allowed the appeal.
Issues considered
- The applicability of Section 9 of the Insolvency and Bankruptcy Code to an operational debt arising from an arbitral award that is under challenge under Section 34 of the Arbitration Act.
- Whether the filing of a Section 34 petition creates a dispute sufficient to bar the initiation of insolvency proceedings under the IBC.
- Whether Section 238 of the IBC overrides the Arbitration Act in the present circumstances.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 34, s. 37
- Insolvency and Bankruptcy Code, 2016s. 238, s. 8, s. 9, s. 9(5)
- Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016s. Form V Part 5
- Limitation Acts. 14
Subjects
Insolvency and Bankruptcy Codeoperational debtarbitration awardSection 9Section 34pre‑existing disputepremature insolvencynon‑obstante clauseForm Vadjudicating authority
Judgment
[2018] 10 S.C.R. 959 959
K. KISHAN A
v.
M/S VIJAY NIRMAN COMPANY PVT. LTD.
(Civil Appeal No. 21824 of 2017)
AUGUST 14, 2018 B
[R.F. NARIMAN AND INDU MALHOTRA, JJ.]
Insolvency and Bankruptcy Code, 2016: s.9 – Invocation of
the Code in respect of an operational debt where an arbitral award
has been passed against the operational debtor which has not yet
C
been finally adjudicated upon – Arbitration award in favour of
respondent – Notice under s.8 of the Code sent to KCPL to pay the
award amount – Within 10 days, KCPL disputed the invoice and
filed s.34 petition – Thereafter, respondent filed petition under s.9
of the Code – Held: Under the Code, insofar as an operational
debt is concerned, all that has to be seen is whether the said debt D
can be said to be disputed – Filing of s.34 petition against an Arbitral
Award shows that a pre-existing dispute which culminates at the
first stage of the proceedings in an Award, continues even after the
Award, at least till the final adjudicatory process under ss.34 and
37 has taken place – Operational creditors cannot use the
E
Insolvency Code either prematurely or for extraneous
considerations or as a substitute for debt enforcement procedures –
The Code cannot be used in terrorem to extract an amount even
though it may not be finally payable as adjudication proceedings
in respect thereto are still pending – The object of the Code, at least
insofar as operational creditors are concerned, is to put the F
insolvency process against a corporate debtor only in clear cases
where a real dispute between the parties as to the debt owed does
not exist – A reading of s.9(5)(ii)(d) of the Code shows that an
application under s.8 must be rejected if notice of a dispute has
been received by the operational creditor – In the instant case, the
G
entire basis for the notice under s.8 of the Code was the fact that an
Arbitral Award was passed against the appellant and reply to the
notice was given within 10 days, raising the existence of a dispute –
The counter claims were rejected by the Arbitral Tribunal, which
rejection was also the subject-matter of challenge in s.34 petition –
Unlike counter claim nos. 1 and 2, which were rejected by the H
959
960 SUPREME COURT REPORTS [2018] 10 S.C.R.
A Arbitral Tribunal for lack of evidence, counter claim no.3 which
raised huge amount was rejected on the basis of a price adjustment
clause on merits – Therefore, it cannot be said at this stage of the
proceedings, that no dispute existed between the parties.
Insolvency and Bankruptcy Code, 2016: s.238 – Non-obstante
B clause – Held: s.238 of the Code would apply in case there is an
inconsistency between the Code and the Arbitration Act – In the
instant case, there is no such inconsistency – On the contrary, the
award passed under the Arbitration Act together with the steps taken
for its challenge would only make it clear that the operational debt
happens to be a disputed one – Appellate Tribunal, when it relied
C upon Form V Part 5 of the 2016 Rules to state that the operational
debt would, therefore, be said to have been proved, missed the vital
sub-clause (iii) in para 34 of Mobilox Innovations case – Arbitration
and Conciliation Act, 1996.
Allowing the appeal, the Court
D
HELD: 1. Operational creditors cannot use the Insolvency
Code either prematurely or for extraneous considerations or as
a substitute for debt enforcement procedures. The alarming result
of an operational debt contained in an arbitral award for a small
amount of say, two lakhs of rupees, cannot possibly jeopardize an
E otherwise solvent company worth several crores of rupees. Such
a company would be well within its rights to state that it is
challenging the Arbitral Award passed against it, and the mere
factum of challenge would be sufficient to state that it disputes
the Award. The object of the Code, at least insofar as operational
F creditors are concerned, is to put the insolvency process against
a corporate debtor only in clear cases where a real dispute
between the parties as to the debt owed does not exist. [Para 13]
[969-G-H; 970-B]
Mobilox Innovations Private Limited v. Kirusa Software
G Private 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 Bayoil
SA [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 Theatres
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 961
Pte Ltd. [2000] SGHC 13; Ramsay Health Care Australia A
Pty Ltd v. Adrian John Compton [2017] HCA 28 –
referred to.
2. Under the Code, insofar as an operational debt is
concerned, all that has to be seen is whether the said debt can be
said to be disputed and the filing of a Section 34 petition against B
an Arbitral Award shows that a pre-existing dispute which
culminates at the first stage of the proceedings in an Award,
continues even after the Award, at least till the final adjudicatory
process under Sections 34 and 37 has taken place. There may
be cases where a Section 34 petition challenging an Arbitral Award
may clearly and unequivocally be barred by limitation, in that it C
can be demonstrated to the Court that the period of 90 days plus
the discretionary period of 30 days has clearly expired, after which
either no petition under Section 34 has been filed or a belated
petition under Section 34 has been filed. It is only in such clear
cases that the insolvency process may then be put into operation. D
There may also be other cases where a Section 34 petition may
have been instituted in the wrong court, as a result of which the
petitioner may claim the application of Section 14 of the Limitation
Act to get over the bar of limitation laid down in Section 34(3) of
the Arbitration Act. In such cases also, it is obvious that the
insolvency process cannot be put into operation without an E
adjudication on the applicability of Section 14 of the Limitation
Act. [Paras 18, 19, 20] [972-E-H; 973-A]
3. The Appellate Tribunal was in error in referring to Section
238 of the Code. The Appellate Tribunal, when it relied upon
Form V Part 5 of the 2016 Rules to state that the operational F
debt would, therefore, be said to have been proved, missed the
vital sub-clause (iii) in para 34 of Mobilox Innovations case. Even
if it be clear that there be a record of an operational debt, it is
important that the said debt be not disputed. If disputed within
the parameters laid down in Mobilox Innovations case, an G
insolvency petition cannot be proceeded with further. [Paras 22,
23] [973-C-D, E-F]
Case Law Reference
(2018) 1 SCC 353 relied on Para 3
H
962 SUPREME COURT REPORTS [2018] 10 S.C.R.
A CIVIL APPELLATE JURISDICTION : Civil Appeal No. 21824
of 2017
From the Judgment and Order dated 20.11.2017 of the National
Company Law Appellate Tribunal in Company Appeal (AT) (Insolvency)
No. 211 of 2017
B WITH
C.A. No. 21825 of 2017
Gourab Banerji, Sr. Adv., Sushanth Reddy, Gautam Singh, S. P.
Mukherjee, Raka Chatterjee, Mohit Pandey, Sahil Tagotra, Ms. Manisha
C Singh, Mrs. D. Bharathi Reddy, Harsha Peechara, Ms. Priyanka Tyagi,
Advs. for the Appellant.
Dr. P. V. Amarnadha Prasad, Sanjay Kumar Chhetry, Vijayshree
Pattnaik, Sadineni Ravi Kumar, Advs. for the Respondent.
The Judgment of the Court was delivered by
D
R. F. NARIMAN, J. 1. The present appeals raise an important
question as to whether the Insolvency and Bankruptcy Code, 2016
(hereinafter referred to as “the Code”) can be invoked in respect of an
operational debt where an Arbitral Award has been passed against the
operational debtor, which has not yet been finally adjudicated upon.
E 2. The brief facts necessary to appreciate the controversy at
hand are as follows:-
i) In the present case, M/s Vijay Nirman Company Pvt. Ltd. (the
Respondent) entered into a sub-Contract Agreement with one M/s
Ksheerabad Constructions Pvt. Ltd. (for short ‘KCPL’) on 01.02.2008,
F to undertake 50% of Section 2 work of ‘Construction and widening of
the existing two lane highway to four lanes on NH 67 at KM 190000 to
KM 218215 admeasuring a total of 28.215 KM for and on behalf of
KCPL.’
ii) Apart from this Agreement, a separate agreement of the same date
G was entered into between the said KPCL and one M/s SDM Projects
Private Limited, Bangalore, as a result of which, a tripartite Memorandum
of Understanding was entered into on 09.05.2008 between KCPL, M/s
SDM Projects Pvt. Ltd. and the Respondent.
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 963
[R. F. NARIMAN, J.]
iii) During the course of the project, disputes and differences arose A
between the parties and the same were referred to an Arbitral Tribunal,
which delivered its Award on 21.01.2017. One of the claims that was
allowed by the said Award was in favour of the respondent for a sum of
Rs.1,71,98,302/- which arises out of certain interim payment certificates.
Another claim that was allowed related to higher rates of payment in
B
which a sum of Rs.13,56,98,624/- was awarded. Three cross claims
that were made by the Respondent were rejected.
iv) It is pertinent to note that, at this stage, a notice dated 06.02.2017
was sent by the Respondent to KCPL to pay an amount of
Rs. 1,79,00,166/-. This notice was stated to be a notice under Section 8
of the Code. Within 10 days, by a letter dated 16.02.2017, KCPL disputed C
the invoice that was referred to in the said notice, stating that the said
amount was, in fact, the subject-matter of an arbitration proceeding, and
as per KCPL’s accounts, the Respondent was liable to pay larger amounts
to them.
v) It may be noted that after the notice and reply, on 20.04.2017, a D
Section 34 petition was filed by KCPL under the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as “the Act”) challenging
the aforesaid Award. Needless to add, this petition was filed within the
period 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 the E
Code, on 14.07.2017. In the gist of the case presented to the National
Company Law Tribunal (‘NCLT’), it was clearly stated as follows:-
“The above amount was included in the Statement of Claims
filed before the Arbitral Tribunal duly constituted on 17.8.2014
along with other claims. The Tribunal gave its award on 21.1.2017 F
and upheld the above claim of VNCPL and awarded the above
amount in favour of VNCPL and against KCPL. (Award copy
enclosed)
Thus, the above amount has become an ‘Operational Debt’ to
be paid by the corporate debtor M/s KCPL as defined u/Sec. G
3(11) of the I&B Code 2016.
A notice in Form-3 U/Sec. 8(1) of the I&B Code 2016 has already
been served on the Corporate Debtor, M/s KCPL and a reply
H
964 SUPREME COURT REPORTS [2018] 10 S.C.R.
A received from KCPL is also enclosed herewith for ready
reference.”
In the Counter Affidavit before the NCLT, it was stated:
“10. I respectfully submit that the case of the petitioner in short
is that since an award has been passed against the respondent
B here in an arbitration proceeding, though a petition U/Sec 34 of
the Arbitration and Conciliation Act, has been filed by the
respondent before the competent court challenging the award
the present application is maintainable U/Sec. 9 of the code though
the respondent had raised a dispute in its replies dated
C 06-02-2017 & 05-06-2017 to the notice issued U/Sec.8(2) of the
code by the applicant.
11. I respectfully submit that a dispute had been raised by the
respondent company even before the present application has
been filed, in the arbitration proceedings by way of a counter
D claim and presently the same is sub judice before the Hon’ble
Commercial Court cum XXIV Additional Chief Judge, City Civil
Court at Hyderabad in petition filed U/Sec. 34 of the Act. Copy
of the section 34 application filed and pending before the Hon’ble
Court is enclosed herewith as Annexure R-6.”
E vii) The NCLT, by its order dated 29.08.2017, referred to the aforestated
facts, and also referred to the fact that the Award which was challenged
under Section 34 specifically stated that learned counsel for the first
Respondent (i.e. the corporate debtor) was fair enough to admit that the
claimant is entitled to the said sum of Rs.1,71,98,302/-. According to the
NCLT, the fact that a Section 34 petition was pending was irrelevant for
F the reason that the claim stood admitted, and there was no stay of the
Award. For these reasons, therefore, the Section 9 petition was admitted.
viii) An appeal filed to the Appellate Tribunal met with the same fate, as
according to the Appellate Tribunal, the non-obstante clause contained
in Section 238 of the Code would override the Arbitration Act. Also,
G according to the Appellate Tribunal, since Form V of Part 5 of the
Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules,
2016 requires particulars of an order of an arbitral panel adjudicating on
the default, this would have to be treated as “a record of an operational
debt”, as a result of which the petition would have to be admitted, as
was correctly done by the NCLT. The appeal was, accordingly, dismissed.
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 965
[R. F. NARIMAN, J.]
3. Mr. Gourab Banerji, learned Senior Advocate, appearing on A
behalf of the appellant has relied upon certain observations made in our
judgment in Mobilox Innovations Private Limited vs. Kirusa Software
Private Limited, (2018) 1 SCC 353 and argued that the object of the
Code is not to replace debt adjudication and enforcement under other
Acts including the Arbitration Act, 1996. He has relied, in particular, on
B
para 51 under which, according to him, the moment there is a real dispute
between the parties, which need not be a “bona fide dispute” which is
likely 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 34
petition is pending is reflective of a real dispute between the parties,
which was pre-existing, and which culminated in an Arbitral Award which C
has yet to attain finality. Also, according to the learned Senior Advocate,
the cross-claims that were rejected by the learned Arbitral Tribunal far
exceeded the amounts awarded against his client, and if any one of
them were to be held to be wrongly dismissed, in particular, counter
claim No.3 of Rs. 19,88,20,475/-, it is obvious that his client would not
D
owe any sum of money to the operational creditor. He also relied upon
certain judgments, which we will discuss later. To further buttress his
submissions, he argued that all that is necessary is that there be a dispute
in some form which would include cross claims made by the corporate
debtor against the operational creditor. According to him, the Appellate
Tribunal was wholly in error in applying Section 238 of the Code as, E
according to Mr. Banerji, there is nothing inconsistent between the
adjudication and enforcement process under the Arbitration Act and the
application of Sections 8 & 9 of the Code. In fact, according to the
learned Senior Advocate, the fact of pending proceedings, whether they
be proceedings culminating in an Award, or challenge proceedings
F
thereafter, would, in fact, show that there is a dispute insofar as an
operational debt that is stated to be owed, and that therefore, the
Arbitration Act can be relied upon for this purpose, there being nothing
inconsistent between it and the Code.
4. Dr. P.V. Amarnadha Prasad, learned Advocate, appearing on
behalf of the respondent has argued in reply that according to the law in G
the United Kingdom, and Practice Directions thereunder, an insolvency
process does not get stultified because an application to set aside the
judgment, order or decision is pending in an appeal or otherwise. He
also referred to the law in Singapore, and relied upon a judgment of the
Singapore High Court to the effect that once it is found that there is a H
966 SUPREME COURT REPORTS [2018] 10 S.C.R.
A primary adjudication between the parties which indicates the existence
of a debt, any further dispute which may be pending in appeal or otherwise
over the debt could not be said to be bona fide disputed by the debtor.
According to him, the Appellate Tribunal was absolutely correct in
applying Section 238 of the Code, as there would be a direct inconsistency
between the application of the Code and a Section 34 proceeding which
B
was said to be pending, and which, according to him, was not relevant in
view of the law that he has cited.
5. Having heard learned counsel for both parties, it is important
to first advert to Section 9(5) of the Code which states as follows:-
C “9(5) The Adjudicating Authority shall, within fourteen days of
the receipt of the application under sub-section (2), by an order-
(i) admit the application and communicate such decision to the
operational creditor and the corporate debtor if,-
(a)the application made under sub-section (2) is complete;
D (b) there is no repayment of the unpaid operational debt;
(c) the invoice or notice for payment to the corporate debtor
has been delivered by the operational creditor;
(d) no notice of dispute has been received by the operational
creditor or there is no record of dispute in the information utility;
E and
(e) there is no disciplinary proceeding pending against any
resolution professional proposed under sub-section (4), if any.
(ii) reject the application and communicate such decision to the
operational creditor and the corporate debtor, if-
F (a) the application made under sub-section (2) is incomplete;
(b) there has been repayment of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for
payment to the corporate debtor;
(d) notice of dispute has been received by the operational
G creditor or there is a record of dispute in the information utility;
or
(e) any disciplinary proceeding is pending against any proposed
resolution professional:
Provided that Adjudicating Authority, shall before rejecting an
H application under sub-clause (a) of clause (ii) give a notice to the
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 967
[R. F. NARIMAN, J.]
applicant to rectify the defect in his application within seven days A
of the date of receipt of such notice from the adjudicating
Authority.”
A reading of Section 9(5)(ii)(d) would show that an application under
Section 8 must be rejected if notice of a dispute has been received by
the operational creditor. In the present case, it is clear on facts that the B
entire basis for the notice under Section 8 of the Code is the fact that an
Arbitral Award was passed on 21.07.2017 against the Appellant. As
has been pointed out by us, this clearly appears from the gist of the case
that was filed along with the insolvency petition. The fact that the reply
of 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. C
6. However, learned counsel appearing on behalf of the
Respondent strongly relied on the fact that this is not an ordinary case
inasmuch as the amount of Rs.1.71 Crores which was awarded was
admitted by Mr. Banerji’s client in the arbitral proceedings to be a debt
due, and that this being so, there can be no dispute regarding the same. D
We are afraid that we are unable to agree. As was correctly pointed out
by Mr. Banerji, counter claims for amounts far exceeding this were
rejected by the learned Arbitral Tribunal, which rejection is also the
subject-matter of challenge in a petition under Section 34 of the Act. It
is important to note that unlike counter claim Nos. 1 and 2, which were E
rejected by the Arbitral Tribunal for lack of evidence, counter claim
No.3 which amounts to Rs.19,88,20,475/- was rejected on the basis of a
price adjustment clause on merits. Therefore, it is difficult to say at this
stage of the proceedings, that no dispute would exist between the parties.
7. Our recent judgment in Mobilox Innovations (supra) throws F
considerable light on the issue at hand. While referring to the legislative
history of the Code, this Court referred to the Legislative Guide on
Insolvency Law of the United Nations Commission on International Trade
Law. One of the things the Legislative Guide spoke about was whether
the debt is subject to a legitimate dispute or set-off, in an amount equal
to or greater than the amount of the debt. Another thing spoken of was G
that improper use of the insolvency process would occur in cases where
a creditor uses insolvency as an inappropriate substitute for debt
enforcement procedures, even though they may not be well developed.
(see para 13 of the judgment)
H
968 SUPREME COURT REPORTS [2018] 10 S.C.R.
A 8. The Notes on Clauses annexed to the Bill of the Insolvency
Code were also referred to by this Court in para 27 of the judgment.
The important sentence in these Notes on Clauses needs to be
reproduced, which is done herein below:-
“This ensures that operational creditors, whose debt claims are
B usually smaller, are not able to put the corporate debtor into the
insolvency resolution process prematurely or initiate the process
for extraneous considerations.”
9. This Court also noticed that the original Bill which ultimately
became the Code had the expression “bona fide dispute” contained in
C an inclusive definition. It is significant to note that by the time the Code
was enacted the expression “bona fide” was dropped. (See para 32 of
the judgment)
10. After referring to Section 8, the judgment went on to hold that
what is important is that the existence of the dispute and/or a suit or
D arbitration proceeding must be pre-existing i.e. it must exist before the
receipt of the demand notice or invoice, as the case may be.
11. The Adjudicating Authority, therefore, when examining an
application under Section 9 of the Act, will have to determine the
following:-
E (i) Whether there is an “operational debt” as defined exceeding
Rs 1 lakh? (See Section 4 of the Act)
(ii) Whether the documentary evidence furnished with the
application shows that the aforesaid debt is due and payable and
has not yet been paid?
F and
(iii) Whether there is existence of a dispute between the parties
or the record of the pendency of a suit or arbitration proceeding
filed before the receipt of the demand notice of the unpaid
operational debt in relation to such dispute?
G If any one of the aforesaid conditions is lacking, the application would
have to be rejected. Apart from the above, the adjudicating authority
must follow the mandate of Section 9, as outlined above, and in particular
the 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 Section
9(5) of the Act. (Para 34).
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 969
[R. F. NARIMAN, J.]
12. In para 38, this Court cautioned: A
“We have also seen that one of the objects of the Code qua
operational debts is to ensure that the amount of such debts,
which is usually smaller than that of financial debts, does not
enable operational creditors to put the corporate debtor into the
insolvency resolution process prematurely or initiate the process B
for extraneous considerations. It is for this reason that it is enough
that a dispute exists between the parties.
Finally, the law was summed up as follows:-
“51. It is clear, therefore, that once the operational creditor
has filed an application, which is otherwise complete, the C
adjudicating authority must reject the application under Section
9 (5)(2)(d) if notice of dispute has been received by the
operational creditor or there is a record of dispute in the
information utility. It is clear that such notice must bring to the
notice of the operational creditor the “existence” of a dispute or D
the fact that a suit or arbitration proceeding relating to a dispute
is pending between the parties. Therefore, all that the adjudicating
authority is to see at this stage is whether there is a plausible
contention which requires further investigation and that the
“dispute” is not a patently feeble legal argument or an assertion
of fact unsupported by evidence. It is important to separate the E
grain from the chaff and to reject a spurious defence which is
mere bluster. However, in doing so, the Court does not need to
be satisfied that the defence is likely to succeed. The Court does
not at this stage examine the merits of the dispute except to the
extent indicated above. So long as a dispute truly exists in fact F
and is not spurious, hypothetical or illusory, the adjudicating
authority has to reject the application.”
13. Following this judgment, it becomes clear that operational
creditors cannot use the Insolvency Code either prematurely or for
extraneous considerations or as a substitute for debt enforcement G
procedures. The alarming result of an operational debt contained in an
arbitral award for a small amount of say, two lakhs of rupees, cannot
possibly jeopardize an otherwise solvent company worth several crores
of rupees. Such a company would be well within its rights to state that
it is challenging the Arbitral Award passed against it, and the mere factum
of challenge would be sufficient to state that it disputes the Award. Such H
970 SUPREME COURT REPORTS [2018] 10 S.C.R.
A a case would clearly come within para 38 of Mobilox Innovations
(supra), being a case of a pre-existing ongoing dispute between the
parties. The Code cannot be used in terrorem to extract this sum of
money of Rs. two lakhs even though it may not be finally payable as
adjudication proceedings in respect thereto are still pending. We repeat
that the object of the Code, at least insofar as operational creditors are
B
concerned, is to put the insolvency process against a corporate debtor
only in clear cases where a real dispute between the parties as to the
debt owed does not exist.
14. Mr. Banerji referred us to certain judgments of the English
and Singapore Courts. In Re A Company - Victory House General
C Partner Ltd. vs. RGB P & C Ltd. [2018] EWHC 1143 (Ch), the
Chancery Division of the High Court, in a situation where a debt has to
be “bona fide” disputed in order to attract the winding up jurisdiction of
the Courts in the UK, made it clear that even in a case where a judgment
debt is no longer a disputed debt, as it has been finally adjudicated upon,
D yet if there be a cross-claim which is being adjudicated upon, or which
may not even have reached the adjudicatory process at all, would be
sufficient to stave off a winding up order. The learned Judge referred to
the judgment in Re Bayoil SA [1999] 1 WLR 147 as follows, and
concluded:-
E “27. This, of course, is not a case of a disputed debt. There
is a judgment debt and it can be enforced immediately. However,
Mr. Chivers draws attention to Re Bayoil SA [1999] 1 WLR
147, which deals with a case not involving a disputed debt but
involving a cross-claim by the company, the subject of the petition
or the intended petition, where the amount of the cross-claim
F exceeds the petition debt. The headnote to Re Bayoil recites the
essential facts. The petitioner claimed for freight. The established
law is there is no defence of set-off available in relation to a
claim to freight. The claim went to arbitration and the arbitrators
made an award in favour of the petitioner. The petitioner then
G presented a petition on the basis of the sum determined by the
arbitration award. The company applied for the petition to be
dismissed or stayed on the ground that it had a genuine and serious
counterclaim in an amount which exceeded the petition debt. It
was a matter of detail in that case, which the company put
forward to advance its case, that it had not been able to litigate
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 971
[R. F. NARIMAN, J.]
that counterclaim. Later cases discussing Re Bayoil make it A
clear that the ability, or inability, to litigate the counterclaim is not
of the essence of the principle in this case. So I put that on one
side……”
“32. I therefore have to ask whether the nascent cross-claim,
the claim in restitution which MrChivers has explained to me, is B
a bona fide cross-claim on substantial grounds. I have no doubt
it is a bona fide claim. I have also no doubt it is on substantial
grounds. At the moment it seems to me that it is a claim that
would succeed but I need not go that far……”
“34. Nothing which I have said detracts in any way from the C
binding character of the judgment which has been made. It may
appear to be a strong thing to say that the employer, having failed
to comply with a judgment against it, should nonetheless escape
the consequences involved in a winding up, but it seems to me
that that is the very thing which was considered to be appropriate
in the Bayoil case and, on the facts of this case, I also consider D
it is a more just result that the alternative contended for by the
petitioner.”
15. A recent judgment of the Singapore High Court, contained in
Lim PohYeoh (alias Lim Aster) and TS Ong Construction Pte Ltd.
[2016] SGHC 179, was also referred to by Mr. Banerji. Again, in a E
situation which demands a far higher threshold that has to be crossed
before the Insolvency Law can be said not to apply, the Singapore High
Court referred to Rule 98(2)(a) of the Rules made under the Bankruptcy
Act. The said Rule states that where a debtor appears to have a valid
counter claim or cross-demand which is equivalent to or exceeds the F
amount of debt, the insolvency process will not be put against such debtor.
It also referred to the Supreme Court Practice Directions to the same
effect. (see paras 43 & 45 of the said judgment)
16. We now come to some of the judgments referred to by learned
counsel for the respondent. It is important to note that both the Practice G
Directions referred to in the U.K. judgment and the Singapore High
Court judgment, referred to in LKM Investment Holdings Pte Ltd. vs.
Cathay Theatres Pte Ltd. [2000] SGHC 13, are in situations where the
debt needs to be bona fide disputed, which is not the situation under our
Code. For this reason, it is not possible to agree with learned counsel for
the Respondent that a pending proceeding challenging an award or decree H
972 SUPREME COURT REPORTS [2018] 10 S.C.R.
A of a tribunal or Court would not make the debt contained therein a debt
that is disputed.
17. The Australian High Court judgment also relied upon by the
respondent in Ramsay Health Care Australia Pty Ltd vs. Adrian John
Compton [2017] HCA 28 was relied upon to show, in para 111 thereof,
B that where a judgment debt has been obtained after testing of the merits
in adversarial litigation, then in the absence of some evidence of fraud,
collusion, or miscarriage of justice, a court exercising bankruptcy
jurisdiction will rarely have substantial reasons to investigate whether
the debt which emerged in the judgment was truly owed. With respect
to the High Court of Australia, we may only state that following Mobilox
C Innovations (supra), it would be very difficult to incorporate the
Australian law into our law. This is for the reason that our judgment in
Mobilox Innovations (supra) has made it clear that the insolvency
process, particularly in relation to operational creditors, cannot be used
to bypass the adjudicatory and enforcement process of a debt contained
D in other statutes. We are, therefore, of the view that the higher threshold
of fraud, collusion, or miscarriage of justice laid down by the Australian
High Court will have no application to the situation under our Code.
18. We repeat with emphasis that under our Code, insofar as an
operational debt is concerned, all that has to be seen is whether the said
E debt can be said to be disputed, and we have no doubt in stating that the
filing of a Section 34 petition against an Arbitral Award shows that a
pre-existing dispute which culminates at the first stage of the proceedings
in an Award, continues even after the Award, at least till the final
adjudicatory process under Sections 34 & 37 has taken place.
F 19. We may hasten to add that there may be cases where a Section
34 petition challenging an Arbitral Award may clearly and unequivocally
be barred by limitation, in that it can be demonstrated to the Court that
the period of 90 days plus the discretionary period of 30 days has clearly
expired, after which either no petition under Section 34 has been filed or
a belated petition under Section 34 has been filed. It is only in such clear
G cases that the insolvency process may then be put into operation.
20. We may hasten to add that there may also be other cases
where a Section 34 petition may have been instituted in the wrong court,
as a result of which the petitioner may claim the application of Section
14 of the Limitation Act to get over the bar of limitation laid down in
H
K. KISHAN v. M/S VIJAY NIRMAN COMPANY PVT. LTD. 973
[R. F. NARIMAN, J.]
Section 34(3) of the Arbitration Act. In such cases also, it is obvious A
that the insolvency process cannot be put into operation without an
adjudication on the applicability of Section 14 of the Limitation Act.
21. With regard to the submission of learned counsel for the
respondent, that the amount of Rs.1.71 Crores stood admitted by
Mr. Banerji’s client, as was recorded in the Arbitral Award, suffice it to B
say that cross-claims of sums much above this amount has been turned
down by the Arbitral Tribunal, which are pending in a Section 34 petition
challenging the said Award. The very fact that there is a possibility that
Mr. Banerji’s client may succeed on these cross-claims is sufficient to
state that the operational debt, in the present case, cannot be said to be
an undisputed debt. C
22. We also accept Mr. Banerji’s submission that the Appellate
Tribunal was in error in referring to Section 238 of the Code. Section
238 of the Code would apply in case there is an inconsistency between
the Code and the Arbitration Act in the present case. We see no such
inconsistency. On the contrary, the Award passed under the Arbitration D
Act together with the steps taken for its challenge would only make it
clear that the operational debt, in the present case, happens to be a
disputed one.
23. We are also of the view that the Appellate Tribunal, when it
relied upon Form V Part 5 of the 2016 Rules to state that the operational E
debt would, therefore, be said to have been proved, missed the vital sub-
clause (iii) in para 34 of Mobilox Innovations (supra). Even if it be
clear that there be a record of an operational debt, it is important that the
said debt be not disputed. If disputed within the parameters laid down in
Mobilox Innovations (supra), an insolvency petition cannot be F
proceeded with further.
24. For all these reasons, we are of the view that the judgment of
the Appellate Tribunal needs to be set aside and is therefore reversed.
25. The appeals are, accordingly, allowed in the aforesaid terms.
G
26. Consequently, the bank guarantees that have been furnished,
pursuant to our order dated 15.12.2017, stand discharged.
Devika Gujral Appeals allowed.
H
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