2021 (10) TMI 1459 - SC - IBC

Maninatinability of application - initiation of CIRP - pre-existing dispute between the parties or not - issuance of the Demand Notice Under Section 8 of the Code - no Arbitration proceeding pending - HELD THAT - This Court has consistently made it clear that an operational creditor cannot use the Code for extraneous considerations or as a substitute for debt enforcement procedures; and the object of the Code is to allow the insolvency process against the corporate debtor to be taken up at the instance of an operational creditor only in the clear case where a real dispute between the parties as to the alleged debt does not exist. The entire scheme of the Code in relation to the insolvency resolution by an operational creditor initially came up for exposition by this Court in the case of Mobilox Innovations 2017 (9) TMI 1270 - SUPREME COURT - In that case the Appellant had sub-contracted certain work to the Respondent and entered into a non-disclosure agreement. The Appellant withheld certain payments against invoices raised by the Respondent while alleging that certain actions of the Respondent were in breach of the nondisclosure agreement. A demand notice was sent by the Respondent Under Section 8 of the Code and in response thereto the Appellant maintained that there existed serious and bona fide disputes and the notice was issued as a pressure tactic - the Appellate Tribunal allowed the appeal preferred by the operational creditor and remitted the matter to the Adjudicating Authority to consider admission of the application if it was otherwise complete. The order so passed by the Appellate Tribunal was challenged in appeal before this Court. On the date when the Appellant chose to serve the notices Under Section 8 of the Code (i.e. on 14.02.2020) the arbitral awards in the present case had not attained finality and rejection of petitions Under Section 34 of the Act of 1996 had been in challenge in appeals Under Section 37 thereof. Even if the said appeals were dismissed in default the Respondent company had moved for restoration with advance notice to the Appellant. It had not been a clear case of the corporate debtor being in default with no preexisting dispute. On the factual aspect it remains rather indisputable that even if the appeals were dismissed in default on 22.11.2019 the Respondent company indeed moved the applications for restoration on 17.12.2019 with advance notice to the Appellant. Thus on the date of issuance of the notices (i.e. 14.02.2020) the Appellant was aware of the fact that the appeals Under Section 37 of the Act of 1996 had not been decided on merits and the applications for restoration had been moved within 30 days of such default dismissal - there are no hesitation in saying that in such a case without a final decision on the prayer for restoration the insolvency process at the instance of an operational creditor cannot be put into operation. The applications moved by the Appellant for initiation of CIRP were required to be rejected in terms of Section 9(5)(ii)(d) of the Code which mandates such rejection if a notice of dispute had been received by the operational creditor or there is record of dispute in the information utility. Both the features are present in this case. The Respondent company had unambiguously responded to the notices sent by the Appellant within 10 days with the assertions that the applications for restoration of appeals were pending in the High Court which were filed much before the receipt of demand notices and with advance notice to the Appellant. Conclusion - The existence of a pre-existing dispute including pending appeals precludes the initiation of CIRP. The IBC is not intended for debt recovery but for resolving genuine insolvency issues. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the existence of a pre-existing dispute affects the maintainability of an application for initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC).
• Whether the restoration of appeals under Section 37 of the Arbitration and Conciliation Act, 1996, after being dismissed in default, constitutes a pre-existing dispute under the IBC.
• The applicability of the doctrine of relation back in the context of restoration of appeals and its effect on the initiation of CIRP.

2. ISSUE-WISE DETAILED ANALYSIS

Existence of Pre-existing Dispute:

• Relevant legal framework and precedents: The IBC, particularly Sections 8 and 9, provides that an operational creditor can initiate CIRP if there is no pre-existing dispute regarding the debt. The definition of "dispute" includes arbitration proceedings, as outlined in Section 5(6) of the IBC. The Supreme Court's decisions in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. and K. Kishan v. Vijay Nirman Company Pvt. Ltd. are pivotal in understanding the concept of pre-existing disputes.
• Court's interpretation and reasoning: The Court emphasized that the IBC is not a tool for debt recovery but aims to resolve insolvency issues. The existence of a dispute, even if not adjudicated upon, suffices to prevent the initiation of CIRP.
• Key evidence and findings: The arbitral awards in favor of the appellant were under challenge in appeals under Section 37 of the Arbitration Act, which were dismissed in default but later restored. The restoration of these appeals was deemed to relate back to the original filing date, indicating an ongoing dispute.
• Application of law to facts: The Court found that the operational creditor was aware of the pending applications for restoration of appeals, which constituted a pre-existing dispute, thereby negating the basis for initiating CIRP.
• Treatment of competing arguments: The appellant argued that the restoration of appeals was a post-facto event and should not affect the CIRP application. The Court rejected this, holding that the existence of a dispute is determined by the situation at the time of the demand notice, not subsequent developments.
• Conclusions: The presence of a pre-existing dispute, evidenced by the restored appeals, barred the initiation of CIRP.

Doctrine of Relation Back:

• Relevant legal framework and precedents: The doctrine of relation back was discussed in the context of restoration of appeals, with references to Vareed Jacob v. Sosamma Geevarghese and Addagada Raghavamma v. Addagada Chenchamma.
• Court's interpretation and reasoning: The Court held that restoration of appeals revives them to their original status, thereby maintaining the existence of a dispute.
• Key evidence and findings: The appeals were restored with advance notice to the operational creditor, establishing the ongoing nature of the dispute.
• Application of law to facts: The restoration related back to the original filing date, reinforcing the existence of a dispute at the time of the demand notice.
• Treatment of competing arguments: The appellant's reliance on the minority opinion in Vareed Jacob was dismissed as misdirected, with the majority opinion being binding.
• Conclusions: The doctrine of relation back applied, confirming the existence of a pre-existing dispute.

3. SIGNIFICANT HOLDINGS

• Verbatim quotes of crucial legal reasoning: "The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors."
• Core principles established: The existence of a pre-existing dispute, including pending appeals, precludes the initiation of CIRP. The IBC is not intended for debt recovery but for resolving genuine insolvency issues.
• Final determinations on each issue: The appeals were dismissed, affirming that the existence of a pre-existing dispute, even if temporarily eclipsed by a default dismissal, prevents the initiation of CIRP.