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TMI Blog2017 (5) TMI 1774X X X X Extracts X X X X X X X X Extracts X X X X ..... from the definition of the term dispute , is that it wanted the same to the illustrative (and not exhaustive). If the intent of the Legislature was that a demand by an operational creditor can he disputed only by showing a record of a suit or arbitration proceeding, the definition of dispute would have simply said dispute means a dispute pending in Arbitration or a suit. What appears from the present case is that much before enactment of the Insolvency and Bankruptcy Code 2016, in or around 2013, the Appellant-Corporate Debtor entered with respondent M/s. Essar Projects India Limited and Another Memorandum of Understanding for construction of work at 0.2MTPA Steel Melt Shop Complex at Pithampur, Dist. Dhar, Madhya Pradesh. For one or other reason the outstanding dues in connection with construction work were alleged to have not been paid by appellant to the Respondent - Operational Creditor - the appellants were called upon by Respondent - Operational Creditor to repay the dues of 6,83,06,077/- along with interest 18%. It was mentioned that the said notice issue under Section 433(e) read with Section 434 of the Companies Act 1956. In the present case as admittedly a notice was issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arte order was passed by 'Adjudicating Authority without prior notice or intimation of hearing to the Appellants-Corporate Debtors against the principles of rules of natural justice. (ii) Learned Adjudicating Authority' has failed to notice that existence of dispute between the parties which 'Operational Creditor' did not brought to the notice of the Adjudicating Authority' while getting an ex parte order. If notice would have been served on 'Corporate Debtor' this fact would have been highlighted. (iii) The Respondents - Operational Creditors concealed the material fact that it issued a winding up notice under Section 433 of Companies "Act 1956 which was duly replied by Appellant - Corporate Debtor vide reply dated 21st November 2016 disputing the entire claim. Even before issuance of notice under Section 8 of I & B Code', the Appellant-Corporate Debtor by its email dated 5th March 2014, 20th August 2013, 27th October 2014, 29th October 2014, 15th November 2014, 16th November 2014 and 30th November 2014 had specifically raised its concern with regard to quality of construction work and non-completion of the work within time frame. The afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'Corporate Debtor' failed to provide a record of the pendency of legal proceedings with regard to alleged dispute. On the other hand, upon receipt of Demand Notice, the 'Corporate Debtor' addressed a letter dated 3rd January 2017 and, inter alia, admitted that the 'Corporate Debtor' is presently under distress and seeking its rehabilitation and restructuring of loans given by the banks and financial institutions. 7. It was contended that as per the scheme of the Code particularly subsection (2) of Section 8, there should be an "existence of a dispute, if any," and a record of pendency of the suit or arbitration proceedings filed before receipt of such notice or invoice in relation to such dispute the 'Corporate Debtor' has to meet the dual threshold of:- (a) identifying the existence of a dispute; and (b) providing a record of the pendency of a suit or arbitration proceedings in relation to such dispute. It was further submitted that the aforesaid scheme of the Code and Rules are reinforced twice i.e. at the time of sending the demand notice and at the time of receipt of the reply from a 'Corporate Debtor'. The notice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence against the debtor as on the date of receipt of notice u/s. 8 of the Code. 7. Since the Corporate Debtor, as stated by the Petitioner, admitted issuing invoices in relation to the amount mentioned, the grievance remained in the reply would be regarding quality of construction, the timeline of construction, loss due to delay in construction etc. Since the same is not disputed before any court of law before receipt of notice issued u/s. 8 of the Code, the dispute raised in the corporate debtor reply to the notice u/s. 8 of the Code cannot be treated as dispute in existence at the time of receipt of the notice u/s. 8 for two reasons, one -- due to admission of raising invoices and two -- due to raising it as dispute in the reply only after notice u/s. 8 has been issued. 8. On perusal of definition of dispute u/s. 5(6) and on perusal of section 8(2)(a), it is evident that "dispute in existence" means and includes raising dispute in court of law or Arbitral Tribunal before receipt of notice u/s. 8 of the Code. 12. The question as to whether a prior notice before admission of an application for Corporate Insolvency Resolution Process is required or not was considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating authority or not. Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to adhere to the principles of the natural justice above anything else. It also allows the NCLT and NCLAT the power to regulate their own procedure. Fetters of the Code of Civil Procedure, 1908 does not bind it. However, it is required to apply its principles. Principles of natural justice require an authority to hear the other party. In an application under Section 7 of the Code of 2016, the financial creditor is the applicant while the corporate debtor is the respondent. A proceeding for declaration of insolvency of a company has drastic consequences for a company. Such proceeding may end up in its liquidation. A person cannot be condemned unheard. Where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in. When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceed to pass an ex-parte ad interim order, however, after recording the reasons for grant of such an order and why it has chosen not to adhere to the principles of natural justice at that stage. It must, thereafter proceed to afford the party respondent an opportunity of hearing before confirming such ex-parte ad interim order. In the facts of the present case, the learned senior advocate for the petitioner submits that, orders have been passed by the NCLT without adherence to the principles of natural justice. The respondent was not heard by the NCLT before passing the order. It would be open to the parties to agitate their respective grievances with regard to any order of NCLT or NCLAT as the case may be in accordance with law. It is also open to the parties to point out that the NCLT and the NCLAT are bound to follow the principles of natural justice while disposing of proceedings before them. In such circumstances, the challenge to the vires to Section 7 of the Code of 2016 fails." 14. The Appellate Tribunal in the said case of "M/s. Innoventive Industries Limited" also noticed Clause (3) of Rule 4 of Insolvency and bankruptcy (Application to Adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of hearing to the Corporate debtor before passing its order. 15. In the aforesaid case of "M/s. Innoventive Industries Limited", the Appellate Tribunal also noticed the purpose of issuance of notice and held:- "55. Process of initiation of Insolvency Resolution process by a financial creditor is provided in Section 7 of the I & B Code. As per sub-section (1) of Section 7 of the I & B Code, the trigger for filing of an application by a financial creditor before the Adjudicating Authority is when a default in respect of any financial debt has occurred. Sub-section (2) of Section 7 provides that the financial creditor shall make an application in prescribed form and manner and with prescribed documents, including: i. "record of the default" recorded with the information utility or such other record or evidence of default as may be specified; ii. the name of the resolution professional proposed to act as an interim resolution professional; and iii. any other information as may be specified by the Board." 16. In view of the decision of Appellate Tribunal in "M/s. Innoventive Industries Limited", while we accept the submissions made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can he disputed only by showing a record of a suit or arbitration proceeding, the definition of dispute would have simply said dispute means a dispute pending in Arbitration or a suit. 21. Admittedly in sub-section (6) of Section 5 of the 'I & B Code', the Legislature used the words 'dispute includes a suit or arbitration proceedings'. If this is harmoniously read with Section (2) of Section 8 of the 'I & B Code', where words used are 'existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings,' the result is disputes, if any, applies to all kinds of disputes, in relation to debt and default. The expression used in sub-section (2) of Section 8 of the 'I & B Code' 'existence of a dispute, if any,' is disjunctive from the expression 'record of the pendency of the suit or arbitration proceedings'. Otherwise, the words 'dispute, if any', in sub-section (2) of Section 8 would become surplus usage. 22. Sub-section (2) of Section 8 of the 'I & B Code' cannot be read to mean that a dispute must be pending between the parties prior to the notice of demand and that too in arbit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious natures of "existence of dispute in "Kirusa Software Private Limited Vs. Mobilox Innovations Private Limited" and held:- "31. The dispute under I & B Code, 2016 must relate to specified nature in clause (a), (b) or (c) i.e. existence of amount of debt or quality of goods or service or breach of representation or warranty. However, it is capable of being discerned not only from in a suit or arbitration from any document related to it. For example, the 'operational creditor' has issued notice under Code of Civil Procedure Code, 1908 prior to initiation of the suit against the operational creditor which is disputed by 'corporate debtor. Similarly notice under Section 59 of the Sales and Goods Act if issued by one of the party, a labourer/employee who may claim to be operation creditor for the purpose of Section 9 of I & B Code, 2016 may have raised the dispute with the State Government concerning the subject matter i.e. existence of amount of debt and pending consideration before the competent Government. Similarly, a dispute may be pending in a Labour Court about existence of amount of debt. A party can move before a High Court under writ jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2013, the Appellant-Corporate Debtor' entered with respondent M/s. Essar Projects India Limited and Another Memorandum of Understanding for construction of work at 0.2MTPA Steel Melt Shop Complex at Pithampur, Dist. Dhar, Madhya Pradesh. For one or other reason the outstanding dues in connection with construction work were alleged to have not been paid by appellant to the Respondent - Operational Creditor. The respondent by a notice dated 26th October 2016 while referred to a Memorandum of Understanding dated 27th June 2013 mentioned:- "7. We state that the Work Orders issue by MCL in connection with the Project were duly completed by our Client as per the work set out in each of such Work Orders. It is extremely pertinent to note that our Client has successfully completed the Project within the contractual period i.e. on November 30, 2014 as per the terms of the Work Orders and has handed over possession of the plant to MCL by December 31, 2014. As MCL is aware, after the completion of certain additional work i.e. by January 2015, the plant has been in operation. We further state that our Client has also removed its machinery and other objects from the Project premis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2014. Accounts of your client have not been reconciled with my client. v. Due to delayed construction, my client has suffered losses. No completion certificate is issued. Outstanding bills are not verified and certified. vi. There are very serious disputes about enforceability of the Contract between my client and your client. vii. Amount sought to be recovered is not admitted by my client as alleged by you. 3. In addition to above issues there are various other issues which are involved in the matter which are seriously opposed by my client. My client opposes the endeavour/effort on the part of your client to recover money from my client. 4. It is submitted that the issue-area of dispute between your client and my client is of recovery of contract amount and those issues and area of disputes are yet to be finally settled. 5. It is submitted that by issuing the notice under reply your client is misusing the provisions contained in Companies Act, 1956. Winding up notice in the aforementioned back ground of the facts and circumstances is nothing but arms twisting which is not permissible in law. 8. Without prejudice to above, please note that recovery of contract amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice was issued by Respondent-Operational Creditor under Section 433(e) and 434 of the Companies Act 1956 in 28th October 2016 which was disputed by Appellant - 'Corporate Debtor' objecting quality of service and non-completion of the work within time which is much prior to enactment of 'I & B Code', 2016, and notice under Section 8 of the I & B code', we hold that there is an "existence of dispute" for which the petition under Section 9 preferred by Respondent - Operational Creditor was not maintainable. 27. Further, as the impugned order dated 6th March 2017 was passed by 'Adjudicating Authority without notice to the Appellant - Corporate debtor in violation of principle of natural justice and the Adjudicating Authority failed to notice the relevant facts that there was a dispute raised and replied by the Corporate Debtor, the impugned order passed by Adjudicating Authority cannot be upheld. 28. We, accordingly, set aside the impugned order dated 6th March 2017 passed by the Adjudicating Authority, Mumbai Bench in C.P. No. 20(I) & BP/NCLT/MAH/2017 and make the Appellant - Corporate Debtor free from all rigour of Corporate Insolvency Resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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