1. Operational creditor filed Section 9 IBC application for dues; debtor paid principal but disputed interest, leading to conflicting NCLT and NCLAT rulings on the existence of a dispute. (Para 2 )
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2023 Supreme(SC) 1290
SUPREME COURT OF INDIA
S. RAVINDRA BHAT, DIPANKAR DATTA, JJ.
M/s Valley Iron And Steel Co. Ltd. & Anr. - Appellants
Versus
M/s Good Luck Traders - Respondents
Civil Appeal No. 7731 of 2019
Decided on : 07-02-2023
Important Points
IMPORTANT POINT
The main legal point established in the judgment is that a genuine dispute must exist for the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, and the mere issuing of a demand is not sufficient.
The main legal point established in the judgment is that a genuine dispute must exist for the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, and the mere issuing of a demand is not sufficient.
Subject
Insolvency Law - Debt Dispute
Act Referred
Headnote
Insolvency and Bankruptcy Code - Disputed Debt - The court clarified that the mere issuing of a demand is not sufficient for initiating insolvency proceedings. The adjudicating authority must reject the application if there is a plausible contention requiring further investigation and the dispute is not a patently feeble legal argument or an unsupported assertion of fact.
Fact of the Case:
The respondent applied under Section 9 of the Insolvency and Bankruptcy Code contending that a certain amount was due and payable to it as an operational debtor. The application was rejected by the National Company Law Tribunal, but the National Company Law Appellate Tribunal directed the application to be proceeded with.
Finding of the Court:
The court found that the facts justified the appellants' contention that the amounts claimed by the respondent were disputed, thus justifying the adjudicating authority's decision to decline the application. The NCLAT was held to have fallen into error.
Issues: The main issue was whether the disputed debt justified the initiation of insolvency proceedings under the IBC.
Ratio Decidendi: The court clarified that a genuine dispute must exist for the initiation of insolvency proceedings, and the adjudicating authority must reject the application if there is a plausible contention requiring further investigation and the dispute is not a patently feeble legal argument or an unsupported assertion of fact.
Final Decision: The appeal was allowed, and the application for initiation of the insolvency process was dismissed. It was clarified that the respondent could claim the disputed sum in accordance with the law.
Legal Category Hierarchy
Advocates appeared:
For the Appellant : Mr. S. D. Singh, Ms. Bharti Tyagi, AOR, Mr. Siddharth Singh, Adv., Mr. Ram Kripal Singh, Adv., Ms. Meenu Singh, Adv., Ms. Shweta Sinha, Adv., Mr. Kartikay Bhargava, Adv.
For the Respondent: Mr. Yadav Narender Singh, AOR, Mr. Sanjeev Srivastava, Adv., Mr. K.K. Verma, Adv., Ms. Namrata Bhatnagar, Adv.
For the Appellant : Mr. S. D. Singh, Ms. Bharti Tyagi, AOR, Mr. Siddharth Singh, Adv., Mr. Ram Kripal Singh, Adv., Ms. Meenu Singh, Adv., Ms. Shweta Sinha, Adv., Mr. Kartikay Bhargava, Adv.
For the Respondent: Mr. Yadav Narender Singh, AOR, Mr. Sanjeev Srivastava, Adv., Mr. K.K. Verma, Adv., Ms. Namrata Bhatnagar, Adv.
Table of Contents
2. Whether the adjudicating authority must be satisfied that a genuine, plausible dispute exists rather than mere issuance of a demand to reject an insolvency application. (Para 3 )
3. The facts justified the contention that the claimed amounts were disputed, meaning the adjudicating authority was correct in declining the insolvency application. (Para 4 )
4. An insolvency application under Section 9 must be rejected if a plausible contention exists that is not spurious, hypothetical, or illusory. (Para 3 )
5. Appeal allowed; NCLAT order set aside and the application for initiation of the insolvency process dismissed. (Para 4 )
6. When should an adjudicating authority reject an application for initiation of the corporate insolvency resolution process under Section 9 of the IBC?
The application must be rejected if a notice of dispute has been received or a record of dispute exists in the information utility, provided the dispute is a plausible contention and not a spurious, hypothetical, or illusory defense. (Para 3 )
7. What is the standard for determining whether a dispute exists at the Section 9 stage?
The adjudicating authority must determine if there is a plausible contention requiring further investigation, ensuring the dispute is not a patently feeble legal argument or an unsupported assertion of fact, without needing to decide if the defense will ultimately succeed. (Para 3 )
ORDER :
1. In this appeal under Section 62 of The Insolvency and Bankruptcy Code, 2016 (hereafter referred to as “IBC”), the grievance of the appellants is that the National Company Law Appellate Tribunal (for short “NCLAT”) allowed the respondents’ appeal and directed its application for initiation of the insolvency process to be proceeded with.
2. The brief facts necessary for deciding this dispute are that the respondent applied under Section 9 of the IBC contending that Rs. 95 lacs was due and payable to it, in its capacity as an operational debtor. The substratum of this claim is based upon about 10 invoices issued on 17th and 18th October, 2012. The respondent-claimant had demanded the amount. The appellants pre paid the principal due (which to the tune of Rs. 54,46,440.26/-) and contended that the balance was disputed given that the operational creditor i.e. the respondent-claimant had claimed 24 per cent interest. The application under Section 9 was rejected by the National Company Law Tribunal (for short “NCLT”, also known as adjudicating authority) on the ground that the demand had been complied with and that the claim also was disputed and time barred. The respondent, therefore, appealed to the NCLT which set aside the adjudicating authority’s determination and directed the application be proceeded with.
3. At the outset, learned counsel for the appellants submitted that after the decision in “Innoventive Industries Ltd. vs. ICICI Bank & Anr., (2018) 1 SCC 407”, this Court has clarified in subsequent decisions that mere issuing of a demand is not sufficient and that the adjudicating authority should be satisfied that a genuine dispute exists. The appellants relied upon a decision of this Court in “Mobilox Innovations Private Ltd. vs. Kirusa Software Private Limited” reported in (2018) 1 SCC 353. This aspect has been clarified in Mobilox Innovations (supra) in the following terms :
“51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the 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 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 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 and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”
4. In the present case, this Court is of the opinion that the facts which justified the appellants to contend that the amounts claimed by the respondent, were disputed did exist thus justifying the adjudicating authority’s decision to decline the application. The NCLAT in this Court’s opinion, fell into error and holding otherwise. For the above reasons, the appeal is allowed. The application i.e. CA No. IB 870(ND)/2018 is, therefore, dismissed.
5. It is clarified that it is open to the respondent to claim the disputed sum, in accordance with law.
