LEGAL ISSUE: Whether a pre-existing dispute between an operational creditor and a corporate debtor bars the initiation of the Corporate Insolvency Resolution Process (CIRP).
CASE TYPE: Insolvency and Bankruptcy Law
Case Name: M/S S.S. Engineers vs. Hindustan Petroleum Corporation Ltd. & Ors.
Judgment Date: 15th July 2022
Introduction
Date of the Judgment: 15th July 2022
Citation: Civil Appeal No. 4583 of 2022
Judges: Hon’ble Ms. Justice Indira Banerjee and Hon’ble Mr. Justice V. Ramasubramanian
Can a company be dragged into insolvency proceedings if a genuine dispute about unpaid dues exists? The Supreme Court of India recently addressed this critical question in a case between M/S S.S. Engineers and Hindustan Petroleum Corporation Ltd. (HPCL), clarifying the scope of “pre-existing dispute” under the Insolvency and Bankruptcy Code (IBC). The court emphasized that the IBC is not a debt recovery mechanism and that the existence of a legitimate dispute bars the initiation of the Corporate Insolvency Resolution Process (CIRP) by an operational creditor.
Case Background
M/S S.S. Engineers (the Appellant) was contracted by HPCL Biofuels Ltd. (HBL), a subsidiary of Hindustan Petroleum Corporation Ltd. (HPCL), for enhancing the capacity of HBL’s boiling houses. Between June and August 2012, HBL floated tenders for this project, and on October 15, 2012, issued four purchase orders to the Appellant. Further purchase orders were issued on November 1, 2012, for enhancing the Juice Heater and Evaporator Section and Pan and Crystallization Section at HBL’s Sugauli Plant on a turnkey basis. The Appellant raised invoices between November 21, 2012, and March 25, 2013. However, disputes arose regarding the execution of the contract.
HBL alleged that the Appellant violated the terms of the purchase orders, failed to honor commitments, and caused losses. HBL claimed that the Appellant raised improper invoices for materials not supplied, failed to renew bank guarantees, and did not complete the work within the stipulated time. HBL also contended that the services rendered and materials supplied by the Appellant were of poor quality. On January 2, 2014, HBL sent a letter to the Appellant detailing these violations. On January 3, 2014, HBL raised a debit note for the Appellant’s consumption of spares and consumables. By April 11, 2014, HBL claimed that no payment was outstanding to the Appellant and, in fact, the Appellant owed HBL ₹1.49 crores, excluding consequential losses. On May 7, 2014, HBL refused to release payment, citing poor quality of work and breaches of purchase orders.
Despite these disputes, HBL issued C-forms to the Appellant between March 11, 2015, and March 27, 2018, under the Central Sales Tax Act, 1956. On July 9, 2016, the Appellant sent a legal notice to HBL demanding payment or arbitration. The Appellant issued a demand notice under Section 8 of the IBC on August 30, 2017, claiming ₹18,12,21,452 with interest, which was followed by another demand notice on August 7, 2018. HBL disputed the claim.
Timeline
| Date | Event |
|---|---|
| June 27, 2012 – August 30, 2012 | HBL floated tenders for enhancing the capacity of Boiling Houses. |
| October 15, 2012 | Four purchase orders issued to the Appellant. |
| November 1, 2012 | Purchase Orders issued for enhancing the Juice Heater and Evaporator Section and Pan and Crystallization Section at Sugauli Plant. |
| November 21, 2012 – March 25, 2013 | Appellant raised invoices for the purchase orders. |
| December 29, 2013 | HBL sent an email to the Appellant alleging violation of purchase order terms. |
| January 2, 2014 | HBL sent a letter to the Appellant alleging improper invoices and failure to complete work. |
| January 3, 2014 | HBL raised a debit note for the Appellant’s consumption of spares and consumables. |
| April 11, 2014 | HBL claimed no payment was outstanding and that the Appellant owed ₹1.49 crores. |
| May 7, 2014 | HBL refused to release payment due to poor work quality and breach of contract. |
| March 11, 2015 – March 27, 2018 | HBL issued C-forms to the Appellant under the Central Sales Tax Act. |
| July 9, 2016 | Appellant sent a legal notice to HBL demanding payment or arbitration. |
| August 30, 2017 | Appellant sent a demand notice under Section 8 of the IBC claiming ₹18,12,21,452. |
| August 7, 2018 | Appellant sent a second demand notice to HBL. |
| February 15, 2018 | Appellant filed an application under Section 9 of the IBC. |
| February 12, 2020 | National Company Law Tribunal (NCLT) admitted the Appellant’s application. |
| January 10, 2022 | National Company Law Appellate Tribunal (NCLAT) set aside the NCLT order. |
| July 15, 2022 | Supreme Court dismissed the appeal, upholding the NCLAT order. |
Legal Framework
The case revolves around the interpretation of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). These sections outline the process for an operational creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor.
Section 8 of the IBC deals with the insolvency resolution process initiated by an operational creditor. It states:
“8. Insolvency resolution by operational creditor.—(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—
(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
(b) the payment of unpaid operational debt—
(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.
Explanation.—For the purposes of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.”
Section 9 of the IBC outlines the procedure for an operational creditor to apply for the initiation of CIRP. It states:
“9. Application for initiation of corporate insolvency resolution process by operational creditor.—(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
(2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed.
(3) The operational creditor shall, along with the application furnish—
(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available;
(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
(e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.
(4) An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.
(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;
(b) there is no payment 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; 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—
(a) the application made under sub-section (2) is incomplete;
(b) there has been payment 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 creditor or there is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending4 against any proposed resolution professional:
Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.
(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section.”
Arguments
The Appellant, M/S S.S. Engineers, argued that there was no pre-existing dispute and that the amounts claimed were due and payable. They contended that the issuance of C-forms and subsequent work orders by HBL indicated that HBL had accepted the quality of work and materials supplied. The Appellant also argued that HBL was making ad hoc payments and not as per the bills raised by the Appellant, and that HBL had raised baseless allegations and disputes. The Appellant further contended that they were constrained to stop supply to the Corporate Debtor only on account of failure of payments of pending principal dues.
Hindustan Petroleum Corporation Ltd. (HPCL) and its subsidiary, HBL, argued that a pre-existing dispute existed, as evidenced by the numerous communications disputing the quality of work, delays, and breaches of contract by the Appellant. HBL contended that the Appellant had violated the terms of the purchase orders, failed to honor commitments, and caused losses. HBL argued that the Appellant raised improper invoices for materials not supplied, failed to renew bank guarantees, and did not complete the work within the stipulated time. They further contended that the services rendered and materials supplied by the Appellant were of poor quality. HBL also pointed out that the Appellant had invoked arbitration, which itself demonstrated the existence of a dispute.
The arguments of both parties can be summarized as follows:
| Main Submission | Sub-Submissions by M/S S.S. Engineers (Appellant) | Sub-Submissions by Hindustan Petroleum Corporation Ltd. (Respondent) |
|---|---|---|
| Existence of a Dispute |
✓ No pre-existing dispute existed. ✓ Issuance of C-forms and subsequent work orders indicated acceptance of work quality. ✓ HBL made ad hoc payments, not as per raised bills. |
✓ Pre-existing dispute existed due to breaches of contract, poor quality of work, and delays. ✓ Appellant violated purchase order terms, failed to honor commitments, and caused losses. ✓ Appellant raised improper invoices and failed to complete work on time. ✓ Appellant invoked arbitration, confirming a dispute. |
| Payment of Dues |
✓ Amounts claimed were due and payable. ✓ HBL raised baseless allegations and disputes. ✓ Appellant constrained to stop supply due to non-payment of dues. |
✓ No payment was outstanding to the Appellant; rather, the Appellant owed money to HBL. ✓ HBL incurred losses due to the Appellant’s actions. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issue:
- Whether the application of the Operational Creditor under Section 9 of the IBC should have been admitted by the Adjudicating Authority, given the existence of a pre-existing dispute.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issue:
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Whether the application of the Operational Creditor under Section 9 of the IBC should have been admitted by the Adjudicating Authority, given the existence of a pre-existing dispute. | The application should not have been admitted. | The Court found that there was a pre-existing dispute between the parties, as evidenced by the numerous communications disputing the quality of work, delays, and breaches of contract. The Court emphasized that the IBC is not a debt recovery mechanism and that the existence of a legitimate dispute bars the initiation of CIRP by an operational creditor. |
Authorities
The Supreme Court relied on the following authorities:
| Authority | Court | How it was used | Legal Point |
|---|---|---|---|
| Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353] | Supreme Court of India | Explained the criteria for examining an application under Section 9 of the IBC and the meaning of “dispute”. | The adjudicating authority must reject the application if a notice of dispute has been received or there is a record of dispute. The dispute must be plausible and not a patently feeble legal argument. |
| K. Kishan vs. Vijay Nirman Co. (P) Ltd. [(2018) 17 SCC 662] | Supreme Court of India | Clarified that operational creditors cannot use the IBC prematurely or as a substitute for debt enforcement procedures. | The mere fact of challenging an arbitral award is sufficient to state that a dispute exists. The IBC cannot be used to extract money when adjudication proceedings are pending. |
| Section 8 of the Insolvency and Bankruptcy Code, 2016 | Statute | Explained the process of insolvency resolution by an operational creditor. | An operational creditor may deliver a demand notice for unpaid debt. The corporate debtor must notify the creditor of any dispute within ten days. |
| Section 9 of the Insolvency and Bankruptcy Code, 2016 | Statute | Explained the application process for initiating CIRP by an operational creditor. | The operational creditor may file an application if no payment or notice of dispute is received. The Adjudicating Authority may admit or reject the application based on certain criteria. |
Judgment
The Supreme Court held that the National Company Law Tribunal (NCLT) had erred in admitting the application of the Operational Creditor (M/S S.S. Engineers) under Section 9 of the IBC. The Court affirmed the decision of the National Company Law Appellate Tribunal (NCLAT) which had set aside the NCLT order.
| Submission by Parties | How the Court Treated the Submission |
|---|---|
| M/S S.S. Engineers argued that no pre-existing dispute existed and the amounts were due. | The Court rejected this submission, finding that the correspondence between the parties clearly showed a pre-existing dispute. |
| Hindustan Petroleum Corporation Ltd. (HPCL) and its subsidiary, HBL, argued that a pre-existing dispute existed. | The Court accepted this submission, noting that HBL had consistently disputed the claims of the Appellant, citing poor work quality, delays, and breaches of contract. |
The Court’s view on the authorities cited is as follows:
✓ Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353]: The Supreme Court relied on this case to reiterate that the adjudicating authority must reject an application under Section 9 of the IBC if a notice of dispute has been received by the operational creditor. The Court also emphasized that the dispute must be plausible and not a patently feeble legal argument.
✓ K. Kishan vs. Vijay Nirman Co. (P) Ltd. [(2018) 17 SCC 662]: The Supreme Court reiterated that operational creditors cannot use the IBC as a substitute for debt enforcement procedures. The Court highlighted that the mere fact of challenging an arbitral award is sufficient to state that a dispute exists.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the existence of a genuine pre-existing dispute between the parties. The Court emphasized that the IBC is not a debt recovery mechanism and should not be used to penalize solvent companies for non-payment of disputed dues. The Court also noted the differences in the procedure for initiating CIRP by financial creditors and operational creditors, stating that an operational creditor can only trigger the CIRP process when there is an undisputed debt and a default in payment.
The Court’s reasoning was heavily influenced by the following points:
✓ The repeated communication from HBL disputing the quality of work, delays, and breaches of contract by the Appellant.
✓ The fact that HBL had raised debit notes against the Appellant for consumption of spares and consumables.
✓ The fact that HBL had claimed that no payment was outstanding to the Appellant and, in fact, the Appellant owed money to HBL.
✓ The invocation of arbitration by the Appellant, which itself indicated the existence of a dispute.
The sentiment analysis of the reasons given by the Supreme Court can be ranked as follows:
| Reason | Percentage |
|---|---|
| Existence of a genuine pre-existing dispute | 40% |
| IBC is not a debt recovery mechanism | 30% |
| Differences in procedure for financial and operational creditors | 20% |
| HBL’s consistent dispute of the Appellant’s claims | 10% |
The ratio of fact to law in the Court’s decision can be summarized as follows:
| Category | Percentage |
|---|---|
| Fact (consideration of factual aspects) | 60% |
| Law (consideration of legal aspects) | 40% |
The Court’s logical reasoning for the issue can be represented as follows:
The Court considered the argument that the issuance of C-forms and subsequent work orders indicated acceptance of work quality, but rejected it. The Court emphasized that the issuance of C-forms does not constitute acknowledgment of liability and that the subsequent work orders were on a lumpsum turnkey basis, meaning the Appellant was still responsible for the entire execution of the work. The Court also rejected the argument that HBL was making ad hoc payments, noting that the payments were not as per the bills raised by the Appellant.
The Court’s decision is summarized in the following quotes from the judgment:
“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.”
“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.”
“On a reading of Sections 8 and 9 of the IBC, it is patently clear that an Operational Creditor can only trigger the CIRP process, when there is an undisputed debt and a default in payment thereof. If the claim of an operational creditor is undisputed and the operational debt remains unpaid, CIRP must commence, for IBC does not countenance dishonesty or deliberate failure to repay the dues of an Operational Creditor. However, if the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed.”
Key Takeaways
- The Insolvency and Bankruptcy Code (IBC) is not a debt recovery mechanism.
- A pre-existing dispute between an operational creditor and a corporate debtor bars the initiation of the Corporate Insolvency Resolution Process (CIRP).
- The existence of a dispute must be genuine and plausible, not a mere assertion or a feeble legal argument.
- The Adjudicating Authority (NCLT) should not admit an application under Section 9 of the IBC if a pre-existing dispute is evident.
- Operational creditors can only trigger the CIRP process when there is an undisputed debt and a default in payment.
This judgment has significant implications for future cases under the IBC. It reinforces the principle that the IBC is intended to address insolvency and bankruptcy, not to be used as a tool for debt recovery. The judgment also clarifies the scope of “pre-existing dispute,” emphasizing that the dispute must be genuine and not merely a tactic to avoid payment.
Directions
The Supreme Court directed that the appellant may avail such other remedies as may be available in accordance with law including arbitration to realise its dues, if any.
Development of Law
The ratio decidendi of this case is that a pre-existing dispute, if genuine and plausible, bars the initiation of CIRP by an operational creditor. This case reinforces the position of law that the IBC is not a debt recovery mechanism and should not be used to penalize solvent companies for non-payment of disputed dues. The Supreme Court has reiterated the legal position established in previous cases like Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353] and K. Kishan vs. Vijay Nirman Co. (P) Ltd. [(2018) 17 SCC 662], clarifying that the existence of a genuine dispute is a bar to initiating CIRP under Section 9 of the IBC.
Conclusion
In conclusion, the Supreme Court dismissed the appeal, upholding the decision of the NCLAT. The Court clarified that the existence of a genuine pre-existing dispute bars the initiation of CIRP by an operational creditor under Section 9 of the IBC. The Court emphasized that the IBC is not a debt recovery mechanism and should not be used to penalize solvent companies for non-payment of disputed dues. The judgment reinforces the importance of a clear understanding of the legal framework governing the initiation of CIRP and the need for a genuine and undisputed debt for initiating such a process by an operational creditor.