Supreme Court Directs Fresh Review of Insolvency Claim: M/S Wizaman Impex vs. Kedrion Biopharma (2022)

Introduction

Date of the Judgment: 7 February 2022

Citation: (2022) INSC 110

Judges: Dinesh Maheshwari, J. and Vikram Nath, J.

Can an appellate tribunal admit new evidence in an insolvency case without giving the other party a chance to respond? The Supreme Court of India recently addressed this question in a case involving a dispute over unpaid dues. The core issue was whether the National Company Law Appellate Tribunal (NCLAT) was right to consider additional documents at the appeal stage and if the claim was filed within the limitation period. The judgment was delivered by a two-judge bench comprising Justice Dinesh Maheshwari and Justice Vikram Nath.

Case Background

The case involves M/S Wizaman Impex Pvt. Ltd. (the appellant), a company considered a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (the Code), and Kedrion Biopharma Inc. (the respondent), an operational creditor. The dispute arose from a distribution agreement where Wizaman Impex was to sell Kedrion Biopharma’s pharmaceutical products until Kedrion India could do so. Kedrion Biopharma claimed that Wizaman Impex had outstanding dues for products sold. Several invoices were raised, and credit notes were also issued. Kedrion Biopharma sent a demand notice on 25 July 2019, demanding USD 901,000, which was returned undelivered. A second demand notice was sent on 7 August 2019, to which Wizaman Impex replied on 17 August 2019, disputing the dues citing a pending dispute with the Directorate of Health Services, Maharashtra, regarding the supply of short shelf-life products. Kedrion Biopharma then filed an application under Section 9 of the Code, claiming that Wizaman Impex had defaulted on its operational debt.

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) rejected Kedrion Biopharma’s application, stating that the claim was time-barred under Article 137 of the Limitation Act, 1963. The NCLT considered documents submitted by Kedrion Biopharma, including a credit memo dated 15 December 2017 and a letter dated 7 July 2016, but concluded that these did not constitute valid acknowledgments of debt that would extend the limitation period. The NCLT also considered a letter dated 2 February 2017 and came to the conclusion that the limitation would run from 2 February 2017. Kedrion Biopharma appealed to the National Company Law Appellate Tribunal (NCLAT), seeking to introduce additional evidence in the form of emails exchanged between 3 November 2017 and 11 January 2019, which discussed settlement proposals. The NCLAT allowed the introduction of these additional documents and, based on them, concluded that Wizaman Impex had acknowledged its liability within the limitation period. The NCLAT then set aside the NCLT order and admitted the application under Section 9 of the Code.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 3(11) of the Insolvency and Bankruptcy Code, 2016: Defines “operational debt” as a claim for payment arising from the provision of goods or services, including employment-related debts.
• Section 3(12) of the Insolvency and Bankruptcy Code, 2016: Defines “default” as non-payment of debt when it becomes due and payable.
• Section 5(21) of the Insolvency and Bankruptcy Code, 2016: Defines “operational creditor” as a person to whom an operational debt is owed.
• Section 9 of the Insolvency and Bankruptcy Code, 2016: Deals with the initiation of the corporate insolvency resolution process by an operational creditor.
• Article 137 of the Limitation Act, 1963: Specifies a limitation period of three years for applications for which no other period of limitation is provided.

The Insolvency and Bankruptcy Code, 2016, provides a framework for resolving insolvency issues, while the Limitation Act, 1963, sets time limits for legal actions. The interplay between these laws is crucial in determining whether a claim is valid and enforceable.

Arguments

Arguments of the Appellant (M/S Wizaman Impex Pvt. Ltd.):

• The appellant argued that the NCLAT erred in admitting additional documents (emails) at the appellate stage without providing them an opportunity to respond.
• The appellant contended that the application filed by the respondent was barred by limitation under Article 137 of the Limitation Act, 1963, as it was filed more than three years after the cause of action arose.
• The appellant submitted that the documents relied upon by the respondent before NCLT did not amount to an acknowledgment of debt.

Arguments of the Respondent (Kedrion Biopharma Inc.):

• The respondent argued that the emails submitted at the appellate stage constituted a valid acknowledgment of debt, thereby extending the limitation period.
• The respondent contended that the NCLAT was correct in admitting the additional documents as they were crucial for determining the existence of a debt.
• The respondent submitted that the corporate debtor had admitted its liability and had shown its readiness to make payment as also to revise the settlement proposal.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the NCLAT was justified in admitting additional documents at the appellate stage without providing an opportunity to the corporate debtor to respond?
2. Whether the application under Section 9 of the Code was barred by limitation?

Treatment of the Issue by the Court

Authorities

The court considered the following authorities:

• Article 137 of the Limitation Act, 1963: The court considered this provision to determine the limitation period for filing the application under Section 9 of the Code.
• Section 3(11) of the Insolvency and Bankruptcy Code, 2016: The court considered this provision to determine the definition of “operational debt”.
• Section 3(12) of the Insolvency and Bankruptcy Code, 2016: The court considered this provision to determine the definition of “default”.
• Section 5(21) of the Insolvency and Bankruptcy Code, 2016: The court considered this provision to determine the definition of “operational creditor”.
• Section 9 of the Insolvency and Bankruptcy Code, 2016: The court considered this provision to determine the procedure for initiating the corporate insolvency resolution process by an operational creditor.

Judgment

The Supreme Court set aside the NCLAT order to the extent that it had allowed the application under Section 9 of the Code. However, the Court retained the part of the NCLAT order that took the additional documents on record. The Court directed the NCLT to reconsider the application under Section 9 of the Code, taking into account the additional documents and providing an adequate opportunity for both parties to be heard. The Court emphasized that it was not pronouncing on the merits of the case or the evidentiary value of the documents, leaving all aspects open for examination by the NCLT.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of natural justice, which requires that both parties in a legal dispute be given a fair opportunity to present their case. The Court emphasized that the NCLAT should not have admitted the additional documents without giving the corporate debtor a chance to respond. The Court also considered the procedural fairness and the need for a thorough examination of all the evidence before making a decision. The Court did not delve into the merits of the case, leaving it for the NCLT to decide after a comprehensive review.

The Court’s reasoning was based on the following points:

• “…the impugned order allowing the appeal and even admitting the application under Section 9 of the Code cannot be sustained on a short point that the said additional documents were taken on record only while finally deciding the appeal and without adequate opportunity of response to the corporate debtor.”
• “…the appropriate course in this matter would be to set aside the impugned order dated 15.12.2021 passed by NCLAT to the extent it has allowed the application under Section 9 of the Code filed by the applicant-respondent but while retaining the other part of the impugned order taking the documents filed with I.A. No. 2685 of 2020 on record.”
• “It goes without saying that we have not pronounced on the merits of the case either way and not even on the evidentiary value and effect of the documents in question. All the aspects are left open for examination by the Adjudicating Authority in accordance with law.”

Key Takeaways

• Appellate tribunals must provide both parties with an opportunity to respond to additional documents admitted at the appellate stage.
• The principle of natural justice is paramount in legal proceedings, ensuring fairness and transparency.
• The Supreme Court has emphasized the need for a thorough examination of all evidence before a decision is made.
• The limitation period for filing applications under Section 9 of the Insolvency and Bankruptcy Code, 2016, is governed by Article 137 of the Limitation Act, 1963.
• The judgment underscores the importance of procedural fairness in insolvency proceedings.

Directions

The Supreme Court directed the National Company Law Tribunal (NCLT) to:

• Reconsider the application under Section 9 of the Insolvency and Bankruptcy Code, 2016.
• Take into consideration the additional documents (emails) that were taken on record by the NCLAT.
• Provide an adequate opportunity of hearing to both parties (M/S Wizaman Impex Pvt. Ltd. and Kedrion Biopharma Inc.).
• Assign a reasonable priority to the matter and proceed expeditiously, given that the application was filed on 30 June 2020.

Specific Amendments Analysis

Not Applicable in this case.

Development of Law

The ratio decidendi of this case is that appellate tribunals must ensure procedural fairness by providing both parties an opportunity to respond to new evidence admitted at the appellate stage. The Supreme Court has reinforced the principle of natural justice in insolvency proceedings, emphasizing the need for a thorough and fair examination of all evidence before a decision is made. This judgment clarifies the procedural requirements for admitting additional documents at the appellate level and ensures that the rights of all parties are protected.

Conclusion

The Supreme Court’s judgment in M/S Wizaman Impex Pvt. Ltd. vs. Kedrion Biopharma Inc. sets aside the NCLAT order to the extent that it had allowed the application under Section 9 of the Insolvency and Bankruptcy Code, 2016, and directs the NCLT to reconsider the matter. The Court emphasized the importance of procedural fairness and the need for both parties to have an opportunity to respond to new evidence. This decision ensures that insolvency proceedings are conducted in a manner that is just and equitable, protecting the rights of all parties involved.