NCLT Not A Debt Collection Forum ; Operational Creditor's Application To Initiate CIRP Must Be Dismissed If The Debt Is Disputed: Supreme Court

The Supreme Court observed that application of the Operational Creditor for initiation of Corporate Insolvency Resolution Process (CIRP) must be dismissed, if the debt is disputed.

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, the bench of Justices Indira Banerjee and V. Ramasubramanian observed.

The bench also remarked that the adjudicating authority under IBC i.e. NCLT is not a 'debt collection forum' and the objective of IBC is not to penalize solvent companies for non-payment of disputed dues claimed by an operational creditor.

In this case, National Company Law Tribunal (NCLT), Kolkata, admitted an application filed by the appellant under Section 9 of the Insolvency and Bankruptcy Code (IBC) as Operational Creditor [M/S S.S. Engineers], for initiation of CIRP against HPCL Biofuels Ltd. (HBL), a wholly owned subsidiary of Hindustan Petroleum Corporation Ltd. The National Company Law Appellate Tribunal (NCLAT) allowed the appeal filed by the HBL and set aside the NCLT order.

In appeal, the Apex Court bench, referring to the communications between the parties and also other records, noted that there were pre-existing disputes between the parties

"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. . When examining an application under Section 9 of the IBC, the Adjudicating Authority would have to examine (i) whether there was an operational debt exceeding Rupees 1,00,000/- (Rupees One Lac); (ii) whether the evidence furnished with the application showed that debt exceeding Rupees one lac was due and payable and had not till then been paid; and (ii) whether there was existence of any dispute between the parties or the record of pendency of a suit or arbitration proceedings filed before the receipt of demand notice in relation to such dispute. If any one of the aforesaid conditions was not fulfilled, the application of the Operational Creditor would have to be rejected", the bench observed.

While dismissing the appeal, the bench made the following observations:

NCLT Not A Debt Collection Forum

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

If the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed

There are noticeable differences in the IBC between the procedure of initiation of CIRP by a financial creditor and initiation of CIRP 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.

Case details

SS Engineers vs Hindustan Petroleum Corporation Ltd | 2022 LiveLaw (SC) 617 | CA 4583 OF 2022 | 15 July 2022 | Justices Indira Banerjee and V. Ramasubramanian

Headnotes

Insolvency and Bankruptcy Code, 2016 ; Section 8-9 - if the debt is disputed, the application of the Operational Creditor for initiation of CIRP must be dismissed - 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. (Para 31-32)

Insolvency and Bankruptcy Code, 2016 ; Section 8-9 - If the claim  is undisputed and the operational debt remains unpaid, CIRP must commence- IBC does not countenance dishonesty or deliberate failure to repay the dues of an Operational Creditor. (Para 31-32)

Insolvency and Bankruptcy Code, 2016 ; Section 7-9- Noticeable differences in the IBC between the procedure of initiation of CIRP by a financial creditor and by an operational creditor -The NCLT is not a debt collection forum. (Para 31-32)

Summary - NCLT admitted an application for initiating CIRP filed by operational creditor - NCLAT set it aside - Supreme Court dismissed and held: 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 it.

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