Similar Claims Of OC's In Arbitration And CIRP Application Indicates Pre-Existing Dispute: NCLT Mumbai Rejects Application For Initiation Of CIRP

Therefore, the bench rejected an application for initiation of CIRP.

Brief Facts:

The matter pertained to an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 by Ksheeraabd Constructions Private Limited (Operational Creditor) (OC) seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against Reliance Infrastructure Limited, Corporate Debtor (CD). The application alleged a total default amount of Rs. 35,80,00,000/-, which included a retention amount of Rs. 1.21 Crore, royalty dues of Rs. 8.86 Crore, Rs. 3.50 Crore related to invoices from August and September 2018, and Rs. 22.23 Crore for other outstanding items including benefit sharing. These claims were based on services provided by the OC as a contractor for the construction of the Pune-Satara Section of National Highway-4 in Maharashtra. The alleged default date was October 30, 2018 when Rs. 25.61 Crore was purportedly due after the CD encashed bank guarantees provided by the OC.

Under the Construction Agreement dated April 4, 2011, the OC was tasked with designing, procuring, and executing the Pune-Satara Highway project on an item-rate basis. The OC performed the work and issued running bills which the CD certified through Interim Payment Certificates (IPCs). Payments were made against IPCs until July 2018, but in August and September 2018, the CD issued IPC Nos. 85 and 86 and sought account reconciliation. The OC prepared a statement showing a net payable amount of Rs. 8.58 Crore to the CD, which was acknowledged in an email from the CD's representative. Despite this, the CD invoked all bank guarantees retaining Rs. 25.61 Crore more than their claimed entitlement. The OC argued that this excess retention represented the outstanding amount owed by the CD. The OC also filed Commercial Arbitration Petitions seeking interim relief regarding the bank guarantees, and arbitration proceedings commenced with both parties submitting their claims and defenses. The OC argued that the present application was distinct from the arbitration claims and that the CD's attempt to evade payment by raising pre-existing disputes was unfounded.

In response, the CD argued that the petition should be dismissed due to pre-existing disputes evidenced by the constitution of an Arbitral Tribunal for all disputes arising from the Construction Agreement. The CD claimed that the debt alleged by the OC was disputed as reflected in the ongoing arbitration proceedings. The CD filed a counter-claim of Rs. 268.99 Crore including damages for delays and other issues. The CD contended that the OC has suppressed relevant facts and cannot seek claims relinquished in the arbitration process through this petition.

Observations by the NCLT:

The NCLT noted that the Construction Agreement included a 'Dispute Resolution Procedure' outlined in Clause 43. According to Clause 43.3 of the agreement, any unresolved disputes, which cannot be amicably settled or mediated, are to be resolved through binding arbitration under the Arbitration and Conciliation Act, 1996.

The NCLT noted the arbitration proceedings were initiated by the OC before the CIRP application was filed. The arbitration petitions were submitted on October 26, 2018, while the CIRP application was filed on January 14, 2019. This timeline demonstrated that arbitration was underway prior to the initiation of CIRP.

The NCLT noted that the OC's claim in the arbitration included detailed disputes related to the Construction Agreement and highlighted issues such as delays caused by the CD's failure to release payments which led to additional costs and financial losses for the OC. The bench held that this demonstrated that disputes existed between the parties prior to the filing of the CIRP application. Further, the NCLT noted that the OC's claims were related to the same issues being contested in the arbitration indicating that the disputes were intertwined and not suitable for summary proceedings under Section 9 of the IBC.

The NCLT also noted that the claims made by the OC in the arbitration and those in the CIRP application were similar and involve the same subject matter. The NCLT referred to the Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. where it was established that a dispute exists if there is a real dispute regarding payment that falls within the definition provided in Section 5(6) of the IBC. In Mr. Sanjay Kumar vs. Gannon Dunkerley & Co Ltd and Anr., the NCLAT held that if disputes require adjudication by a competent court or tribunal, Section 9 of the IBC does not empower the adjudicating authority to resolve these issues.

The bench held that:

“If the dispute is raised by the CD and if the CD shows the disputed issues of facts which require adjudication by a competent court of law, then Section 9 of IBC would not empower the Adjudicating Authority to take upon itself the task of sifting through the rival contentions raised and to give a judgement upon it. Therefore, we are neither inclined to consider the claims and counter-claims made by the parties nor venturing into determination as to the merits of the dispute, which might culminate in favour of either of the parties. We are conscious that at this stage of an application under Section 9 IBC, our jurisdiction is limited to consideration of existence of an actual dispute, both in fact and in law. There cannot be a case for the OC that no dispute existed with the CD before filing the Application. We find that by filing this Application, after initiating arbitration proceedings against the CD, the OC is attempting forum shopping with the desire for recovery of money. This is a clear case of a real dispute existing between the parties before issuance of statutory notice under Section 8 of the IBC. The object of the IBC is not to admit a CD into CIRP when there is pre-existing dispute between the parties.”

Given the presence of ongoing arbitration proceedings and the nature of the disputes, the NCLT held that there was a pre-existing dispute between the parties. Therefore, the application for CIRP was rejected based on the existence of this dispute, as, the NCLT held, the IBC aims to prevent the admission of cases where disputes are already being resolved through other legal mechanisms.

Case Title: Ksheeraabd Constructions Private Limited Vs Reliance Infrastructure Limited

Case Number: CP (IB) No.185/MB/2019

Operational Creditor: Sr. Adv. J.P. Sen a/w Adv. Rakesh N. Reddy

Corporate Debtor: Sr. Adv. Prateek Seksaria a/w Adv. Tushad Kakalia and Adv. Raghavi Sharma i/b Mulla & Mulla and Craigie Blunt & Caroe

Date of Judgment: 02.08.2024

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