Application For Initiating CIRP Has To Be Rejected If A Dispute Truly Exists In Fact And Is Not Spurious, Hypothetical Or Illusory: Supreme Court

The Supreme Court observed that adjudicating authority has to reject an application seeking initiation of Corporate Insolvency Resolution Process under Section 9 of Insolvency and Bankruptcy Code, if a dispute truly exists in fact and is not spurious, hypothetical or illusory.

The bench of Justices RF Nariman and BR Gavai observed that, at this stage, the authority is not required to be satisfied as to whether the defence is likely to succeed or not and it cannot go into the merits of the dispute.

The court allowed the appeal against the National Company Law Appellate Tribunal order which had set aside the National Company Law Tribunal order rejecting the application filed by Overseas Infrastructure Alliance (India) Private Limited seeking initiation of CIRP against Kay Bouvet Engineering Ltd.

In appeal before the Supreme Court, the Kay Bouvet contended that the material placed on record and specifically the Demand Notice and reply thereto, clearly showed that there was an "existence of dispute" and as such, the NCLT had rightly dismissed the petition. On the other hand, the Overseas contended that Kay Bouvet has admitted of receiving the amount from it and once the party admits of any claim, the same would come in the definition of "Operational Debt" as defined under subsection (21) of Section 5 of the IBC and enable the party to whom admission is made to file the proceedings under Section 9 of the IBC being an "Operational Creditor".

To address these contentions, the bench referred to Section 8 and 9 of the IBC and observed thus:

13. Perusal of the aforesaid provisions would reveal that an "Operational Creditor", on the occurrence of default, is required to deliver a "Demand Notice" of unpaid "Operational Debt" or a copy of invoice, demanding payment of amount involved in the default to the "Corporate Debtor" in such form and manner as may be prescribed. Within 10 days of the receipt of such "Demand Notice" or copy of invoice, the "Corporate Debtor" is required to either bring to the notice of the "Operational Creditor" "existence of a dispute" or to make the payment of unpaid "Operational Debt" in the manner as may be prescribed. Thereafter, as per the provisions of Section 9 of the IBC, after the expiry of the period of 10 days from the date of delivery of notice or invoice demanding payment under sub­section (1) of Section 8 and if the "Operational Creditor" does not receive payment from the "Corporate Debtor" or notice of the dispute under sub­ section (2) of Section 8 of the IBC, the "Operational Creditor" is entitled to file an application before the adjudicating authority for initiating the Corporate Insolvency Resolution Process.

Thereafter, the court referred to the judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, in which the terms "existence", "genuine dispute" and "genuine claim" etc were interpreted. The bench observed:

15. It could thus be seen that this Court has held that one of the objects of the IBC qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It has been held that it is for this reason that it is enough that a dispute exists between the parties.

17. It is thus clear that once the "Operational Creditor" has filed an application which is otherwise complete, the adjudicating authority has to reject the application under Section 9(5)(ii)(d) of IBC, if a notice has been received by "Operational Creditor" or if there is a record of dispute in the information utility. What is required is that the notice by the "Corporate Debtor" must bring to the notice of "Operational Creditor" the existence of a dispute or the fact that a suit or arbitration proceedings relating to a dispute is pending between the parties. All that the adjudicating authority is required 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 a mere bluster. It has been held that however, at this stage, the Court is not required to be satisfied as to whether the defence is likely to succeed or not. The Court also cannot go into the merits of the dispute except to the extent indicated hereinabove. It has been held that so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has no other option but to reject the application.

The court then perused the records to examine whether the claim of Kay Bouvet with regard to the "existence of dispute", can be considered to be the one which is spurious, illusory or not supported by any evidence and found that it was not.

"32. In these circumstances, we find that NCLT had rightly rejected the application of Overseas after finding that there existed a dispute between Kay Bouvet and Overseas and as such, an order under Section 9 of the IBC would not have been passed. We find that NCLAT has patently misinterpreted the factual as well as legal position and erred in reversing the order of NCLT and directing admission of Section 9 petition.", the Court said while allowing the appeal.

Case: Kay Bouvet Engineering Ltd. vs Overseas Infrastructure Alliance (India) Private Limited ; CA 1137 OF 2019
Citation: LL 2021 SC 370
Coram:  Justices RF Nariman and BR Gavai
Counsel: Sr. Adv Jayant Bhushan for appellant, Sr. Adv C.A. Sundaram for respondent

Click here to Read/Download Judgment