A.D. Electro Steel Co. Pvt. Ltd. & Anr vs Anil Steels (Operational Creditor)

A.D. Electro Steel Co. Pvt. Ltd. & Anr. ...Appellants

Versus

Anil Steels (Operational Creditor) ...Respondent

Present: For Appellants: Mr. P. Nagesh and Mr. A.K.Jain, Advocates.

For Respondent: - Mr. Sameer Rastogi and Mr. Yatin Sachdeva, Advocates. Mr. V. Seshagiri and Mr. Anchit Tripathi, Advocates for Bank of India.

ORDER

06.10.2017- The Respondent-'Operational Creditor' filed an

application under section 9 of the Insolvency and Bankruptcy Code,

2016 (hereinafter referred to as "I&B Code") for initiation of 'Corporate

Insolvency Resolution Process' against the Appellants-'Corporate

Debtor'. By impugned order dated 7th September, 2017, the

Adjudicating Authority (National Company Law Tribunal), Kolkata

Bench, Kolkata, having admitted the application and appointed 'Interim

Resolution Professional' with direction to take steps as per sections 15,

17 and 18 of the '1&B Code', the present appeal has been preferred

against the said order.

2. The main plea taken by the Appellants-'Corporate Debtor' is that

there is a dispute in existence and therefore the application under -2-

Section 9 was not maintainable at the instance of the Respondent-

'Operational Creditor'.

3. From the record we find that the Respondent-'Operational Creditor'

through Advocate issued notice dated 15th June, 2016 under section

138 of the Negotiable Instrument Act, 1881 and made certain claims. In

reply to the same, learned counsel for the Appellants- 'Corporate Debtor'

by reply dated 28th June, 2016 raised the dispute about the supply of

certain quantities of Buffer Plunger (Wagon) Casting and Buffer Casing

(Wagon) Casting. It was also alleged that the terms and conditions of the

agreement have been violated.

4. The question about existence of a dispute fell for consideration

before the Hon'ble Supreme Court in "Mobilox Innovations Private Ltd

v. Kirusa Software Private Ltd, (2017) SCC OnLine SC 1154".

Taking into consideration the provisions in the 'I&B Code', the Hon'ble

Supreme Court observed and held as follows: -

"33. The scheme under Sections 8 and 9 of the Code,

appears to be that an operational creditor, as defined,

may, on the occurrence of a default (i.e, on non-payment

of a debt, any part whereof has become due and payable

and has not been repaid), deliver a demand notice of such

unpaid operational debt or deliver the copy of an invoice

demanding payment of such amount to the corporate -3-

debtor in the form set out in Rule 5 of the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules,

2016 read with Form 3 or 4, as the case may be (Section

8(1)). Within a period of 10 days of the receipt of such

demand notice or copy of invoice, the corporate debtor

must bring to the notice of the operational creditor the

existence of a dispute and/or the record of the pendency

of a suit or arbitration proceeding filed before the receipt

of such notice or invoice in relation to such dispute

(Section 8(2)(a)). What is important is that the existence of

the dispute and/or the suit or arbitration proceeding must

be pre-existing - i.e it must exist before the receipt of the

demand notice or invoice, as the case may be. In case the

unpaid operational debt has been repaid, the corporate

debtor shall within a period of the self-same 10 days

send an attested copy of the record of the electronic

transfer of the unpaid amount from the bank account of

the corporate debtor or send an attested copy of the

record that the operational creditor has encashed a

cheque or otherwise received. payment from the corporate

debtor (Section 8(2)(b)). It is only if, after the expiry of the

period of the said 10 days, the operational creditor does

not either receive payment from the corporate debtor or -4-

notice of dispute, that the operational creditor may trigger

the insolvency process by filing an application before the

adjudicating authority under Sections 9(1) and 9(2). This

application is to be filed under Rule 6 of the Insolvency

and Bankruptcy (Application to Adjudicating Authority)

Rules, 2016 in Form 5, accompanied with documents and

records that are required under the said form. Under Rule

6(2), the applicant is to dispatch by registered post or

speed post, a copy of the application to the registered

office of the corporate debtor. Under Section 9(3), along

with the application, the statutory requirement is to

furnish a copy of the invoice or demand notice, an

affidavit to the effect that there is no notice given by the

corporate debtor relating to a dispute of the unpaid

operational debt and a copy of the certificate from the

financial institution maintaining accounts of the

operational creditor confirming that there is no payment

of an unpaid operational debt by the corporate debtor.

Apart from this information, the other information

required under Form 5 is also to be given. Once this is

done, the adjudicating authority may either admit the

application or reject it. If the application made under sub-

section (2) is incomplete, the adjudicating authority, -5-

under the proviso to sub-section 5, may give a notice to

the applicant to rectify defects within 7 days of the receipt

of the notice from the adjudicating authority to make the

application complete. Once this is done, and the

adjudicating authority finds that either there is no

repayment of the unpaid operational debt after the

invoice (Section 9(5)(i)(b)) or the invoice or notice of

payment to the corporate debtor has been delivered by

the operational creditor (Section 9(5)(i)(c)), or that no notice

of dispute has been received by the operational creditor

from the corporate debtor or that there is no record of such

dispute in the information utility (Section 9(5)(i)(d)), or that

there is no disciplinary proceeding pending against any

resolution professional proposed by the operational

creditor (Section 9(5)(i)(e)), it shall admit the application

within 14 days of the receipt of the application, after

which the corporate insolvency resolution process gets

triggered. On the other hand, the adjudicating authority

shall, within 14 days of the receipt of an application by

the operational creditor, reject such application if the

application is incomplete and has not been completed

within the period of 7 days granted by the proviso

(Section 9(5) (ii) (a)). It may also reject the application -6-

where there has been repayment of the operational debt

(Section 9(5)(ii)(b)), or the creditor has not delivered the

invoice or notice for payment to the corporate debtor

(Section 9(5)(ii)(c)). It may also reject the application if the

notice of dispute has been received by the operational

creditor or there is a record of dispute in the information

utility (Section 9(5)(ii)(d)). Section 9(5)(ii)(d) refers to the

notice of an existing dispute that has so been received, as

it must be read with Section 8(2)(a). Also, if any

disciplinary proceeding is pending against any proposed

resolution professional, the application may be rejected

(Section 9(5)(ii)(e)).

34. Therefore, the adjudicating authority, when

examining an application under Section 9 of the Act will

have to determine:

(i) Whether there is an "operational debt" as

defined exceeding Rs. 1 lakh? (See Section 4 of the

Act)

(ii) Whether the documentary evidence furnished

with the application shows that the aforesaid debt

is due and payable and has not yet been paid?

And -7-

(iii) Whether there is existence of a dispute

between the parties or the record of the pendency

of a suit or arbitration proceeding filed before the

receipt of the demand notice of the unpaid

operational debt in relation to such dispute?"

39. It is now important to construe Section 8 of the

Code. The operational creditors are those creditors

to whom an operational debt is owed, and an

operational debt, in turn, means a claim in respect

of the provision of goods or services, including

employment, or a debt in respect of repayment of

dues arising under any law for the time being in

force and payable to the Government or to a local

authority. This has to be contrasted with financial

debts that may be owed to financial creditors,

which was the subject matter of the judgment

delivered by this Court on 31.8.2017

in Innoventive Industries Ltd. v. ICICI Bank (Civil

Appeal Nos. 8337-8338 of2Ol 7). In this judgment,

we had held that the adjudicating authority under

Section 7 of the Code has to ascertain the

existence of a default from the records of the

information utility or on the basis of evidence -8-

furnished by the financial creditor within 14 days.

The corporate debtor is entitled to point out to the

adjudicating authority that a default has not

•occurred; in the sense that a debt, which may also

include a disputed claim, is not due i.e it is not

payable in law or in fact. This Court then went on

to state:

"29. The scheme of Section 7 stands in

contrast with the scheme under Section 8 where

an operational creditor is, on the occurrence of a

default, to first deliver a demand notice of the

unpaid debt to the operational debtor in the

manner provided in Section 8(1) of the Code. Under

Section 8(2), the corporate debtor can, within a

period of 10 days of receipt of the demand notice

or copy of the invoice mentioned in sub-section (1),

bring to the notice of the operational creditor the

existence of a dispute or the record of the

pendency of a suit or arbitration proceedings,

which is pre-existing - i.e before such notice or \

invoice was received by the corporate debtor. The

moment there is existence of such a dispute, the -9-

operational creditor gets out of the clutches of the

Code.

30. On the other hand, as we have seen, in

the case of a corporate debtor who commits a

default of a financial debt, the adjudicating

authority has merely to see the records of the

information utility or other evidence produced. by

the financial creditor to satisfy itself that a default

has occurred. It is of no matter that the debt is

disputed so long as the debt is "due" i.e payable

unless interdicted by some law or has not yet

become due in the sense that it is payable at some

future date. It is only when this is proved to the

satisfaction of the adjudicating authority that the

adjudicating authority may reject an application

and not otherwise."

40. It is, thus, clear that so far as an operational

creditor is concerned, a demand notice of an

unpaid operational debt or copy of an invoice

demanding payment of the amount involved must

be delivered in the prescribed form. The corporate

debtor is then given a period of 10 days from the

receipt of the demand notice or copy of the invoice -10-

to bring to the notice of the operational creditor the

existence of a dispute, if any. We have also seen

the notes on clauses annexed to the Insolvency

and Bankruptcy Bill of 2015, in which "the

existence of a dispute" alone is mentioned. Even

otherwise, the word "and" occurring in Section

8(2)(a) must be read as "or" keeping in mind the

legislative intent and the fact that an anomalous

situation would arise if it is not read as "or". If

read as "and", disputes would only stave off the

bankruptcy process if they are already pending in

a suit or arbitration proceedings and not

otherwise. This would lead to great hardship; in

that a dispute may arise a few days before

triggering of the insolvency process, in which case,

though a dispute may exist, there is no time to

approach either an arbitral tribunal or a court.

Further, given the fact that long limitation periods

are allowed, where disputes may arise and do not

reach an arbitral tribunal or a court for upto three

years, such persons would be outside the purview

of Section 8(2) leading to bankruptcy proceedings

commencing against them. Such an anomaly cannot possibly possibly have been intended by the

legislature nor has it so been intended. We have

also seen that one of the objects of the Code 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 is for this reason that it is enough that a dispute

exists between the parties."

5. In the present case, we find that there was an "existence of dispute"

between the parties. Learned Counsel for the Respondent-'Operational

Creditor' while did not dispute the aforesaid fact and submits that the

amount due to the 'Operational Creditor' have already been paid.

6 In view of the fact that there was a dispute between the parties

and the decision of the present case is covered by the Hon'ble Supreme

Court in "Mo bi lox Innovations Private Ltd v. Kirusa Software

Private Ltd" we have no other option but to set aside the impugned

order dated 7th September, 2017 passed in CP (IB) No. 415/KB/2017.

The said order is accordingly, set aside.

-12-

7. In effect, order (s), if any, passed by Ld. Adjudicating Authority

appointing any 'Interim Resolution Professional' or declaring

moratorium, freezing of account, if any, and all other order (s) passed

by Adjudicating Authority pursuant to impugned order and action, if

any, taken by the 'Interim Resolution Professional', including the

advertisement, if any, published in the newspaper calling for

applications all such orders and actions are declared illegal and are set

aside. The application preferred by Respondent under Section 9 of the

I&B Code, 2016 is dismissed. Learned Adjudicating Authority will now

close the proceeding. The appellant company is released from all the

rigour of law and is allowed to function independently through, its Board

of Directors from immediate effect.

Learned Adjudicating Authority will fix the fee of Interim

Resolution Professional ',if appointed, and the Respondents will pay the

fees of the Interim Resolution Professional, for the period he has

functioned. The appeal is allowed with aforesaid observation and

direction. However, in the facts and circumstances of the case, there

shall be no order as to cost.

(Justice S.J. Mukhopadhaya) Chairperson

(Justice A.I.S. Cheema) (Balvinder Singh) Member (Judicial) Member(Technical) Ar