Application u/s 9 of IBC for initiating CIRP liable to be rejected if a genuine dispute exists: Supreme Court

By - Hiranmayi Gowravajhula*

The Supreme court on Tuesday held that if a disagreement genuinely exists in reality and is "not spurious, hypothetical, illusory or misconceived", the adjudicating authority must reject an application seeking to initiate the Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code. 

The bench comprising Justices RF Nariman and BR Gavai allowed the appeal against the National Company Law Appellate Tribunal (“NCLAT”) judgement, which had set aside the National Company Law Tribunal (“NCLT”) order denying Overseas Infrastructure Alliance (India) Private Limited’s application for initiating CIRP against Kay Bouvet Engineering Ltd. 

In the appeal to the Supreme Court, Kay Bouvet argued that the information on record, especially the demand notice and reply thereunder, plainly demonstrated the “presence of dispute”, and that the NCLT had correctly declined the petition. 

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On the contrary, the Overseas Infrastructure submitted that Kay Bouvet had admitted to receiving the amount from Overseas Infrastructure and that once a party admits to having a claim, the claim falls under the definition of “Operational Debt” as defined under subsection (21) of Section 5 of the IBC, allowing the party to whom admission is made to file proceedings under Section 9 of the IBC as an “Operational Creditor”. 

While addressing the aforementioned contentions raised by the parties, the court observed that on the emergence of a default, an “Operational Creditor” is obliged to transmit a “Demand Notice” of an unpaid “Operational Debt” or a copy of an invoice requesting payment of the amount involved in the default to the “Corporate Debtor” in such form and manner as may be stipulated. 

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According to the bench, the "Corporate Debtor" must either bring the "presence of a disagreement" to the attention of the “Operational Creditor” within 10 days of receiving such "Demand Notice" or copy of invoice, or make payment of outstanding “Operational Debt” in the manner provided.

The bench referred to the judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, in which the phrases “presence”, “genuine disagreement”, and “legitimate claim”, among others, were construed. The bench noted that one of the purposes of the IBC relating to operational debts is to ensure that the amount of such debts, which is usually less than that of financial debts, does not enable operational creditors to place the corporate debtor into the insolvency resolution process prematurely or to initiate the process for purely speculative reasons. 

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The court finally concluded that it is obvious that if a notification has been received by the “Operational Creditor” or if there is a record of disagreement in the information utility, the adjudicating body must reject the application under Section 9(5)(ii)(d) of the IBC.

The bench then went on to review the documents to see if Kay Bouvet’s assertion about the “presence of disagreement” was false, illusory, or not supported by facts, and concluded that it was not. 

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“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 bench held.

CLICK HERE TO READ JUDGMENT.

*Hiranmayi Gowravajhula is a 1st year student pursuing B.B.A.LL.B from Symbiosis Law School, Hyderabad.