K. Kishan vs M/s Vijay Nirman Company Pvt. Ltd.

37 has taken place – Operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures – The Code cannot be used in terrorem to extract an amount even though it may not be finally payable as adjudication proceedings in respect thereto are still pending – The object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist – A reading of s.9(5)(ii)(d) of the Code shows that an application under s.8 must be rejected if notice of a dispute has been received by the operational creditor – In the instant case, the entire basis for the notice under s.8 of the Code was the fact that an Arbitral Award was passed against the appellant and reply to the notice was given within 10 days, raising the existence of a dispute – The counter claims were rejected by the Arbitral Tribunal, which rejection was also the subject-matter of challenge in s.34 petition – Unlike counter claim nos. 1 and 2, which were rejected by the Arbitral Tribunal for lack of evidence, counter claim no.3 which raised huge amount was rejected on the basis of a price adjustment clause on merits – Therefore, it cannot be said at this stage of the proceedings, that no dispute existed between the parties. Insolvency and Bankruptcy Code, 2016: s.238 – Non-obstante clause – Held: s.238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act – In the instant case, there is no such inconsistency – On the contrary, the award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt happens to be a disputed one – Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations case – Arbitration and Conciliation Act, 1996.

Allowing the appeal, the Court

HELD: 1. Operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. The object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist. [Para 13] [969-G-H; 970-B]

Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353 – relied on.

Re A Company - Victory House General Partner Ltd. v. RGB P & C Ltd. [2018] EWHC 1143 (Ch) ; Re Bayoil SA [1999] 1 WLR 147; Lim PohYeoh (alias Lim Aster) and TS Ong Construction Pte Ltd. [2016] SGHC 179; LKM Investment Holdings Pte Ltd. v. Cathay Theatres Pte Ltd. [2000] SGHC 13; Ramsay Health Care Australia Pty Ltd v. Adrian John Compton [2017] HCA 28 –

referred to.

2. Under the Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed and the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 and 37 has taken place. There may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation. There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act. [Paras 18, 19, 20] [972-E-H; 973-A]

3. The Appellate Tribunal was in error in referring to Section

238 of the Code. The Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations case. Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations case, an insolvency petition cannot be proceeded with further. [Paras 22, 23] [973-C-D, E-F]