NCLT not a debt collection forum, says SC – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/business-laws/nclt-not-a-debt-collection-forum-says-sc/article65704580.ece

Supreme Court says Insolvency and Bankruptcy Code not meant to judge commercial disputes

The Supreme Court has categorically said that in a dispute between an operational creditor and a company, the operational creditor cannot sue the company for insolvency. It does not matter whether there is merit in the stand of the operational creditor — after all, the Insolvency and Bankruptcy Code’s (IBC) purpose is not to sit in judgment of commercial disputes.

The apex court said this in its verdict in the SS Engineers vs Hindustan Petroleum Corporation case.

SS Engineers believed it had provided services worth ₹38 crore to HPCL Biofuels Ltd (HBL), a subsidiary of HPCL. HBL was not happy with the services and refused to pay. A dispute arose. SS Engineers sued HBL for insolvency at the National Company Law Tribunal (NCLT), Kolkata.

The NCLT admitted the insolvency proceedings against HBL, thus favouring SS Engineers, and held that the company’s dues from HBL far exceeded the deductibles for various lapses in work, as per the contract — such as liquidated damages.

HBL took the matter to the appellate tribunal, NCLAT, which reversed NCLT’s verdict, saying it should have disallowed the Corporate Insolvency Resolution Process (CIRP).

SS Engineers then approached the Supreme Court against the NCLAT order. The apex court agreed with the appellate tribunal, saying NCLT had “committed a grave error of law by admitting the application of the operational creditor, even though there was a pre-existing dispute”.

It said that under Section 9 of the IBC, the adjudicating authority would have to examine (i) whether there was an operational debt exceeding ₹1 lakh; (ii) whether the evidence furnished with the application showed that debt exceeding ₹1 lakh had not been paid; and (iii) whether there was any dispute between the parties or a record of pendency of a suit or arbitration proceedings filed before the receipt of a demand notice in relation to the dispute. If any of the conditions was not fulfilled, the application of the operational creditor would have to be rejected.

Justice Indira Banerjee and Justice V Ramasubramanian said: “It is not for this court to adjudicate the disputes between the parties and determine whether, in fact, any amount was due from the appellant to the HPCL/HBL or vice versa. The question is whether the application of the operational creditor under Section 9 of the IBC should have been admitted by the adjudicating authority. The answer to the aforesaid question has to be in the negative.”

They further said that the NCLT, exercising powers under Section 7 or Section 9 of IBC, “is not a debt collection forum”. The IBC deals with insolvency and bankruptcy. “It is not the object of the IBC that CIRP should be initiated to penalise solvent companies for non-payment of disputed dues claimed by an operational creditor.”

The verdict further stresses that there are “noticeable differences” in the IBC between the initiation of CIRP by a financial creditor and by an operational creditor. “From a reading of Sections 8 and 9 of the IBC, it is patently clear that an operational creditor can only trigger the CIRP process when there is an undisputed debt and a default in payment thereof. If the claim of an operational creditor is undisputed and the operational debt remains unpaid, CIRP must commence, for IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor. However, if the debt is disputed, the application of the operational creditor for initiation of CIRP must be dismissed.”

Can’t invoke arbitration

In the Balkrishna Spintex Pvt Ltd vs The New India Assurance Company Ltd case, the Gujarat High Court has held that the insured cannot invoke arbitration after the execution of the discharge voucher without protest.

Balkrishna Spintex had insured its stock and Rajkot factory with The New India Assurance Company. Consequent to a fire at the factory, the company filed a claim. It gave written consent to the assessed amounts and executed a discharge voucher without protest.

The insurance company paid the claim.

However, a fortnight after receipt of the assessed amounts, Balkrishna Spintex said it had received the amounts under duress and due to financial hardship. The policy contained an arbitration clause and the company wanted to use it to recover the balance in its claim.

The insurer opposed, saying Balkrishna Spintex had signed the discharge voucher without protest. The matter went to the Gujarat High Court.

The court held there was no dispute after the discharge voucher had been signed by the plaintiff without protest. Chief Justice Aravind Kumar observed that “the respondent does not plead either undue influence, coercion, threat or discharge voucher having been signed under any compulsion.” The respondent, the judge pointed out, had signed the discharge voucher “with eyes wide open”.

Merely because the petitioner has contended within 15 days of receiving the amount that it was received under duress, it cannot be tenable to refer the dispute to a sole arbitrator, the verdict said.

In any case, the duress must be established by the plaintiff. The court cited a Supreme Court judgment in the United India Insurance Company vs Antique Art Exports Pvt Ltd case, in which it was held that “a mere plea of fraud, coercion or undue influence is not enough and the party that alleges such is under an obligation to prima facie establish this by placing satisfactory material on record”.

Review, not rectification

A person enters into an agreement with another to sell his property. Before the sale is completed, he passes away. His legal heirs complete the transaction and receive the money, but their names are not in the sale deed.

The question before the Income Tax Appellate Tribunal, Ahmedabad Bench, was whether or not the money received by the legal heirs should be taken as ‘consideration’ for the sale — if it is ‘consideration’, then they have to pay capital gains tax.

In the Ramelaben Ganpatlal Patel vs Income Tax Officer case, the appellate tribunal agreed with the Central Income Tax Tribunal that the money received was a ‘consideration’.

Ramelaben had filed a rectification petition under Section 245(2) of the Income Tax Act. The appellate tribunal observed thus: “It is well settled that the scope of rectification under Section 254(2) of the Act is limited to rectifying the mistakes which are apparent from the record and it is not permissible to review the decision taken by the tribunal. In our view, what the assessee is seeking in the guise of this miscellaneous application is the review of the well-reasoned and well considered decision taken by the tribunal, which is not permissible under Section 254(2) of the Act. We, therefore, reject the said application being devoid of any merit.”

Published on July 31, 2022

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