As long as dispute truly exists and is not hypothetical or illusory, adjudicating authority has to reject application for CIRP: SC
Read Judgment: Kay Bouvet Engineering vs. Overseas Infrastructure Alliance
LE Staff
New Delhi, August 12, 2021: The Supreme Court has ruled that as long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application for Corporate Insolvency Resolution Process (CIRP).
A Division Bench of Justice R.F Nariman and Justice B R Gavai observed that once the “Operational Creditor” has filed an application which is otherwise complete, the adjudicating authority has to reject the application u/s 9(5)(ii)(d) of the Insolvency & Bankruptcy Code (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, added the Bench.
Going by the background, the Respondent/Overseas, engaged in the business of progressive project development, execution and management Company, entered into an agreement for Engineering, Procurement and Construction contract (EPC) with one Mashkour Sugar Mills based in Sudan (‘Mashkour’) to set up a high level sugar plant. The project was said to be financed by the Govt. of India by line of credit through EXIM Bank.
The Appellant, engaged in the business of heavy engineering, was selected as a sub-contractor and thereafter, a tripartite agreement was executed between all the three parties. The Respondent in furtherance of agreement advanced 10% of the consideration to the Appellant. However, the EXIM bank denied to release payment and the agreement was terminated on the grounds that refusal of payment showed unwillingness of the Indian govt. to support the project. The Respondent commenced a civil suit for specific performance making Mashkour and the Appellant defendants therein.
Thereafter, a new EPC agreement was executed by the Appellant and Mashkour appointing the Appellant as the primary EPC contractor. The Respondent demanded the return of 10% advance made after execution of the tripartite agreement. On default of payment by the Appellant, the Respondent claiming itself to be operational creditor initiated the CIRP process against the Appellant. The petition was dismissed by the NCLT on the ground that suit for specific performance and CIRP process could not run side by side on the same issue. The NCLAT then passed the order setting aside the order of the NCLT and the appeal was allowed remanding the matter back to the NCLT to admit the petition u/s 9 of the IBC after giving limited notice to the appellant so as to enable it to settle the claim.
After going through the contentions, the Division Bench found that Mashkour was to release payment of two invoices of Overseas for USD 10.5 Million and the Overseas was to release payment of USD 10.62 Million to Kay Bouvet on submission of Advance Bank Guarantee and Performance Bank Guarantee to Mashkour and its confirmation and acceptance by Mashkour.
The Apex Court noted that the case of Kay Bouvet that the amount of Rs.47,12,10,000/- which was paid to it by Overseas, was paid on behalf of Mashkour from the funds released to Overseas by Exim Bank on behalf of Mashkour, cannot be said to be a dispute which is spurious, illusory or not supported by the evidence placed on record.
The material placed on record amply clarifies that the initial payment which was made to Kay Bouvet as a sub-Contractor by Overseas who was a Contractor, was made on behalf of Mashkour and from the funds received by Overseas from Mashkour, observed Justice Gavai.
The Top Court also found that when a new contract was entered into between Mashkour and Kay Bouvet directly, Mashkour had directed the said amount of Rs.47,12,10,000/- to be adjusted against the supplies to be made to Mashkour Sugar Company Ltd. for the purpose of completing the Project.
On the contrary, the documents clarify that the termination of the contract with Overseas would not absolve Overseas of any liability for the balance of the LoC 1st tranche of 25 Million disbursed to them other than USD 10.62 paid to Kay Bouvet, added the Court.
The Apex Court therefore concluded that the 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 u/s 9 of the IBC would not have been passed.
Sign up for our weekly newsletter to stay up to date on our product, events featured blog, special offer and all of the exciting things that take place here at Legitquest.
Add a Comment