In CIVIL APPEAL NO. 4583 OF 2022-SC- Operational Creditor can only trigger CIRP process, when there is undisputed debt and default in payment, says Apex Court Justices Indira Banerjee & V. Ramasubramanian [15-07-2022]

Read Order: M/S S.S. ENGINEERS v. HINDUSTAN PETROLEUM CORPORATION LTD. & ORS

Mansimran Kaur

New Delhi, July 21, 2022: While observing that 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 Supreme Court has dismissed an appeal filed against the impugned order passed by the National Company Law Appellate Tribunal.

The Division bench of Justice Indira Banerjee and Justice V. Ramasubramanian opined that the Adjudicating Authority (NCLT) committed a grave error of law by admitting the application of the Operational Creditor, even though there was a pre-existing dispute as noted by the Adjudicating Authority. 

Factual matrix of the case was such that on  January 3, 2014 , HBL raised a debit note in respect of consumption by the appellant of spares and consumables from the warehouse of HBL. A series of correspondence followed. By a letter dated March 11, 2014 addressed to the appellant, HBL made allegations with regard to the service rendered and/or goods supplied by the appellants and contended that there was no payment outstanding from HBL to the appellant.  On the other hand, HBL claimed that an amount of Rs.1.49 crore was due from the appellant, which excluded consequential losses.

Thereafter between the years 2015 to 2018, C-forms were issued by HBL to the appellant under Section 8 of the Central Sales Tax Act read with Rules 12(1) of the Central Sales Tax (Registration and Turnover) Rules, 1957.  The statutory duty of issuance of C-forms under the Central Sales Tax, do not and cannot constitute acknowledgment of any liability of HBL to the appellant, to make payment.  Subsequently,the appellant sent legal notice to HBL through demanding payment or alternatively reference of the disputes to arbitration.

Eventually, on February 15, 2018, the appellant filed its application under Section 9 of the IBC for initiation of CIRP against HBL. The Adjudicating Authority admitted the application preferred by the appellant. The same was overturned by the Appellate Authority while adjudicating an appeal preferred by the HBL.  It was this impugned order that was assailed by way of present appeal before this Court. 

After considering all the material on record and after taking into account the earlier orders passed, this Court opined that the NCLT committed a grave error of law by admitting the application of the Operational Creditor, even though there was a pre-existing dispute as noted by the Adjudicating Authority.  Reliance was also placed on the judgments in Mobilox Innovations Private Limited v. Kirusa Software Private Limited and K Kishan vs. Vijay Nirman Co. (P) Ltd. 

On facts of the present case, the Court further noted that  the correspondence between the parties evinced  the existence of real dispute. The Bench added that the the NCLT, exercising powers under Section 7 or Section 9 of IBC, is not a debt collection forum. The IBC tackles and/or 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, noted the Court.

Additionally, the Court stated that there is a stark distinction in the IBC, between the procedure of initiation of CIRP by a financial creditor and initiation of CIRP by an operational creditor. On 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, the Court noted. 

 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, the Court further affirmed. 

In light of the above stated observations, the appeal was dismissed.