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NCLT holds that pre-existing dispute doesn’t fall within the ambit of IBC, interprets definition of “dispute”

Raymond Constructions Co. India Private vs. Larsen & Toubro Limited

NCLT rules in favour of Larsen & Toubro Limited (Corporate Debtor); states that the Debt in question in the present matter does not fall within the ambit of a Petition filed under section 9 of the Insolvency & Bankruptcy Code, 2016 (the Code) and hence is inadmissible.

Present matter is filed before the NCLT Bench by Raymond Constructions Co. India Private Limited (Operational Creditor) against the Corporate Debtor under section 9 of the Code read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (the Rules) demanding outstanding payments from the Corporate Debtor in relation to subcontracting work done by the Operational Creditor for the Corporate Debtor.

Upon perusal of the relevant documents, NCLT observes that two projects were sub-contracted to the Operational Creditor by the Corporate Debtor –  one at IMT Rohtak and one at Ganganagar. NCLT observes that the project at IMT Rohtak was completed, a completion certificate was issued and retention money has been paid by the Corporate Debtor. NCLT observes that with regards the Ganganagar site,  the claim of the Operational Creditor is based on the running bills issued by the Corporate Debtor on the basis of the work order which was a communication for assignment of the civil work along with the value to be paid on completion of the work assigned subject to the satisfaction of the Corporate Debtor and such satisfaction ought to be based upon the site inspection by both  parties in the presence of technical persons but the Operational Creditor has been avoiding the demands for joint site inspection by the Corporate Debtor.

NCLT observes that prior to the demand notice served by the Operational Creditor, there is a pre-existing dispute between the parties regarding the quality of the work done which hasn’t been solved owing to the deliberate carelessness of the Operational Creditor. NCLT further observes that with regards issue of the deduction of TDS by the Corporate Debtor, the deduction of TDS is merely a recording a statutory compliance subject to ascertainment of the liability of principal payment if the condition for payment of principal amount remained unsatisfied. NCLT notes that the bills raised by the Corporate Debtor were prior to completion of work simply to communicate the over all position of the work wise value of the total contract subject to certain quality checks. NCLT observes the existence of dispute prior to issue of Demand Notice and states that a pre-existing dispute as to the “quality of good and services” as defined under section 5(6) of the IBC has been established. Thereafter, Section 5(6) of the IBC which reads as follows:

(6) “dispute” includes a suit or arbitration proceedings relating to— (a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;

NCLT relied on Supreme Court decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, Civil Appeal No.9405 of 2017 dated 21.09.2017 wherein vide Para 40, an observation has been made as under:-

“It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application”.

Hence, NCLT observes that in the present case merely feeble legal argument was not made but in the present case sufficient evidences was placed on record to substantiate the dispute time and again. Hence, on separation of grain from the chaff, it was evidenced that this was not a case of raising a spurious defence by the debtor, but a duly substantiated case of ‘existence of dispute’. Therefore, NCLT holds that having considered the totality of the facts and circumstances mentioned above, the existence of dispute prior to issue of Demand Notice was established. Accordingly, the Petition does not deserve Admission.

Thereafter, NCLT interprets the term “dispute” and relies on SC decision of Mobilox Vs. Kirusa (supra) wherein NCLT needs to examine at the stage of admission that whether there is a plausible contention which requires further investigation and on assertion of fact a dispute is supported by evidence. Further, NCLT replied on Mithlesh Singh Vs. Union of India, (2003) 3 SCC 309  wherein the expression used in Section 8(2) of the Insolvency & Bankruptcy Code “existence of dispute, if any” is very significant because the Legislature is deemed not to waste its words or to say anything in vain hence every word is significant, as held in. It is also important to clarify that if the intent of the Legislature was to limit the dispute to only a pending Suit or Arbitration (refer Section 5(6) Definition of Dispute) then there was no requirement to add in Section 8(2)(a) of the Code “existence of a dispute, if any”. A harmonious and co- joint reading is, therefore, required. A view has also been expressed that the definition of ‘dispute’ as per Section 5 of Insolvency & Bankruptcy Code is illustrative and not exhaustive. It is held that a ‘dispute’ must not be spurious, hypothetical or illusory, quoted verbatim. “So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application”. The Adjudicating Authority is also expected to see whether there is a plausible contention of dispute and not a feeble argument, quoted verbatim, “Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence”.

Accordingly, NCLT held that, “is not a case where the impugned Debt and the alleged default was free from existence of plausible dispute or merely a feeble argument; but duly supported by corroborative evidences, therefore, cannot be proceeded under the Insolvency Code so as to commence CIRP by declaring the Debtor Insolvent or Bankrupt.”

NCLT adds that the scope and jurisdiction of NCLT is limited and also confined to the provisions of Insolvency Code only while dealing with Petition filed under Section 9 of the IB Code, therefore, the impugned Debt in question does not fall within those ambits and hence dismisses the case.

 

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