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Supreme Court: Petition to initiate CIRP liable to be rejected if no legitimate dispute exists

The Supreme Court has decided 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”). An application under section 9 of the Insolvency and Bankruptcy Code (“IBC”) is liable to be rejected by the authority if they are not satisfied as to whether the defence is likely to succeed or not and it cannot go into the merits of the dispute.

The court was hearing an appeal in Kay Bouvet Engineering v. Overseas Infrastructure Alliance against an order of the National Company Law Appellate Tribunal (“NCLAT”) which had set aside an order of the National Company Law Tribunal (“NCLT”). The NCLT order had rejected the application filed by Overseas Infrastructure Alliance (India) Private Limited seeking initiation of CIRP against Kay Bouvet Engineering Ltd. The respondent (Overseas) entered into an Engineering, Procurement and Construction contract (“EPC”) with one Mashkour Sugar Mills to set up a high-level sugar plant, which was financed by the Govt. of India by a line of credit. The appellant (Kay Bouvet) was hired as a sub-contractor and a tripartite agreement was entered into by the government, the respondent and the appellant. As the respondent did not receive the advance payment by the government, it initiated a civil suit for specific performance. Subsequently, a new EPC was executed by the appellant and Mashkour Sugar Mills which made the appellant the primary EPC contractor. The respondent again demanded the advance but as it was not paid, the Respondent claiming itself to be an operational creditor, initiated the CIRP process against the Appellant. After the NCLT rejected the application on the grounds that a suit for specific performance and CIRP process could not run side by side on the same issue, the NCLAT was approached, which set aside the NCLT order. It remanded the matter back to the NCLT to admit the petition under section 9 of the IBC. Before the Supreme Court, the appellants contended that there was an "existence of dispute" and as such, the NCLT had rightly dismissed the petition. For this, it placed the Demand Notice and its reply on record. On the other hand, the respondent argued that as the appellant had received a certain amount out of the EPC, this constituted an ‘operational debt’ under subsection (21) of Section 5 of the IBC. This would enable the party to whom admission is made to file the proceedings, being an ‘operational creditor’, under Section 9 of the IBC.

The court perused Section 8 and 9 of the IBC, as well as its judgement in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, in which the terms "existence", "genuine dispute", and "genuine claim" etc., were interpreted. If there is an existence of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties and the same has been received by the adjudicating authority, and the dispute is one which does not require further investigation and that the dispute is a patently feeble legal argument or an assertion of fact unsupported by evidence, it can reject the application.

The Supreme Court observed that the appellant’s contention with regard to an existence of dispute would only succeed if it is not spurious, illusory or not supported by any evidence. In the present case, it found that the dispute satisfied this requirement. The division bench composed of Justice R.F Nariman and Justice B R Gavai held that the NCLT had rightly rejected the application of the respondent and as there was a dispute between the two, an order u/s 9 of the IBC could not have been passed.

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