The Supreme Court has stated categorically that in a dispute between an operational creditor and a business, the operational creditor cannot sue the business for insolvency. It doesn’t matter that the position of the operational creditor is correct – after all, the purpose of the Insolvency and Bankruptcy Code (IBC) is not to adjudicate commercial disputes.
The Supreme Court said so in its verdict in SS Engineers v Hindustan Petroleum Corporation.
SS Engineers believed to have provided services worth ₹38 crore to HPCL Biofuels Ltd (HBL), a subsidiary of HPCL. HBL was unhappy with the services and refused to pay. An argument arose. SS Engineers sued HBL for insolvency at the National Company Law Tribunal (NCLT), Kolkata.
The NCLT admitted the insolvency proceedings against HBL, thus favoring SS Engineers, and found that the company’s contributions to HBL far exceeded the deductibles for various failures in the works, in accordance with the contract – such as liquidated damages .
HBL took the case to the appellate court, NCLAT, which overturned NCLT’s verdict, saying it should have dismissed the Corporate Insolvency Resolution Process (CIRP).
SS Engineers then went to the Supreme Court against the NCLAT order. The supreme court agreed with the appeals tribunal, saying that NCLT had “committed a serious error of law in admitting the operational creditor’s claim, even though there was a pre-existing dispute”.
He said that under Section 9 of the IBC, the procuring authority should consider (i) whether there was operational debt above ₹1 lakh; (ii) if the evidence provided with the application showed that the debt in excess of ₹1 lakh has not been paid; and (iii) if there was a dispute between the parties or a file pending a lawsuit or arbitration proceeding filed before the receipt of a formal notice relating to the dispute. If any of the conditions were not met, the application of the operational creditor should be rejected.
Judge Indira Banerjee and Judge V Ramasubramanian said, “It is not for this court to adjudicate the disputes between the parties and determine whether, in fact, any amount was owed by the appellant to the HPCL/HBL or vice versa. The question is whether the claim of the operational creditor under Article 9 of the IBC should have been accepted by the contracting authority. The answer to the above question must be negative.
They further stated that the NCLT, exercising powers under Section 7 or Section 9 of the IBC, “is not a forum for debt collection“. The BAC deals with insolvency and bankruptcy. “It is not the object of the IBC that the CIRP be initiated to sanction solvent companies for non-payment of disputed contributions claimed by an operational creditor.”
The verdict further points out that there are “significant differences” in the IBC between the initiation of CIRP by a financial creditor and by an operational creditor. “From reading Articles 8 and 9 of the IBC, it is demonstrably clear that an operational creditor can only trigger the CIRP process where there is an undisputed debt and a default in payment thereof. If an operational creditor’s claim is uncontested and the operational debt remains unpaid, CIRP must commence, as IBC does not accept dishonesty or willful failure to repay an operational creditor’s assessments. However, if the claim is disputed, the application for opening the CIRP of the operational creditor must be rejected.
Unable to invoke arbitration
In the case of Balkrishna Spintex Pvt Ltd v The New India Assurance Company Ltd, the High Court of Gujarat ruled that the insured cannot invoke arbitration after execution of the discharge bond without protest.
Balkrishna Spintex had insured its stock and factory in Rajkot with The New India Assurance Company. Following a fire at the factory, the company filed a complaint. She gave her written agreement to the assessed amounts and signed a receipt without protest.
The insurance company paid the claim.
However, fifteen days after receiving the assessed amounts, Balkrishna Spintex stated that they received the amounts under duress and due to financial difficulties. The policy contained an arbitration clause and the company wanted to use it to recover the balance of its claim.
The insurer objected, claiming that Balkrishna Spintex had signed the release form without protest. The case was taken to the High Court of Gujarat.
The court ruled that there was no dispute after the release slip was signed by the claimant without protest. Chief Justice Aravind Kumar observed that “the Respondent does not allege undue influence, coercion, threat or the release note having been signed under any duress”. The respondent, the judge pointed out, had signed the release form “with eyes wide open”.
Just because the claimant argued within 15 days of receiving the amount that it was received under duress, it cannot be arguable to refer the dispute to a sole arbitrator, according to the verdict.
In all cases, duress must be established by the applicant. The court cited a judgment of the Supreme Court in the case of United India Insurance Company v Antique Art Exports Pvt Ltd, in which it was held that “a mere plea of fraud, coercion or undue influence is not sufficient and the party alleging it is under an obligation to establish it prima facie by recording satisfactory evidence”.
Revise, not rectify
A person enters into an agreement with another to sell their property. Before the sale is concluded, he dies. His legal heirs complete the transaction and receive the money, but their names do not appear in the deed of sale.
The issue before the Income Tax Appeal Tribunal, Ahmedabad Court, was whether or not the money received by the legal heirs should be considered “consideration” for the sale – whether it is “consideration”, then they have to pay capital gains tax.
In Ramelaben Ganpatlal Patel v Income Tax Officer, the Appeal Tribunal agreed with the Central Income Tax Tribunal that the money received was ‘consideration’.
Ramelaben had filed a request for rectification under Section 245(2) of the Income Tax Act. The Court of Appeal observed thus: “It is well established that the scope of rectification under section 254(2) of the Act is limited to the rectification of errors which are apparent from the record and that it is not review of the decision taken by the court is not permitted. In our view, what the person being assessed is asking for under the cover of this miscellaneous request is the review of the well-reasoned and carefully considered decision taken by the court, which which is ineligible under section 254(2) of the Act. We therefore reject the said application as devoid of any merit.”
July 31, 2022