Inadmissibility under Section 9 of IBC in the context of Allied Silica Limited v Tata Chemicals Limited – By Aditi Bhawsar & Anjali Patel

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Inadmissibility under Section 9 of IBC in the context of Allied Silica Limited v Tata Chemicals Limited

Introduction

In the matter of Allied Silica Limited v. Tata Chemicals Limited [2020] ibclaw.in 37 NCLAT, the NCLAT rejected the plea of the petitioner and upheld the order of NCLT that dismissed the plea on the ground of petitioner’s failure to prove the presence of operational debt and further on the ground of preexisting dispute. 

In the present matter, both the parties entered into a Business Transfer Agreement (BTA) under which the silica business of the petitioner was acquired by the defendant on a slump sale basis. Allied Silica moved to NCLT claiming that Tata chemicals had only transferred Rs 65 crore out of Rs 123 crore and the remaining amount was due as unpaid operational debt. The petitioner moved to NCLAT challenging the order of NCLT that rejected the petition for recovery of operational debt. This article analyses the inadmissibility of application under Section 9 of Code in the context of Allied Silica Limited v. Tata Chemicals Limited.

Analysis

Section 9 of Insolvency and Bankruptcy Code provides power to the operational creditor to initiate a corporate insolvency resolution process after default by the debtor. The section authorizes the creditor to file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process if he does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, after the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8.

The application is maintainable if no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility. The presence of operational debt is another indispensable prerequisite for claiming the maintainability of the application. In the present case, the application was not maintainable and got rejected due to the above-mentioned grounds and the same is being discussed in detail.

The Non-Existence of Operational Debt

In the present matter, the petitioner argued that the due amount not paid by the respondent is operational debt. But the NCLT and NCLAT held otherwise and similarly the corporate debtor pleaded that the alleged debt is not an operational debt and the appellant is not an ‘Operational Creditor’ as defined under IBC.  

According to Section 5 (21) of the Code, operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

To file an application and seek remedy it is important to prove the existence of operational debt by the creditor. It was observed in the case of Neeraj Jain V/s Cloud Walker Streaming Technologies (P) Ltd & Anr [2020] ibclaw.in 221 NCLAT that “the word debt as defined under the IBC means a liability or obligation in respect of the claim, which is due from any person and includes both financial as well as operational debt.”  In the present case though the petitioner alleged otherwise there was no question regarding the debt in the first place. According to the facts of the case, BTA was the primary document upon which the parties relied, and its execution was not disputed by the parties. Out of 123 crores, 63 crores were paid initially but the remaining 53 crores were divided into 3 Tranche payments as was discussed in BTA. The payment under each Tranche was to be paid after fulfillment of condition precedent. The creditor did not fulfill any such condition and the debtor rightly adjusted the Tranche III against the improvement costs borne by the corporate debtor, on account of non-completion of Tranche II conditions. So, the creditor plea fails on the ground because no such amount was due in the present matter. 

The NCLT and NCLAT both while deciding whether the debtor made a default relied on the BTA and found that the debtor while exercising his right under BTA did not commit any wrong by setting off the remaining amount against non-completion of the condition by the creditor. 

Pre-Existing Dispute under IBC

Under the Insolvency and Bankruptcy Code, 2016, the Corporate Insolvency Resolution Process(CIRP) can be initiated by an operational creditor if, there is no ”dispute” with default on the part of Corporate debtor. NCLAT in the present rejected the application filed under section 9 of IBC. It was observed that the Operational Creditor had sent letters to the Operational Debtor on 13th and 17th May 2019 respectively, regarding the alterations made in the Business Transfer agreement and demanding the remaining balance amount of Rs. 58 crores. Then, a draft notice was sent to the Operational Debtor on 3rd June 2019, demanding the due amount with interest. Operational Debtor acknowledged the receipt of the demand notice on 6th June 2019 and sent the reply on 14th June to the Creditor. Thus, reply to the demand notice is given within the statutory period of ten days. 

In reply to the demand notice, the operational Debtor also raised the issue of a pre-existing dispute regarding the payments allegedly made on 18th June 2018. Also, the operational Creditor sent an email to the Debtor for discontinuing the work in the Cuddalore plant, claiming the default amount of Rs.58 crores. Further, the Operational creditor filed the case in the Ld Adjudicating authority on 2nd August 2019 under section 9 of IBC, claiming the remaining amount of Rs. 58 crores for consummated slump sale. NCLAT held that the emails by the Creditor reflect that dispute existed between parties regarding some alterations in the Business Transfer Agreement (BTA) before issuance of demand notice.

NCLAT relied on Mobilox Innovations Private Limited vs Kirusa Software Private Limited [2017] ibclaw.in 01 SC to interpret the phrase “pre-existing dispute” used in section 9 of IBC and held that-

”It is clear, 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 that requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence”. Hence, the Ld, Adjudicating part has rightly dismissed the application filed under section 9 of IBC and we do not find any reason to interfere with the impugned order.

Therefore, we can say that, if there is a dispute between the Operational Creditor and Operational Debtor, then the adjudicating party can dismiss an application filed under IBC. But what do you understand by the term “dispute”?.

Under the Insolvency and Bankruptcy Code, 2016, the Corporate Insolvency Resolution Process(CIRP) can be initiated by an operational creditor if, there is no ”dispute” with default on the part of Corporate debtor. The term is defined under section 5(6) of IBC. It states that-

“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;

The ”dispute” is significant for the maintainability of every application filed under section 9 IBC, which states that –

After the expiry of the period of 10 days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor if,–

 (d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and 

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if–

 (d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

Therefore it is clear that the NCLAT has based its decision on the ”significance of the pre-existing dispute” regarding the rejection of the application filed under section 9 of IBC.

Conclusion

After analyzing the present matter and assessing the grounds on which NCLT AND NCLAT declined to entertain the matter, we can conclude that both the adjudicating bodies were right in rejecting the application filed by the Operation creditor because the petitioner did not fulfill the relevant pre-conditions required under section 9 and thus his petition was not maintainable. The Operational debtor rightly decided to set off the remaining payment for the non-completion of condition as agreed by both the parties under BTA.

 

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