Invocation of Arbitration Clause Sufficient to Prove Pre-Existing Dispute: National Company Law Appellate Tribunal, Principal Bench, New Delhi
Whether the factum of invocation of an arbitration clause in pursuance of fulfilment of contractual obligations pertaining to operational creditor and corporate debtor, was a question considered by the NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, before a bench consisting of Justice Anant Bijay Singh, Member (Judicial) and Ms. Shreesha Merla, Member (Technical), in the matter of Hindustan Petroleum Corporation Ltd. &amp; Anr. vs. S S Engineers &amp; Anr. [COMPANY APPEAL (AT) (INSOLVENCY) No. 332 of 2020], on 10.01.22. The facts of the case were that considering the legal framework as a whole, i.e., provisions of Section 3(23) along with other provisions of the Insolvency and Bankruptcy Code, 2016, Learned Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata), held that the term “person” in would include sole proprietorship firm as well being eligible to file petition under Section 7 or 9. Additionally, it was held that an analysis of the genuineness of the claim of pre-existing dispute, and amount of outstanding debt, was necessary in the facts and circumstances of the case, hence, it has been so analysed on the basis of the provisional statement prepared and filed by the Corporate Debtor itself. Aggrieved by the Order dated 12.02.2020 passed by the Adjudicating Authority, the appellant preferred this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016. The Learned Counsel for the Appellants, contended that the Application for initiation of CIRCorporate Insolvency Resolution Process (CIRP) was barred by limitation. Additionally, it was argued that various Form-C’s issued by the Corporate Debtor would not amount to an ‘Acknowledgement of Debt’ so as to extend the period of limitation. Further, it was asserted that the project in question was a turnkey project and the bifurcation given in the said Purchase Order was for the purpose of calculation of tax and not otherwise. The said Purchase Orders were under the same tender and the disputes which arose were under the same tender. It was contended that the Adjudicating Authority failed to take note that the Purchase Order and the tender documents provide for a turnkey based project. Further, it was contended that there is a ‘Pre-Existing Dispute’ between the parties as the first Respondent failed to honour the terms of the Purchase Order and its terms and conditions and delayed the supply of material, failed to deploy completion contractors, delayed the execution of the project and rendered inferior and substandard quality of work and finally withdrew from the Project abandoning the site as can be seen from the correspondence and the Minutes of the Meetings held with the Operational Creditor. It was also averred that It is on account of abandoning of the project by the Operational Creditor that the Corporate Debtor had suffered huge losses and made excess payments to the sub-contractors. The Corporate Debtor had cleared all outstanding dues in a timely manner as was agreed to by the first Respondent in the Minutes of the Meetings. It was also submitted that the Corporate Debtor invoked the Arbitration clause seeking to refer the ‘disputes for adjudication by an Arbitrator’. It was also contended that the Application for initiation of CIRP was not properly authorised as the business of the sole proprietorship is not a legal entity; and that the Corporate Debtor acts as the extended limb of the Central Government and cannot be put under CIRP. The Learned Counsel for the Respondents, contended that the work is divided into three parts (a) supply (b) works contract (c) services. He contended that the C Forms/Sales Tax declaration were given for the entire supply portions and this amounts to liability and admission as stipulated under Section 18 of the Limitation Act, 1963. Reliance was placed on various precedents in order to affirm that submission of Form-C is a significant element itself as the same signifies a jural relationship between the parties. It was submitted that when liability is shown in the Balance Sheet, it itself is a clear ‘Acknowledgement of Debt’ by the Company and has the effect of extending the period of limitation under Section 18 of the Limitation Act, 1963. Additionally, it was contended that there is no ‘Pre-Existing Dispute’ and that in the provisional Financial Statement given by the Corporate Debtor, there is a clear admission of debt owed to the Operational Creditor. It was also asserted that the Arbitration Notice issued on 09.07.2016 was for the recovery of the amount as there was an Arbitration clause in the tender and does not in any manner bar any initiation of Insolvency Proceedings. The National Company Law Appellate Tribunal, Principal Bench, New Delhi, considered the relevant facts and arguments, and perused the precedents relied on, in order to come to a conclusion. It was noted from the subject matter of the tender that the execution of the Project is on a lumpsum turnkey basis, whereby and whereunder the contractor was responsible for the entire execution of the work in accordance with the specifications and to the satisfaction of the Corporate Debtor. It was acknowledged that the issue raised in the current appeal needs to be adjudicated on the touchstone of the ratio laid down by the Hon’ble Supreme Court in a catena of judgements with respect to ‘Pre-Existing Dispute’. It was noted that the law was 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. In the present case, it was noted that, the correspondence on record evidences that there indeed was a delay in the performance of the Contract and the final Notice was issued on 01.12.2013 by the Corporate Debtor to complete the work. It was noted that instead of payment of dues, several allegations of inadequacies were raised by the Corporate Debtor on the work. The Tribunal found it pertinent to note that on 09.07.2016, ‘prior to the issuance of the Demand Notice under Section 8 of the Code’, the ‘Operational Creditor’ invoked Arbitration pursuant to the 8 project orders issued by the ‘Corporate Debtor’, which itself substantiates the ‘Existence of a Dispute’. It was also opined that regarding whether ‘C’ Forms, issued in acknowledgement of completion of sale, would amount to ‘Acknowledgement of Debt’ as envisaged under Section 18 of the Limitation Act, 1963, the Tribunal did not wish at this juncture, to go into those aspects as it was of the considered view that there is a ‘Pre-Existing Dispute’ between the parties. The appeal was accordingly allowed, and the Order of the Adjudicating Authority was Set Aside.
National Company Law Appellate Tribunal Principal Bench New Delhi COMPANY APPEAL(INSOLVENCY) No. 3320 Arising out of Order dated 12th February 2020 passed by National Company Law Tribunal Kolkata Bench Kolkata in C.P.No. 1422 KB 2018). IN THE MATTER OF: 1. Hindustan Petroleum Corporation Ltd. Through Power of Attorney Holder Sh. Ramesh Chandra Bagh Deputy General Manager Delhi Retail Regional Office Registered Office: Petroleum House 17 Jamshedji Tata Road Churchgate Mumbai 400020 North Zone Office: 7th Floor Scope Minar Laxmi Nagar District Centre Delhi 110092. 2. Mr. Rakesh Misri Directorof HPCL Biofuels Ltd. Registered Office: Hindustan Bhavan 8 Shoorji Vallabhdas Marg Mumbai 400001. And Residence at: Framroz Court Flat No. 24 5th Floor Marine Drive Mumbai 400020 ...Appellant No. 1 ...Appellant No. 2 1. M s. S.S. Engineers A Sole Proprietorship concern through Sole Registered Office: J 179 MIDC Bhosari Pune 411026 2. HPCL Biofuels Ltd. Through Mr. Nitesh Kumar More Interim Resolution Professional Registered Office: 18 ...Respondent No. 1 2 Rabindra Sarani Poddar Court Gate No. 1 7th Floor Room No. 701 Kolkata 700001 Also at: House No. 9 Shree Sadan 1st Floor Patliputra Colony Patna 800013. ...Respondent No. 2 Ishaan Chakrabarty Mr. Vivek Pandey Mr. Ramji Srinivasan Sr. Advocate along with Mr. Shivkrit Rai Mr. Abir Roy Harshapreetha & Mr. T. Sundar Ramanathan Advocates. Mr. Ratnako Banerjee Sr. Advocate along with Mr. Avinash Das Ms. Sakshi Kapoor Mr. Ranjit Singh Mr. Swatarup Banerjee Ms. Pooja Sethi & Mr. Amar Singh Advocates for R 1. J U D G E M E N T Aggrieved by the Order dated 12.02.2020 in CP IB) No. 1422 KB 2018 passed by the Learned Adjudicating Authority ‘M s. Hindustan Petroleum Corporation Ltd.’ preferred this Appeal under Section 61 of the Insolvency and Bankruptcy Code 2016 and observed as follows: “16. Thus considering the legal framework as a whole i.e. provisions of section 3(23) along with other provisions of the IBC 2016 in our considered view in the present context in our considered view would include sole proprietorship firm as well being eligible to file petition under section 7 or 9 under IBC 2016. We further observe that these aspects and legal provisions were not argued in cases relied on by the Corporate Debtor while deciding the issue as regards to maintainability of the application term "person" Company Appeal(Insolvency) No. 3320 3 by the sole proprietorship firm hence we most humbly submit that such decisions are not applicable. 17. As regards the pre existing dispute we have gone through all the facts stated by the Corporate Debtor but having regard to the quantum of claim in respect of supplies order in our considered view the amount of disputed claim due and payable will be more than Rs. One lakh in any case. Hence such claims do not help the case of Corporate Debtor in substantial manner. Having said so we would further refer to the provisional statement attached with the letter of the Corporate Debtor dated June 25 2014 copy of which has been placed at Page 1779 of Vol. 10 of the paper book to find as to what is the factual position as per the stand of Corporate Debtor on various issues. As per this provisional statement the total purchase order value has been shown as Rs. 3818.72 lakhs. There have been several deductions including for services provided by Corporate Debtor Operational Creditor in the execution of the contract entry tax TDS WCD payment to parties payment to Operational Creditor by the Corporate Debtor sub Operational Creditor. These are normal deductions as per business practice and terms of contract. However it is noteworthy that Liquidated Damage @ 5% amounting to Rs. 190.94 lakhs Performance Bank Guarantee to the tune of 673.6 lakhs work claim of Rs. 352.00 lakhs for boiler house extension P.O. finalisation and additional work 71 lakh have also been considered. The net effect has been worked out by Corporate Debtor as Rs. 500 lakhs receivable from the Operational Creditor. If the boiler house extension and additional work are the amount the Operational Creditor gets reduced to 63.13 lakhs. Further if the amount retained for Performance Bank Guarantee is taken into consideration then the amount payable to Operational Creditor works out at Rs. 610.23 lakhs i.e. 673 63.13). As noted earlier L.D. Is applicable 5% amounting to Rs. 190 94 lakhs has already been deducted. Further amount of Rs. 400.55 lakhs in respect of Purchase Orders issued at the risk and cost of the vendor have also been deducted. Thus all recoveries for non performance default has been considered and therefore amount of Performance Bank Guarantee minus recovery i.e. 610.23 lakhs at least becomes payable by Corporate Debtor to the ignored Company Appeal(Insolvency) No. 3320 4 Operational Creditor. As an adjudicating authority in the proceedings we are not suppose to do this kind of working but to find out the genuineness of the claim of pre existing dispute and amount of outstanding debt it was necessary in the facts and circumstances of the case hence it has been so analysed on the basis of the provisional statement prepared and filed by the Corporate Debtor itself. At the cost of repetition we again state that this statement takes consideration all these disputes raised by Corporate Debtor hence the amount payable by the Corporate Debtor remains in positive which is more than one lakh ultimately that too when we have considered the project as a whole against the claim of Operational Creditor of undisputed dues of supply portion only. We have also gone through the emails which have been taken into consideration while preparing this provisional statement. Hence on the basis of material on record it cannot be said that any other dispute remains to be considered. Apart from this the fact which is crucial to note is that the Corporate Debtor has awarded new work orders to the Operational Creditor subsequently which means that all the disputes relating to this contract had been considered resolved and this fact has remained undisputed. Further Form "C"s have been issued as late as up to March 2018. We further make it clear that we have analysed the provisional statement with limited objective of admissibility of this application and this analysis cannot be considered as expression of opinion on the amount of claim in any manner which may be actually due and payable.” Emphasis Supplied) Submissions of Learned Counsel appearing on behalf of the It is strenuously argued that the Application for initiation of CIRP is ‘barred by Limitation’ as the last payment was made by the ‘Corporate Debtor’ on 07.11.2013 the Demand Notices were issued on 30.08.2017 and on 25.07.2018 and the Application was filed on Company Appeal(Insolvency) No. 3320 5  The various Form C’s issued by the ‘Corporate Debtor’ would not amount to an ‘Acknowledgement of Debt’ so as to extend the period of limitation as the Form C’s were issued for the purpose of paying concessional rate of tax under CST Act 1956 and the rules made therein. Form C does not meet requirement of an ‘Acknowledgement of Debt’ in writing for the purpose of Section 18 of the Limitation Act 1963 as there is no conscious admission of the liability to pay and the commitment towards the liability. In support of this contention the Learned Counsel placed reliance on the following Bom) 402‘Reunion Electrical Manufacturers Ltd.’ 70 SCL 52 ‘Taipack Limited’ Vs. ‘Ram Kishore Nagar Mal’ 2007ARB LR ‘Alliance Paints and Varnish Works Pvt. Ltd.’ Vs. ‘Hari Kishan ‘Zion Steel Limited’ Vs. ‘Subtleweigh Electric Pvt. Ltd.’ Gupta’168 DLT 591 2014) 1 HCC284.  The project was a turnkey project and the bifurcation given in the said Purchase Order was for the purpose of calculation of tax and not otherwise. The said Purchase Orders were under the same tender and the disputes which arose were under the same tender. The Adjudicating Authority failed to take note that the Purchase Order and the tender documents provide for a turnkey based project. Company Appeal(Insolvency) No. 3320 6 It is contended that there is a ‘Pre Existing Dispute’ between the parties as the first Respondent failed to honour the terms of the Purchase Order and its terms and conditions and delayed the supply of material failed to deploy completion contractors delayed the execution of the project and rendered inferior and substandard quality of work and finally withdrew from the Project abandoning the site as can be seen from the correspondence and the Minutes of the Meetings held with the ‘Operational Creditor’. In support of his contention the Learned Counsel placed reliance on Annexure 8 and Annexures 16 93. It is on account of abandoning of the project by the ‘Operational Creditor’ that the ‘Corporate Debtor’ had suffered huge losses and made excess payments to the sub contractors. The ‘Corporate Debtor’ had cleared all outstanding dues in a timely manner as was agreed to by the first Respondent in the Minutes of the Meetings.  The ‘Corporate Debtor’ invoked the Arbitration clause seeking to refer the ‘disputes for adjudication by an Arbitrator’. Two Demand Notices were issued by the first Respondent one on 30.08.2017 and the other on 25.07.2018 both raised a demand for payment in relation to the very same 8 Purchase Orders seen in the letter dated 09.07.2016. The Learned Counsel placed reliance on the ratio of Hon’ble Supreme Court in the following Judgments: ‘Mobilox InnovationsLtd.’ Vs. ‘Kirusa SoftwareLtd.’1 SCC 353. ‘K. Kishan’ Vs. ‘Vijay Nirman Co.Ltd.’17 SCC 662. Company Appeal(Insolvency) No. 3320 7  The Application for initiation of CIRP is not properly authorised as the business of the sole proprietorship is not a legal entity.  The ‘Corporate Debtor’ acts as the extended limb of the Central Government and cannot be put under CIRP. Submissions of Learned Counsel appearing on behalf of the Respondent ‘Operational Creditor’:  Learned Counsel strenuously contended that the work is divided into three parts supply works contract services. He contended that the C Forms Sales Tax declaration were given for the entire supply portions and this amounts to liability and admission as stipulated under Section 18 of the Limitation Act 1963.  Learned Counsel placed reliance on the Judgement of the Hon’ble High Court of Andhra Pradesh ‘M s. Electroflame Ltd. Hyderabad’ Vs. ‘M s. Mittal Iron Foundry Private Limited’ 1998 2) APLJ 6 wherein it was held that submission of Form C is a significant element itself as the same signifies a jural relationship between the parties. He submitted that when liability is shown in the Balance Sheet it itself is a clear ‘Acknowledgement of Debt’ by the Company and has the effect of extending the period of limitation under Section 18 of the Limitation Act 1963. It is also contended that the Balance Sheets of the ‘Corporate Debtor’ has not been placed on  The tender conditions provide that C Forms will have to be issued for the supply portion. The Learned Counsel drew our attention to the 8 Purchase Orders to show that there is a clear breakup of the ‘supply’ Company Appeal(Insolvency) No. 3320 8 portion ‘works contract’ portion and the ‘services’ portion and further submitted that the issuance of C Forms from the period 11.03.2015 to 27.03.2018 is an act of admission of the supply of machinery as also of their value and amounts to ‘part payment’ of the total consideration and hence the Application is not ‘barred by Limitation’. It is contended that there is no ‘Pre Existing Dispute’ and the letters relied upon by the Appellants to urge ‘Pre Existing Disputes’ are all prior to the letter dated 25.06.2014 in which an unascertained sum is claimed as damages by the ‘Corporate Debtor’. In the provisional Financial Statement given by the ‘Corporate Debtor’ there is a clear admission of debt owed ‘Operational Creditor’. The unascertained sum which is sought to be adjusted against the bill amount is a counter claim for alleged damages and cannot be adjusted against the admitted claim. Further there is no defense as against the sum which has been retained against the Purchase Orders.  The Arbitration Notice issued on 09.07.2016 was for the recovery of the amount as there was an Arbitration clause in the tender and does not in any manner bar any initiation of Insolvency Proceedings. The ‘Corporate Debtor’ did not reply to the Notice dated 09.07.2016. There is also no Reply to the first Notice under Section 8 of the Code which is dated 30.08.2017. The second Notice was replied to by letter dated 07.08.2018 in which counter claim for damages was made which is wholly a malafide and a frivolous attempt by the ‘Corporate Debtor’ and is also otherwise ‘barred by Limitation’. Company Appeal(Insolvency) No. 3320 9 A perusal of the ‘Tender Enquiry’ dated 27.06.2012 the ‘Instructions to bidders’ ‘General Conditions of Contract’ and ‘Special Conditions of Contract’ show that the tender is for ‘design engineering manufacture procurement supply transportation to site transit and storage insurance storing at site project management civil work mechanical works electrical works instrumentation work erection installation interfacing testing commissioning performance testing putting into successful commercial operation and handing over additional equipment goods and material centrifugal section including civil foundation for enhancing the boiling house capacity from 1750 TCD to 3750 TCD on Lumpsum Turnkey Basis including civil foundation work’. It is an admitted fact that the ‘Operational Creditor’ was awarded another work on 13.06.2013 and on 08.08.2013 all on a ‘lumpsum turnkey basis’. It is seen from the subject matter of the tender that the execution of the Project is on a lumpsum turnkey basis whereby and whereunder the contractor was responsible for the entire execution of the work in accordance with the specifications and to the satisfaction of the ‘Corporate Debtor’. Clause 5.1 of the General Condition of Contract stipulates that ‘as soon as the work is completed in all respects the contractor shall give Notice of such completion to the site in charge and within 30 days of receipt of such Notice the site in charge shall inspect the work and furnish the contractor with a certificate of completion indicating the defects if any and the date of completion’. Company Appeal(Insolvency) No. 3320 For better understanding of the case the Purchase Order dated 10 15.10.2012is reproduced as hereunder: Company Appeal(Insolvency) No. 3320 11 It is seen from the Purchase Order that there is a detailed breakup as stated by the Counsel for the first Respondent of the ‘supply’ portion ‘works contract’ portion and ‘services’ portion. However the fact remains that the description of the tender read together with the General Conditions of the Contract and Special Conditions of the Contract establish that it is a lumpsum turnkey based contract. It is the case of the ‘Corporate Debtor’ that the ‘Operational Creditor’ had delayed the performance of his obligations and the same was brought to the Notice of the ‘Operational Creditor’ vide Letter dated 11.08.2013. For better understanding of the case the subject letter dated 11.08.2013 is reproduced as hereunder: Company Appeal(Insolvency) No. 3320 12 Company Appeal(Insolvency) No. 3320 The issue raised in this Appeal needs to be adjudicated on the 13 touchstone of the ratio laid down by the Hon’ble Supreme Court in a catena of Judgements with respect to ‘Pre Existing Dispute’. It will be relevant to refer to para 51 of the Judgment of the Hon’ble Apex Court in ‘Mobilox Innovations Ltd.’ Vs. ‘Kirusa Software Ltd.’1 SCC 353: “51. 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 In the instant case the correspondence on record evidences that there indeed was a delay in the performance of the Contract and the final Notice was issued on 01.12.2013 by the ‘Corporate Debtor’ to complete the works. The letter dated 02.01.2014 is detailed as follows: Company Appeal(Insolvency) No. 3320 14 Company Appeal(Insolvency) No. 3320 15 Company Appeal(Insolvency) No. 3320 16 Company Appeal(Insolvency) No. 3320 17 Emphasis Supplied) Company Appeal(Insolvency) No. 3320 12. From the aforenoted letter dated 02.01.2014 the Appellant ‘Corporate 18 Debtor’ raised several issues summarized as hereunder:  Erection and commissioning of electric power was not done.  No monthly Progress Report was submitted in violation of Clause 8.4.3 of the Purchase Order.  Not met a single deadline of completion.  On account of delay in execution the ‘Corporate Debtor’ had to start their own mills with old equipment and lesser capacity on 23.12.2013 and on 24.12.2013 respectively.  On account of incomplete supply of equipment the ‘Corporate Debtor’ was forced to get the same completed by making direct payments in gross violation of the terms of the contracts.  Non supply of 70% of SS Tubes of evaporator and sets and pans.  Extreme poor quality of the equipment supplied by the ‘Operational Creditor’ namely valves pumps etc.  Poor supervision poor coordination poor quality of erection work in violation of clause 15.1.2 of the terms and conditions of the contract.  Centrifugal machines supplied are still not commissioned and no follow up on behalf of the ‘Operational Creditor’. Inadequate manpower used for electrical erection work. Raw juice pumps supplied are not working at both the sides.  Condenser nozzles are not fitted properly at both the locations.  Violation of clause 1.2 of SCC in terms of non supply of instrument cables from MCC to DLS. Company Appeal(Insolvency) No. 3320  Incomplete erection of evaporator sets vertical crystallizers and DCH 19  Lapse of more than one year of award of contract for new equipment and still there are several defects and defaults. Hence clause 23 of ‘owners right to withhold payment’ has been invoked. 13. As against these disputes raised the first Respondent ‘Operational Creditor’ stated in their Reply that despite several requests and reminder letters from 2013 to 2017 the ‘Corporate Debtor’ instead of paying the due amounts raised these baseless allegations and disputes. It is the case of the ‘Operational Creditor’ that there is no ‘Existence of Dispute’ prior to the issuance of Demand Notice. In their email dated 08.04.2013 in relation to the Minutes of the Meeting the ‘Operational Creditor’ had clarified that work progress is subject to prompt payments. July 31 2013 was decided as the commissioning date subject to immediate and prompt payment made by the ‘Corporate Debtor’. The ‘Operational Creditor’ had always shown their willingness to commission and perform their obligations and their senior personnel were stationed at the site of the ‘Corporate Debtor’ and additional staff always visited from time to time. It was only because of pendency of payment of the dues that the ‘Operational Creditor’ had faced difficulties in executing the ongoing Project. The ‘Corporate Debtor’ was making ad hoc payments but not as per the bills raised. The Learned Counsel relied on the emails dated October 12 2013 November 2 2013 and November 14 2013 to buttress his contention that despite repeated reminders the ‘Corporate Debtor’ never responded. The ‘Corporate Debtor’ engaged contractors on their own to commission the plant after the receipt of all the supplied Company Appeal(Insolvency) No. 3320 material from the ‘Operational Creditor’ without their approval or consent 20 and made exorbitant payments to such contractors. No consent has been given to the ‘Corporate Debtor’ to make such payments to the subject contractors directly and therefore such an act was at their own risk. Letters dated May 05th 2014 and May 07th 2014 were addressed to the ‘Corporate Debtor’ seeking supporting documentation of the work undertaken by the contractors engaged by the ‘Corporate Debtor’ but there was no response. The ‘Operational Creditor’ only accepted the debit of Rs.1 25 80 121 against 5% entry tax which was also accordingly been deducted in calculating the principal amount of ‘Operational Debt’ of Rs.13.69 Crores. Except these debits none of the debits have been accepted or consented to by the ‘Operational Creditor’. It is also their case that fraudulent debit notes were raised by the ‘Corporate Debtor as Purchase Orders were placed with Power Former Engineer for repairs of centrifugal machine which was never part of the ‘scope of work’ of the first Respondent. It is strenuously contended by the Learned Counsel that the conduct of the ‘Corporate Debtor’ in awarding fresh Purchase Order in August 2013 at the fag end of the completion of the previous 6 orders while at the same time complaining against their performance is self contradictory and goes to show the malafide intention of the ‘Corporate Debtor’. It is the case of the ‘Operational Creditor’ that all equipment supplied was of good quality and all the valves which were procured were from a vendor mandated by the ‘Corporate Debtor’ only. If the ‘Corporate Debtor’ was dissatisfied with the quality of work or substandard material supplied there are no substantial reasons as to why new contracts were awarded at the fag end of the previous Company Appeal(Insolvency) No. 3320 6 contracts. 87% of the material and services were already completed as per 21 the billing breakup and therefore the question of short supply or purchase of additional material by the ‘Corporate Debtor’ does not arise. It is also vehemently contended that the ‘Operational Creditor’ was constrained to stop supply to the ‘Corporate Debtor’ only on account of failure of payments of pending principal dues which amounts to more than Rs.13 Crores. The ‘Corporate Debtor’ continued to raise various debit notes unilaterally without any supporting documentation for which the ‘Operational Creditor’ cannot be held responsible. 15. The ‘Operational Creditor’ vide email dated 02.02.2014 i.e. one month after the aforenoted letter sought for release of payment. Once again the ‘Corporate Debtor’ on 04.02.2014 and on 28.02.2014 reiterated the poor performance of the ‘Operational Creditor’ on account of which huge losses were incurred. 16. On 29.03.2014 it is the case of the ‘Corporate Debtor’ that the ‘Operational Creditor’ had abandoned the site and therefore the ‘Corporate Debtor’ had to take over the Project and make all the relevant payments to the vendor. The material on record shows that on 28.04.2014 another letter was addressed by the ‘Corporate Debtor’ to the ‘Operational Creditor’ citing all the inadequacies in the performance of the contract. On 19.06.2014 the ‘Operational Creditor’ once again raised the payment for Rs.13.34 Crores. 17. Section 8 of the Code reads as hereunder: creditor.—(1) An operational creditor may on the occurrence of a default deliver a demand notice of unpaid operational debtor copy of an demanding payment of the amount involved in the Company Appeal(Insolvency) No. 3320 22 default to the corporate debtor in such form and manner as may be prescribed. 2) The corporate debtor shall within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub sectionbring to the notice of the operational creditor— a) existence of a dispute record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute b) theof unpaid operational debt— i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor or ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor. Explanation.—For the purposes of this section a “demand notice” means a notice served by an corporate debtor demanding of the operational debt in respect of which the default has occurred. It is clear from Section 8(2)(a) that ‘Existence of a Dispute’ record of the pendency of the Suit or Arbitration Proceeding filed before the receipt of such Notice or invoice in relation to such dispute should be brought to the notice of the ‘Operational Creditor’ within 10 days of receipt of the Demand Notice. In this case the Demand Notice under Section 8 of the Code claiming a sum of Rs.13.69 Crores was issued on 25.07.2018. On 07.08.2018 the ‘Corporate Debtor’ responded to the Demand Notice referring to various communications Minutes of the Meeting and submitted that there was a ‘Pre Existing Dispute’. Though we are conscious of the fact that the ‘Corporate Debtor’ responded to the Demand Notice belatedly the fact remains that the Appellant raised the issue of ‘Existence of a Dispute’ in Company Appeal(Insolvency) No. 3320 their Reply filed before the Adjudicating Authority with all the supporting 23 It is pertinent to note that on 09.07.2016 ‘prior to the issuance of the Demand Notice under Section 8 of the Code’ the ‘Operational Creditor’ invoked Arbitration pursuant to the 8 project orders issued by the ‘Corporate Debtor’ which itself substantiates the ‘Existence of a Dispute’. In the ‘Notice’ invoking Arbitration the ‘Operational Creditor’ has stated that there is an outstanding of Rs.18 12 21 452 and has further stated that they are ready to settle the disputes through Arbitration. A brief perusal of the documents on record evidence that the ‘Operational Creditor’ admitted that the contract was on lumpsum turnkey basis and stated in the Arbitration ‘Notice’ that the ‘Corporate Debtor’ had raised issues relating to non adherence of the terms of the contract. 20. The Hon’ble Apex Court in ‘K. Kishan’ Vs. ‘Vijay Nirman Co.Ltd.’ 2018) 17 SCC 662 has observed as follows: “19. After referring to Section 8 the judgment in Mobilox Innovations case went on to hold that what is important is that the existence of the dispute and or a suit or arbitration proceeding must be pre existing i.e. it must exist before the receipt of the demand notice or invoice as the case may be. 20. The adjudicating authority therefore when examining an application under Section 9 of the Code to determine will have Innovations case SCC p. 394 para 34) 34. ...Whether there is an " operational debt" as defined exceeding Rs 1 lakh ii) Whether the documentary evidence furnished with the application shows that the aforesaid Company Appeal(Insolvency) No. 3320 24 the record of the parties or debt is due and payable and has not yet been paid iii) Whether there is existence of a dispute pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute If any one of the aforesaid conditions is lacking the application would have to be rejected. Apart from the above the adjudicating authority must follow the mandate of Section 9 as outlined above and in particular the mandate of Section 9(5) and admit or reject the application as the case may be depending upon mentioned in Section 9(5). In para 38 this Court cautioned: Innovations case SCC “38.... We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of such debts which is usually smaller than that of financial debts does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the Finally the law was summed up as follows:is clear therefore that once operational creditor has filed an application which is otherwise complete the adjudicating authority must reject the application under Section 9(5)(ii)(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 Company Appeal(Insolvency) No. 3320 25 investigation and whether there is a plausible contention which 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 is not spurious fact and truly exists hypothetical or the adjudicating illusory authority has to reject the application.” 22. Following this judgment it becomes clear that operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt contained in an arbitral award for a small amount of say two lakhs of rupees cannot possibly jeopardise an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the arbitral award passed against it and the mere factum of challenge would be sufficient to state that it disputes the award. Such a case would clearly come within para 38 of Mobilox Innovations being a case of a pre existing ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of rupees two lakhs even though it may not be finally in respect payable as adjudication proceedings thereto are still pending. We repeat that the object of the Code at least insofar as operational creditors are concerned is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist …... 27. We repeat with emphasis that under our Code insofar as an operational debt is concerned all that has to be seen is whether the said debt can be said to be disputed and we have no doubt in stating that the filing of a Section 34 petition against an arbitral award shows that a pre existing dispute which culminates at the first stage of the proceedings in an award continues even after the award at least till the final adjudicatory process under Sections 34 and 37 has taken place.” Company Appeal(Insolvency) No. 3320 26 21. The facts of the present case are being examined in the light of the law laid down by the Hon’ble Supreme Court though the Learned Counsel for the ‘Operational Creditor’ has strenuously contended that the issuance of further work orders and the Notice issued by the ‘Operational Creditor’ invoking Arbitration does not amount to ‘Existence of a Dispute’ the nature of communication on record with rival contentions clarify the ‘Existence of a Dispute’ between the parties prior to issuance of the Demand Notice. It has been time and again held that ‘it is enough that a ‘dispute exists’ between the parties. 22. The communication between the parties as noted in para 10 read together with the Arbitration invoked by the ‘Operational Creditor’ we are of the considered view that there is an ‘Existence of a Dispute’ between the parties which is a genuine dispute and not a spurious patently feeble legal argument or an assertion of fact unsupported by evidence. Therefore we are of the opinion that the ratio laid down by the Hon’ble Apex Court in the aforenoted ‘Mobilox InnovationsLtd.’and ‘K. Kishan’is squarely applicable to the facts of this case. It is the case of the ‘Operational Creditor’ that the ‘Corporate Debtor’ has not filed their Balance Sheets and has categorically raised this issue in their Reply to the Appeal. We are also conscious of the fact that the ‘Corporate Debtor’ has not filed the Balance Sheets to examine the question of limitation referring to the observations of the Hon’ble Supreme Court in ‘Asset Reconstruction Company Limited’ Vs. ‘Bishal Jaiswal and Ors.’ AIR 2021 SC 5249 and in ‘Dena Bank’ Vs. C. Shivakumar Reddy and Ors.’ 167 SCL 453 (Insolvency) No. 3320 regarding whether ‘C’ Forms 27 acknowledgement of completion of sale would amount to ‘Acknowledgement of Debt’ as envisaged under Section 18 of the Limitation Act 1963 we do not wish at this juncture to go into those aspects as we are of the considered view that there is a ‘Pre Existing Dispute’ between the parties and we allow the Appeal. 24. This Appeal is allowed and the Order of the Adjudicating Authority dated 12.02.2020 is set aside. The Adjudicating Authority will now close the proceedings. The Corporate Debtor is released from all rigours of law and is allowed to function independently through its Board of Directors with immediate effect. 25. The Registry is directed to upload the Judgement on the website of this Tribunal and send the copy of this Judgement to the Learned Adjudicating Authority Justice Anant Bijay Singh] MemberMs. Shreesha Merla] MemberNEW DELHI 10th January 2022 Company Appeal(Insolvency) No. 3320 