SUPREME COURT SHEDS LIGHT ON THE MEANING OF A  DISPUTE UNDER SECTION 8(2)(A) OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016

SECTION 8(2) OF IBC

The Supreme Court, in the case of M/s S.S. Engineers v. Hindustan Petroleum Corporation Limited & Ors.^[1] passed an Order on July 15^th 2022 which has shed light on the meaning of a dispute under Section 8(2)(a) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

In the year 2012, purchase orders were issued by Hindustan Biofuels Limited in favour of SS Engineers to enhance the juice heater, evaporator section and pan and crystallization section at Sugauli Plant on a turnkey basis under the business arrangement between the parties. SS Engineers/the appellant raised invoices against the purchase orders between November 21^st 2012 to March 25^th 2013.

However, in an email addressed to the appellant on December 12^th 2013, Hindustan Biofuels Limited claimed that the appellant has been violating the terms of the purchase orders, which had resulted in significant losses for the company. Hindustan Biofuels Limited informed the appellant in a letter dated January 2^nd 2014 that the appellant had violated the general terms and conditions, including issuing incorrect invoices for materials that had not been supplied, failing to renew bank guarantees, failing to carry out supplies, and failing to complete work within the allotted time frame. As a result, Hindustan Biofuels Limited issued a debit note for INR 1,49,900 on January 3^rd 2014.

The appellant sent a demand notice dated August 30^th 2017 to Hindustan Biofuels Limited under Section 8 of the IBC, claiming that Hindustan Biofuels Limited owed the appellant INR 18,12,21,452 along with interest as of December 30^th 2013. On August 7^th 2018, the appellant sent a second demand notice to Hindustan Biofuels Limited. Hindustan Biofuels Limited replied to the demand notice dated July 25^th 2018 and disputed the claim. 

SS Engineers, as an operational creditor, filed an application before the National Company Law Tribunal (“NCLT”), Kolkata under Section 9 of the IBC, for the initiation of a corporate insolvency resolution professional ("CIRP") against Hindustan Biofuels Limited, the corporate debtor, a wholly owned subsidiary of Hindustan Petroleum Corporation Limited. NCLT admitted the appellant’s application and CIRP was initiated.

Hindustan Biofuels Limited challenged the Order dated February 12^th 2020 passed by NCLT and filed an appeal in National Company Law Appellate Tribunal (“NCLAT”), Principal Bench, New Delhi. NCLAT set aside the Order dated February 12^th 2020 on the ground that there were pre-existing disputes between the parties in respect of the claim of the appellants.

The appellants challenged the Order dated January 10th 2022 passed by NCLAT before the Hon’ble Supreme Court. 

The Hon'ble Supreme Court, relying on the judgments in Mobilox Innovations Private Limited v. Kirusa Software Private Limited^[2] and K. Kishan v. Vijay Nirman Co. (P) Limited^[3] concluded that when assessing an application by an operational creditor under Section 9 of the IBC, the adjudicating authority/NCLT would have to examine:

• Whether there was an operational debt exceeding INR 1,00,000;  
• Whether the evidence submitted with the application showed that debt exceeding INR 1,00,000 was due and payable and had not yet been paid; and 
• If there was a dispute between the parties or record of the pendency of a suit or arbitration proceedings filed before the receipt of demand notice concerning such a dispute. 

After examining communications between the parties and other records, the Hon’ble Supreme Court dismissed the appeal and held that the NCLT committed a grave error of law by admitting the application of the appellant as the operational creditor, even though there was a pre-existing dispute as noted by NCLT.

Shilpi Pandey, Senior Associate

[1] Civil Appeal No. 4583 of 2022; July 15, 2022

^[2] (2018) 1 SCC 353

^[3] (2018) 17 SCC 662