Statutory First Charge & Enforcement of Security Interest by Financial Creditor (Bank) in SARFAESI.

Recently, in two judgments, High Court Mumbai & NCLAT had passed on the burden of satisfaction of “Statutory First Charge holders - MVAT & EPF/Workmen’s dues respectively '' on the auction purchaser under SARFAESI.

i). HC Bombay (18.02.2021) in Medineutrina Pvt. Ltd. Vs District Industries Centre (D.I.C.) and Other  [Writ Petition No. 7971/2019] held that;

• It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes.

• Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. 

• Thus the purchase of the property on 'as is where is and what is there is ' basis, would mean that the property was being had by the auction purchaser, with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property, cannot be permitted to quibble out of it, on the alleged plea of not being noticed about any such liability/imposition.

• That apart, it is equally a duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities. He takes it lock, stock and barrel, with everything.

• Thus even in the present case, the dues as claimed by the respondent no.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent no.2, before the auction, the petitioner, would be liable to pay the same to the respondent no.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent no.2, it would then be entitled to a no dues certificate from the respondent no. 2.

 

ii). NCLAT (03.03.2021) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors. [Majority judgement in Company Appeal (AT) (Insolvency) No.1194 of 2019] held that; - 

• There is considerable force in the contention raised by Respondent No.4 that dues of EPF are an encumbrance on the establishment and become first charge thereupon within the purview of Section 11(2) of the Employee’s Provident Funds and Miscellaneous Provisions Act, 1952. 

• we are of the considered opinion that the Appellant auction purchaser had accepted the acquisition of Unit No.1 subject to condition of ‘as is where is basis, as is what is basis, whatever there is basis’ and being fully aware of the nature of liabilities passing on to it in consequence of such sale besides being aware of the issuance of demand notice by Respondent No.2- ‘Rashtriya Anil Steel Majdoor Sangh’, thus the liabilities said to have been acquired by the Appellant in terms of the impugned order cannot be held to be an erroneous conclusion warranting interference.

Contra view; 

A. Excerpts of Dissenting Judgement Per; V. P. Singh, Member (T) in Tarun International Ltd. Vs  Vikram Bajaj (RP for Anil Special Steel Industries Ltd.) & Ors.

• # 35.The first provision to Section 13 of the SARFAESI Act provides that where the secured creditor of a company opts to realise security, he may retain the secured assets' sale proceeds after depositing the workmen's dues to Liquidator. The second proviso to Section 13 imposes a duty on the liquidator to intimate the secured creditor about the workmen's dues. In such cases where workmen's dues cannot be ascertained, the liquidator is obligated to intimate the estimated amount of workers dues to the secured creditor. In such a case, the secured creditor may retain the secured assets' sale proceeds after depositing the amount of such estimated dues with the liquidator. 4th proviso to Section 13 of SARFAESI Act imposes a duty on the secured creditor to give an undertaking to the liquidator to pay the balance of the workmen dues if any. Thus, it is clear that if a company is being wound up and the secured creditor of such a company opts to realise his security, then the secured creditor has authority to retain the secured assets' sale proceeds after depositing the workmen's dues.

B. Blogger’s comments;

The question is, when MVAT dues are deemed to have statutory first charge on the assets of the CD, how come subsequent charge holders, " Bank" took possession of the unit of CD and auctioned the same under SARFAESI. Any realization of assets by a secured creditor is subject to satisfaction of the first/prior charge holder. ( Section 101 of “Transfer of Property Act.”)

 

Secondly, whether " Bank" carried the consent of other prior / pari-passu charge holders & secured creditors, (MVAT), prior to enforcement of security interest, in terms of section 13(9) of the SARFAESI Act. 

 

Thus, in my opinion, the following rulings of the Hon’ble High Court are relevant, when the property is sold by the owner of the property (“Doctrine of Merger of Charge” - Section 101 of “Transfer of Property Act.1882”. Subsequent/subordinate charge gets merged with the property on transfer or enforcement of security interest by creditor.). Satisfaction of first/prior charge holders is the duty of a secured creditor who exercises / enforces his security interest.

• “It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes. . . . . 

• Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.” 

 

In both the judgements (supra), the position in respect of registration of statutory charge &/or attachment orders with CERSAI, in terms of Section 26B & 26C of The  SARFAESI  Act, 2002 was not examined.

 

Let’s look into the provisions of SARFAESI & other Statutes

 

i). Transfer of Property Act,1882

# 101. No merger in case of subsequent encumbrance. - No merger in case of subsequent encumbrance Any mortgagee of, or person having a charge upon, immovable property, or any transferee from such mortgagee or charge-holder, may purchase or otherwise acquire the rights in the property of the mortgagor or owner, as the case may be, without thereby causing the mortgage or charge to be merged as between himself and any subsequent mortgagee of, or person having a subsequent charge upon, the same property; and no such subsequent mortgagee or charge-holder shall be entitled to foreclose or sell such property without redeeming the prior mortgage or charge, or otherwise than subject thereto.

 

The  SARFAESI  Act, 2002

# Section 13. Enforcement of security interest.-

(9) Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than sixty per cent. in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

 

# Section 26B. Registration by secured creditors and other creditors. -

(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.

 

# Section 26C. Effect of the registration of transactions, etc. -

(1) Without prejudice to the provisions contained in any other law, for the time being in force, any registration of transactions of creation, modification or satisfaction of security interest by a secured creditor or other creditor or filing of attachment orders under this Chapter shall be deemed to constitute a public notice from the date and time of filing of particulars of such transaction with the Central Registry for creation, modification or satisfaction of such security interest or attachment order, as the case may be.

 

(2) Where security interest or attachment order upon any property in favour of the secured creditor or any other creditor are filed for the purpose of registration under the provisions of Chapter IV and this Chapter, the claim of such secured creditor or other creditor holding attachment order shall have priority over any subsequent security interest created upon such property and any transfer by way of sale, lease or assignment or licence of such property or attachment order subsequent to such registration, shall be subject to such claim:

Provided that nothing contained in this sub-section shall apply to transactions carried on by the borrower in the ordinary course of business.

 

# Section 26E. Priority to secured creditors.—Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Explanation.—For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.

 

Insolvency and Bankruptcy Code, 2016.

# Section 52. Secured creditor in liquidation proceedings. -

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

 

Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.

# Regulation 37. Realization of security interest by secured creditor

(7) The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).

 

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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Ineligibility of the promoters/directors of CD under section 29A(c).

It’s a general perception that erstwhile promoters/directors of CD (under CIRP) are disqualified from submitting resolution plan under the provisions of Section 29A(c), except for the exemption granted in case of MSME units under Section 240A. Let’s look into the provisions of the Code & rulings of Hon’ble Supreme Court of India on this aspect.

# Section 29A. Persons not eligible to be resolution applicant. -

• XXXXXX

• (c) at the time of submission of the resolution plan has an account, or an account of a corporate debtor under the management or control of such person or of whom such person is a promoter, classified as non-performing asset in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949) or the guidelines of a financial sector regulator issued under any other law for the time being in force, and at least a period of one year has lapsed from the date of such classification till the date of commencement of the corporate insolvency resolution process of the corporate debtor:

• Provided that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan:

• XXXXX

• (d) has been convicted for any offence punishable with imprisonment –

• (i) for two years or more under any Act specified under the Twelfth Schedule; or

• (ii) for seven years or more under any law for the time being in force:

• Provided that this clause shall not apply to a person after the expiry of a period of two years from the date of his release from imprisonment:

• Provided further that this clause shall not apply in relation to a connected person referred to in clause(iii) of Explanation I];

Hon’ble Supreme Court of India in ArcelorMittal India Private Limited Vs. Satish Kumar Gupta and Ors. (Civil Appeal Nos. 9402 – 9405 of 2018) observed as under;

• # 42. When we come to sub-clause (c) of Section 29A, the first thing that was argued, at which the parties were at loggerheads, was the time at which sub-clause (c) can be said to operate. According to Shri Rohatgi, in the original sub-clause (c), preamendment, the time must necessarily be the date of commencement of the corporate insolvency resolution process, as is mentioned by the Section itself. According to Messrs Salve and Singhvi, it is clear that since submission of a resolution plan is spoken of, it is the time of submission of such plan and not any anterior stage.

• # 43. According to us, it is clear that the opening words of Section 29A furnish a clue as to the time at which sub-clause (c) is to operate. The opening words of Section 29A state: “a person shall not be eligible to submit a resolution plan…”. It is clear therefore that the stage of ineligibility attaches when the resolution plan is submitted by a resolution applicant. The contrary view expressed by Shri Rohatgi is obviously incorrect, as the date of commencement of the corporate insolvency resolution process is only relevant for the purpose of calculating whether one year has lapsed from the date of classification of a person as a non performing asset. Further, the expression used is “has”, which as Dr. Singhvi has correctly argued, is in praesenti. This is to be contrasted with the expression “has been”, which is used in subclauses (d) and (g), which refers to an anterior point of time. Consequently, the amendment of 2018 introducing the words “at the time of submission of the resolution plan” is clarificatory, as this was always the correct interpretation as to the point of time at which the disqualification in sub-clause (c) of Section 29A will attach. In fact, the amendment was made pursuant to the Insolvency Law Committee Report of March, 2018. That report clearly stated:

• -“In relation to applicability of section 29A(c), the Committee also discussed that it must be clarified that the disqualification pursuant to section 29A(c) shall be applicable if such NPA accounts are held by the resolution applicant or its connected persons at the time of submission of the resolution plan to the RP.”

The ruling of the Hon’ble Supreme Court of India has clarified as to the time frame the disqualification attaches to the resolution applicant under Section 29A(c), and have made it clear that the disqualification has to be seen at the time of submission of the resolution plan, not at an anterior point of time. 

Here, it is worth noting that with the commencement of the insolvency process, the erstwhile promoters/directors are divested of the management and control of the CD and the same (management & control of CD) passes on to IRP/RP. As such, at the time of filing of resolution plan, erstwhile promoters/directors, are not having the control/management of the CD. 

Secondly the proviso to the sub-section (c) provides that the person shall be eligible to submit a resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non performing asset accounts before submission of resolution plan, which shows that disability under Section 29A(c) is not of permanent in nature, and is curable. 

Thus with the above observations Hon’ble Supreme Court of India has rendered the clause (c) of Section 29A infructuous/meaningless as far as the promoters/directors etc. of CD are concerned, as at the time of submission of resolution plan CD is not under the management or control of its erstwhile  promoters/directors, rather CD, during insolvency (CIRP), is under the management & control of IRP/RP. 

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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Status of Disputed Claim in Insolvency Proceedings (CIRP) - Creditor’s perspective

Disputed claim admitted for notional amount of INR 1.

NCLT Ahmedabad (08.03.2019)  in IA 49 of 2018 (Essar Power Limited vs. Resolution Professional of ESIL & Anr), directed RP to include this claim (Rs 893,21,52,807 ) as disputed and admit notional amount of INR 1 against this claim subject to final outcome of dispute pending.(Page-52/153 of the order). The said views of the NCLT were upheld by the Hon’ble SCI.

 

Case reference;

SCI (15.11.2019) in CoC of Essar Steel India Limited Vs Satish Kumar Gupta & Ors.(Civil Appeal No. 8766-67 OF 2019) ruled as under:

• # 102. So far as Dakshin Gujarat Vij Co. (Respondent No. 11 in Civil Appeal Diary No. 24417 of 2019), State Tax Officer (Respondent No. 12 in Civil Appeal Diary No. 24417 of 2019), Gujarat Energy Transmission Corporation Ltd. (Respondent No. 17 in Civil Appeal Diary No. 24417 of 2019) and Indian Oil Corporation Ltd. 162 (Respondent No. 18 in Civil Appeal Diary No. 24417 of 2019) are concerned, the resolution professional admitted the claims of the abovementioned respondents notionally at INR 1 on the ground that there were disputes pending before various authorities in respect of the said amounts. However, the NCLT through its judgment dated 08.03.2019 directed the resolution professional to register the entire claim of the said respondents. The NCLAT in paragraphs 43 and 196 of the impugned judgment upheld the order passed by the NCLT as aforesaid and admitted the claim of the abovementioned respondents. We therefore hold that this part of the impugned judgment deserves to be set aside on the ground that the resolution professional was correct in only admitting the claim at a notional value of INR 1 due to the pendency of disputes with regard to these claims.

 

Now with this ruling of Hon’ble SCI, the matter stands settled that in case of pendency of  dispute the claim of a creditor has to be taken at the notional value of INR 1.

 

When the claim of the creditor has been admitted at the notional value of INR 1, the concerned creditor will be deprived of any share in the distribution of funds in the resolution plan approved by CoC & AA, and adding to the injury, the said resolution plan shall be binding on the creditor in terms of section 31(1) of the code which reads as under.

 

# Section 31. Approval of resolution plan. -

(1) If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) of section 30 meets the requirements as referred to in sub-section (2) of section 30, it shall by order approve the resolution plan which shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.

Provided that the Adjudicating Authority shall, before passing an order for approval of resolution plan under this sub-section, satisfy that the resolution plan has provisions for its effective implementation.

 

As far as other recourse available to the creditor of a disputed claim are concerned, the following rulings of Hon’ble SCI are of paramount importance, which have effectively sealed /denied any other recourse available to the creditor of a disputed claim.

 

Case Law;

i). SCI (15.11.2019) in CoC of Essar Steel India Limited Vs Satish Kumar Gupta & Ors.(Civil Appeal No. 8766-67 OF 2019) ruled as under;

• # 67.   . . . . .  A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.

 

ii). Supreme Court (13.04.2021) in Ghanashyam Mishra and Sons Pvt. Ltd. Vs. Edelweiss Asset Reconstruction Company Ltd.  [Civil Appeal No. .8129 of 2019] held that;

• # 95. In the result, we answer the questions framed by us as under:

• (i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

• (ii) 2019 amendment to Section 31 of the I&B Code is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect;

• (iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

• # 130.  . . . .As such, when the resolution plan is approved by NCLT, the claims, which are not part of the resolution plan, shall stand extinguished and the proceedings related thereto shall stand terminated. . . . .

 

Conclusion

Thus, in the case of a disputed claim, it will be in the interests of the creditor to settle the dispute as early as possible, preferably before the approval of the resolution plan by the CoC. Now the question arises, with whom  the creditor can settle the dispute during CIRP. Here following provisions of the Code may be of some help.

 

# Section 17. Management of affairs of corporate debtor by interim resolution professional. -

(1) From the date of appointment of the interim resolution professional, -

• (a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

• (b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(2) The interim resolution professional vested with the management of the corporate debtor, shall-

• (a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;

 

# Section 23. Resolution professional to conduct corporate insolvency resolution process. -

(1) Subject to section 27, the resolution professional shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period:

Provided that the resolution professional shall, if the resolution plan under sub-section (6) of section 30 has been submitted, continue to manage the operations of the corporate debtor after the expiry of the corporate insolvency resolution process period until an order is passed by the Adjudicating Authority under section 31

(2) The resolution professional shall exercise powers and perform duties as are vested or conferred on the interim resolution professional under this Chapter.

 

In my view, the IRP /RP while managing the affairs of the Corporate Debtor, as a going concern, has powers to settle the disputes etc. Settlement of disputes with the creditors, in due course of business, is within the powers vested in IRP/RP for management of  CD. (Section 17 read with Section 23, quoted supra above). In my opinion, this will not require the prior approval of CoC under the provisions of Section 28. 

 

Now the question arises, which claims, during the insolvency process (CIRP), are / can be taken as “Disputed Claims”. Let’s look the provisions of the Code and some of the case laws’

 

# Section 5. Definitions;

(6) “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;

 

Case-law on Disputed claims 

i). Supreme Court of India (31.08.2017) in Innoventive Industries Ltd. v. ICICI Bank & Anr.(Civil Appeal Nos. 8337 - 8338 of 2017) held that;

• # 27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of “debt”, we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a “claim” and for the meaning of “claim”, we have to go back to Section 3(6) which defines “claim” to mean a right to payment even if it is disputed.

• # 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration  proceedings, which is pre existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code.

 

ii). Supreme Court of India(01.09.2017) in Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited (Civil Appeal No. 9405 Of 2017) held that;

• # 30. It is settled law that the expression “and” [occurring in section 8(2)(a)] may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation.

• # 35. We have already noticed that in the first Insolvency and Bankruptcy Bill, 2015 that was annexed to the Bankruptcy Law Reforms Committee Report, Section 5(4) defined “dispute” as meaning a “bonafide suit or arbitration proceedings…”. In its present avatar, Section 5(6) excludes the expression “bonafide” which is of significance. Therefore, it is difficult to import the expression “bonafide” into Section 8(2)(a) in order to judge whether a dispute exists or not.

• # 40. 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.  …....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 application

• # 43. ………. a “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6).

 

iii). Supreme Court of India (14.08.2018) in K. Kishan Vs. M/S Vijay Nirman Company Pvt. Ltd.(Civil Appeal No. 21824 of 2017 With Civil Appeal No. 21825 of 2017) held that;

• # 18. 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 & 37 has taken place.

• # 19. There may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation

• # 20) We may hasten to add that there may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

• # 23. ……… Even if it is clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations, an insolvency petition cannot be proceeded with further.

 

iv). NCLT Ahmedabad Bench (10.08.2020) Raghuvir Buildcon Private Limited Vs. Ketan Construction Limited.[C.P. (I.B.) No.57/9/NCLT/AHM/2019 With IA 201 of 2020 IA 123 of 2020] held that;

• # 18 Thus, the parameter to ascertain as to whether there is a dispute or otherwise can be summarized as under:

• i) The dispute should have prima facie bona fide and exists naturally in a given fact;

• ii) The grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory or misconceived;

• iii) The existence of a dispute need not require further to be proved;

• iv) The dispute should be natural and not a made to believe dispute.

• The extent of ascertainment/ examination of such parameters defines the scope of exercise of jurisdiction by the Adjudicating Authority. It has been pleaded that  Adjudicating Authority has limited jurisdiction as compared to a Trial Court and Civil Court. We do not have any quarrel or dispute with this proposition. However, intensity of the examination would depend upon the facts and documentary evidences produced by each of the parties in support of their claims. Having said so, it would also be an endeavor of the Corporate Debtor to prove that there is a pre-existing dispute to avoid its obligation. The Hon’ble Supreme Court has said that such defense should not be feeble legal argument or an assertion of fact unsupported by evidence. Further, such defence should not be spurious or merely bluster, frivolous or vexatious. It should not be a made to believe story. However, merits of the case need not to be a factor to decide the matter. These observations itself define the scope that the Adjudicating Authority has to look into the material produced before it and to analyze the same to reach some conclusion. It can neither be precluded from doing so nor it is precluded by these observations, hence, the Adjudicating Authority is well within its jurisdiction when it analyzes the accounting records, correspondences, contract etc. as produced by the parties to arrive at a conclusion as regard to nature and existence of dispute. This exercise may require some deep analysis in some case or in some cases it may be a very minor examination based upon the facts of each case and material produced by the parties. In cases, in our considered view, where greater analysis is required then in that situation, such analysis would not amount to roving inquires or exercise beyond jurisdiction as it would be the demand of the situation.

• # 19. Apart from the above legal position, the question which comes to our mind is that in what circumstances a fact situation can be categorized as dispute i.e. when does a disagreement or difference of opinion become a dispute. As observed earlier that the term ‘dispute’ has been defined inclusively in IBC, 2016, however, basic meaning of the term ‘dispute’ has not defined, hence, we would have to look for the meaning of this term as per law dictionaries/other legal forums.

• 19.1.The Black’s Law Dictionary defines the term ‘dispute’ as under:  A conflict or controversy, esp. one that has given rise to a particular law suit.

• 19.2. West’s Encyclopedia of American Law, edition 2 describes the term “dispute” as under:  A conflict or controversy; a conflict of claims or rights; an assertion of a right, claim, or demand on one side, met by contrary claims or allegations on the other. The subject of litigation; the matter for which a suit is brought and upon which issue is joined, and in relation to which jurors are called and witnesses examined. A labor dispute is any disagreement between an employer and his or her employees concerning anything job-related, such as tenure, hours, wages, fringe benefits, and employment conditions.

• 19.3. The term ‘dispute’ as per U.S Legal.com is described as under:  “Dispute means a controversy. It refers to an allegation of fact by one person denied by another person, both acting with some show of reason.

• # 20. Thus, at a glance itself, it can be said that a threshold or stage is to be crossed to convert a difference/disagreement into dispute. In other words, normally commercial / legal differences per se are not dispute unless such differences are ascertained into a claim on which both the parties have opposite /different views and want to settle the same through some legal process or otherwise. Thus, in our view, routine correspondence in commercial relationship cannot automatically or necessarily be considered and admitted as dispute unless such stage is reached.

v). NCLT (PB) New Delhi.(21.03.2018) in Grasim Industries Limited vs. Tecpro Systems Ltd. [CA -19(PB) /2018 in (IB) -197(PB)/2017] held that,

• he (IRP) is  under mandatory duty to verify every claim and maintain the  list of creditors containing their names along with the amount claimed by them and the amount of their claim admitted.

• Such a claim is not verifiable from the books of accounts of the Corporate Debtor. Moreover, the same amount is subject matter of arbitration before the Arbitral Tribunal and there is a specific bar created by the admission order in terms of Section 14 of the Code

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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