Supreme Court (01.10.2021) In M/s Jai Balaji Industries Vs. D.K. Mohanty & Anr. [Civil Appeal No. 5899 of 2021 with Civil Appeal No. 5904 of 2021] held that;
We are clearly of the view that the aforesaid enunciations are squarely applicable to the facts of the present case. As noticed, on the date when the appellant chose to serve the notices under Section 8 of the Code (i.e., on 14.02.2020), the arbitral awards in the present case had not attained finality and rejection of petitions under Section 34 of the Act of 1996 had been in challenge in appeals under Section 37 thereof.
We have no hesitation in saying that in such a case, without a final decision on the prayer for restoration, the insolvency process at the instance of an operational creditor cannot be put into operation.
It remains trite that when a suit or appeal is dismissed in default and is restored after the Court is satisfied on the cause shown for default, such restoration would revive the proceedings to their status before default dismissal; and the doctrine of relation back would come into play in the manner that the proceedings shall continue in their original status, unless otherwise stated in the order of restoration or coming out by necessary implication.
We are further clearly of the view that the applications moved by the appellant for initiation of CIRP were required to be rejected in terms of Section 9(5)(ii)(d) of the Code which mandates such rejection if a notice of dispute had been received by the operational creditor or there is record of dispute in the information utility.
Excerpts of the order;
# 1. By way of these appeals under Section 62 of Insolvency and Bankruptcy Code, 2016,1 the appellant, said to be an operational creditor of the respondent No. 2 company, seeks to question the common order dated 17.08.2021 passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi in Company Appeal (AT) (Insolvency) No. 888/2020 and Company Appeal (AT) (Insolvency) No. 889/2020, whereby the Appellate Tribunal, after holding that the operational debt claimed by the appellant was not free from pre-existing dispute, set aside the orders dated 30.09.2020 passed by the National Company Law Tribunal, Kolkata Bench, Kolkata,3 in admitting the application made by the appellant for initiation of Corporate Insolvency Resolution Process concerning the respondent No. 2 company.
# 4. Two separate arbitral awards dated 22.02.2010 and 15.02.2010 were passed in relation to the respective MOUs in favour of the appellant whereunder the respondent company was held liable to make payment of Rs. 4.44 crores and Rs. 2.79 crores respectively.
# 4.1. The respondent company challenged the legality and validity of the awards so made by way of petitions under Section 34 of the Arbitration and Conciliation Act, 1996 These petitions were, however, dismissed by the District Court, Barasat by its orders dated 27.02.20129 and 29.02.201210 respectively. These orders were challenged by the respondent company by way of two appeals11 under Section 37 of the Act of 1996 before the High Court of Calcutta on 07.08.2012. The appeals remained pending for long but, on 22.11.2019, the same were dismissed in default because of non-appearance of the appellant therein (i.e., the respondent company).
# 4.2. On 17.12.2019, the respondent company moved respective applications for restoration of appeals; and these applications were allowed by the High Court on 02.03.2020, after finding sufficient cause for non-appearance on the date of hearing. Consequently, both the appeals under Section 37 of the Act of 1996 stood revived and are said to be pending yet.
# 5. In the meantime and before such restoration of appeals, the appellant sent two separate demand notices under Section 8 of the Code [read with Rule 5 of the Insolvency and Bankruptcy Code (Application to Adjudicating Authority) Rules, 2016] to the respondent company on 14.02.2020, claiming operational debts to the tune of Rs. 7,75,13,684/- and Rs. 5,62,01,258/- under the respective arbitral awards, for the appeals having been dismissed by the High Court.
# 5.1. In terms of Section 8(2)(a) of the Code, the respondent company sent its replies to the demand notices on 25.02.2020, asserting, inter alia, that there existed a dispute and the matter was pending in arbitration proceedings, which pre-dated the receipt of demand notice. Substantiating this assertion, the respondent company stated that the applications for restoration of appeals were pending in the High Court, which were filed much before the receipt of demand notices and with advance notice to the appellant. Thus, the respondent company asserted, within 10 days of service of the demand notices, that the matter of debt owed was sub judice and no operational debt was payable to the appellant.
# 6. Notwithstanding the replies so sent by the respondent company, the appellant proceeded to move the National Company Law Tribunal, Kolkata Bench, Kolkata, seeking initiation of Corporate Insolvency Resolution Process against the respondent company for non-payment of the aforementioned operational debts and filed two applications under Section 9 of the Code. It would be apposite to indicate at this stage itself that NCLAT took note of the fact that such applications, though sworn on 29.02.2020, were filed only on 02.03.2020; however, NCLT had proceeded on the assumption that the applications were filed on 29.02.2020. As would be noticed hereafter later, the date of filing of such applications under Section 9 of the Code has its own bearing in the matter because the aforesaid appeals of the respondent company under Section 37 of the Act of 1996 were restored by the High Court on 02.03.2020.
#7. The Adjudicating Authority, i.e., NCLT, dealt with the applications so made by the appellant under Section 9 of the Code by its common order dated 30.09.2020; and proceeded to examine the question as to whether the appeals under Section 37 of the Act of 1996 were pending on the day the operational debt owed to the appellant became due.
# 7.1. The NCLT took the view that on the day the appellant served demand notices to the respondent company under Section 8 of the Code and on the date of filing of applications under Section 9 of the Code, no proceedings were pending in challenge to the arbitral awards and hence, no dispute as to the debt owed to the appellant was existing on the relevant dates. The NCLT further observed that although the High Court allowed the applications for restoration of appeals under Section 37 of the Act of 1996, this was belatedly done, only on 02.03.2020. The relevant observations of NCLT could be usefully extracted as under: –
“7…..On 14.02.2020, the Operational Creditor sent Corporate Debtor notice under Section 8 of Insolvency and Bankruptcy Code, 2016. It was received by the Corporate Debtor on 18/2/2020 and Corporate Debtor replied vide letter dated 25.02.2020. This application to initiate CIRP of the Corporate Debtor has been filed by the Operational Creditor on 29.02.2020. On that day, no Appeal under Section 37 of A & C Act, 1996 was pending because the Hon’ble High Court restored the Appeal on 02.03.2020.”
# 7.4. In view of the above, the NCLT held that the corporate debtor had committed default in payment of operational debts in spite of the receipt of demand notice; and that there was no dispute pending, by way of arbitral proceedings or otherwise, on the date on which default occurred or the date on which application was filed to initiate CIRP of the corporate debtor. With these observations, the NCLT admitted the applications made by the appellant under Section 9 of the Code in its capacity as an operational creditor; initiated CIRP in relation to the respondent company; declared moratorium; appointed Interim Resolution Professional; and issued further consequential directions.
# 8. Being aggrieved by the orders so passed by the Adjudicating Authority (NCLT), the present respondents preferred respective appeals before the Appellate Tribunal (NCLAT) under Section 61 of the Code contending, inter alia, that the applications under Section 9 of the Code were actually filed only on 02.03.2020 but, on that date, the appeals had been restored by the High Court and such restoration related back to the date of filing of appeals. On the other hand, it was contended on behalf of the appellant that on the date of issuance of the demand notice (14.02.2020), no arbitration proceedings were pending as the appeals were restored only on 02.03.2020 and, therefore, the Adjudicating Authority had rightly admitted the applications for CIRP in the present case.
# 8.2. The NCLAT referred to the decision of this Court in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.: (2018) 1 SCC 353 and, in keeping with the principles enunciated therein, proceeded to examine as to whether there was a pre-existing dispute concerning the debt in question on the date of receipt of demand notice. Thereafter, NCLAT referred to the decision of this Court in the case of Vareed Jacob v. Sosamma Geevarghese & Ors.: (2004) 6 SCC 378, to observe that as per the view of the majority therein, once an appeal is restored to its original number, the interlocutory orders therein stand revived unless otherwise directed. By applying these principles, the NCLAT held that once the appeal under Section 37 of the Act of 1996 was restored, it related back to the original date of filing in the following words: –
“9. What can be gleaned from the majority decision is that upon restoration of Appeal to its original number, the Appellant is restored to the position when the Court has initially dismissed the Appeal for default, unless the Court expressly or by implication excludes the operation of any Orders passed during the period between the dismissal of the restoration.
# 10. The minority view relied upon by the Learned Counsel appearing for ‘Operational Creditor’ is not applicable to this case. The binding Judicial Precedent is the view taken by the majority. That constitutes the Rule of the Court. Having regard to the interpretation of the ratio laid down in the aforenoted Judgement that once an Appeal is restored to its original number, the fact that Interlocutory Orders would stand revived unless otherwise directed, further strengthens the case of the Appellant herein. We are of the considered view that the ratio of majority view of ‘Vareed Jacob’ (Supra) is applicable to the facts of this case and hence, we hold that once an Appeal under Section 37 of the A&C Act, 1996, is restored it relates back to the original date of filing.”
# 8.3. A question regarding effect of pendency of the proceedings for execution of award also cropped up, to which, the NCLAT observed that the execution would come into picture if the appeals under Section 37 had been decided; and ‘money recovery’ and ‘triggering of insolvency’ were not parallel proceedings. The NCLAT also observed that, in fact, IBC discourages recovery proceedings; and the practice of using this Code towards execution of decree or money recovery is rather deprecated.
# 8.4. Moving on, the Appellate Tribunal referred to Section 8 of the Code and observed that the requirement was to see as to whether there existed a dispute or record of pendency of the suit or arbitration proceedings; and with reference to the facts of the present case, construed that a dispute was in existence prior to the issuance of demand notices. It was also observed that the applications for restoration were filed with advance notice to the operational creditor. Having said that, the Appellate Tribunal referred to the enunciations of this Court in the case of Mobilox Innovations and K. Kishan (supra) and held that it was a clear case of a pre-existing dispute between the parties prior to the issuance of demand notice and hence, the operational debt cannot be said to be an undisputed one. The relevant part of observations and findings of the Appellate Tribunal (NCLAT) in its impugned common order dated 17.08.2021 could be usefully extracted as under: –
17. The ratio in the aforenoted Judgement is squarely applicable to the fact of the instant case as it can be seen from the record that the entire basis for the Section 8 Notice is that the Appeals preferred by the ‘Corporate Debtor’ under Section 37 of the A&C Act, 1996 were dismissed for default on 22.11.2019…
# 16. We are clearly of the view that the aforesaid enunciations are squarely applicable to the facts of the present case. As noticed, on the date when the appellant chose to serve the notices under Section 8 of the Code (i.e., on 14.02.2020), the arbitral awards in the present case had not attained finality and rejection of petitions under Section 34 of the Act of 1996 had been in challenge in appeals under Section 37 thereof. Even if the said appeals were dismissed in default, the respondent company had moved for restoration with advance notice to the appellant. It had not been a clear case of the corporate debtor being in default with no pre-existing dispute.
# 17. The appellant, however seeks to suggest that the appeals having been dismissed in default and having not been restored as on the date of notice, the law requiring pre-existing dispute is of no application. In that regard, restoration of the appeals is sought to be termed by the appellant as a ‘later development’ or a ‘post-facto event’. The submissions are neither in conformity with the relevant facts nor compatible with the law applicable.
# 17.1. On the factual aspect, it remains rather indisputable that even if the appeals were dismissed in default on 22.11.2019, the respondent company indeed moved the applications for restoration on 17.12.2019 with advance notice to the appellant. Thus, on the date of issuance of the notices (i.e., 14.02.2020), the appellant was aware of the fact that the appeals under Section 37 of the Act of 1996 had not been decided on merits and the applications for restoration had been moved within 30 days of such default dismissal. It would be interesting to draw a parallel with the illustration stated by this Court in the above quoted paragraph 29 of K. Kishan (supra), that even if a Section 34 petition had been instituted in a wrong Court and application under Section 14 of the Limitation Act to get over the bar of limitation was being pursued, the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act. The same analogy would apply, rather with more emphasis and force, in relation to a default dismissal where there had not been any adjudication on merits and where the prayer for restoration is pending consideration. We have no hesitation in saying that in such a case, without a final decision on the prayer for restoration, the insolvency process at the instance of an operational creditor cannot be put into operation.
# 19.1. It is difficult to find any application of the aforesaid enunciation to the question at hand. It remains trite that when a suit or appeal is dismissed in default and is restored after the Court is satisfied on the cause shown for default, such restoration would revive the proceedings to their status before default dismissal; and the doctrine of relation back would come into play in the manner that the proceedings shall continue in their original status, unless otherwise stated in the order of restoration or coming out by necessary implication. The principles stated in Addagada Raghavamma (supra) do not apply to the present case; and the reference to this decision remains entirely inapposite for the present case.
# 22. We are further clearly of the view that the applications moved by the appellant for initiation of CIRP were required to be rejected in terms of Section 9(5)(ii)(d) of the Code which mandates such rejection if a notice of dispute had been received by the operational creditor or there is record of dispute in the information utility. Both the features are present in this case. The respondent company had unambiguously responded to the notices sent by the appellant within 10 days with the assertions that the applications for restoration of appeals were pending in the High Court, which were filed much before the receipt of demand notices and with advance notice to the appellant.
# 23. It is also significant to notice that as on the very day of filing of the applications under Section 9 by the appellant, i.e., 02.03.2020, the appeals were indeed restored by the High Court. The NCLAT took note of the fact that the applications, though sworn on 29.02.2020, were filed only on 02.03.2020. Thus, a wishful attempt of the appellant to use the default dismissal of appeals for initiation of CIRP had also lost its ground on the date of filing of the applications under Section 9 of the Code. The NCLT had proceeded from an altogether wrong angle and even while passing the order on 30.09.2020, did not pause to consider that the appeals stood restored on the date of filing of the applications under Section 9 and therefore, even the hyper-technical stance of the appellant was also knocked out. The NCLT had, in fact, totally misconstrued the clear and emphatic expositions in K. Kishan (supra).
# 24. For what has been observed and discussed hereinabove, we are satisfied that the Appellate Tribunal (NCLAT) has rightly set aside the orders passed by the Adjudicating Authority (NCLT) and has rightly closed the proceedings against the respondent company. There is absolutely no reason to consider any interference at the instance of the appellant.
# 25. Accordingly, these appeals fail and are dismissed. All pending applications also stand disposed of.
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