Limitations on power of Adjudicating Authority while adjudicating application u/s 9 of the IBC.

Limitations on power of Adjudicating Authority while adjudicating application u/s 9 of the IBC.

Image Credit: NCLAT

Introduction

Section 9(5) of the Insolvency and Bankruptcy Code, 2016 (IBC), deals with the power of the adjudicating authority (i.e., National Company Law Tribunal/ NCLT) to admit the application and communication of such decision to the operational creditor and the corporate debtor within fourteen days from the receipt of the application.

Defined Powers u/s 9 of IBC

The NCLT has only two options, either to admit the application or to reject the same and there is no third option to the Adjudicating Authority under law.

In case if there is no pre-existing disputes under Section 8(2) of the Code that deals with ‘Insolvency proceedings by operational creditor’ that arose between the corporate debtor and/ or if, in case any suit or arbitration proceedings are pending against the Corporate Debtor who has committed a default, or there is an alternative remedy available, based on these mere facts the NCLT cannot refuse to admit the application.

The IBC cannot be used as a debt recovery mode and the Code does not provides any dispute adjudication/resolution mechanism between the parties.

Over-riding effect of Section 238 of the Code

The marginal notes to Section 238 of the IBC provide that “Provisions of this Code to override other laws”, meaning thereby that the non-obstante clause of the Code provides an overriding effect to the Code over any other laws.

Hence, this provision would not admit of the alternative remedy being a disabling provision for Operational Creditor to seek resolution of a dispute regarding the operational debt claimed against the Corporate Debtor by triggering the Corporate Insolvency Resolution Process.

Sodexo India Services Pvt. Ltd. v. Chemizol Additives Pvt. Ltd., Comp. App. (AT) (Insolvency) No. 1094 of 2020

Brief facts of the case

1. M/s Sodexo Food Solutions India Pvt. Ltd. , an Operational Creditor entered into an agreement dated 14.12.2014 with the corporate-debtor for providing catering and canteen services for one year.

2. The agreement provided that the corporate debtor shall pay to the operational creditor, timely and in case of default, the corporate debtor shall be liable to pay Rs. 5, 45,000 along with interest @ 8% p.a.

3. No dispute ever with regard to the services.

4. However, from April 2018 onwards the corporate debtor defaulted in making payments, despite reminders.

5. On not receiving any reply to the notice sent by operational creditor, it approached NCLT against the corporate debtor under section 9 of the Code.

Decision of the NCLT

a. The NCLT held that before initiation of CIRP against the corporate debtor, it must satisfy that the debt in question should be undisputed. Mere acceptance of debt by the corporate debtor doesn’t give the right to the operational creditor to initiate proceedings against it.

b. The NCLT also took into account the fact that the corporate debtor being a solvent company, the initiation of CIRP against it would not solve any purpose.

c. NCLT further observed that it has power to refer the matter pending before it, to Mediation and Conciliation, u/s 442 of the Companies Act, 2013.

d. The NCLT held that the party should exhaust the alternate remedy available to it and then approach the NCLT. Hence, NCLT directed the operational creditor to invoke the arbitration clause and refer the dispute to the arbitrator.

e. The NCLT disposed of the application wherein it observed that parties should make requisite endeavors for resolution regarding the outstanding debt; otherwise, the appellant would be at liberty to invoke the arbitration clause contained in the Agreement.

Issue

On Appeal by the Operational Creditor before the NCLAT, the issue which arise for adjudication was as to whether the NCLT’s power under Section 9 of the Code is limited to reject or admit the petition/ application?

Decision & Observations of the NCLAT

A. Immaterial as to whether Corporate debtor solvent or not.

B. It held that the Code does not grant power to NCLT to conduct a rambling inquiry into the aspect of solvency or insolvency of the Corporate Debtor except to the extent of the Financial Creditors or the Operational Creditors, who sought to trigger of Corporate Insolvency Resolution Process.

C. The NCLT had ignored the fact that corporate debtor have committed default and it had failed to pay the debt to the operational creditor.

D. The Appellate Tribunal allowed the appeal and directed the NCLT to pass an order of admission and initiation of CIRP against the corporate debtor.

Conclusion

The decision of the NCLAT is in the right perspective and intention of the Code.-

  • Mere existence of an alternative remedy that includes an arbitration clause should not disable any person including the operational creditor, to take steps as are available to it under the Code.

  • The solvency of the Corporate Debtor is of no consequence in the application fled under section 9 of the Code. Mere existence of default by the Corporate Debtor is enough to initiate CIRP process, as have been expressly the intention of the drafters of the Code.

  • Rightly, if NCLT is allowed to conduct inquiry into solvency and in-solvency of the Corporate Debtor on case to case basis, the same not only lead to anomaly but also in defeating the very purpose of the Code, i.e. putting companies into CIRP process that are unable to pay its debts.

  • Moreover, the existence or non-existence of Arbitration and/or alternative remedy cannot be a ground to reject the application u/s 9 of the Code, since if the same is accepted, every operational creditor always have the remedy under common law for filing of civil suits, even if there is no arbitration agreement.

  • The Adjudicating Authority has only two options, either to admit Application or to reject the same. No third option or course is postulated by law.

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