whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon. = The very fact that there is a possibility that Mr. Banerji’s client may succeed on these cross-claims is sufficient to state that the 22 operational debt, in the present case, cannot be said to be an undisputed debt. = We also accept Mr. Banerji’s submission that the Appellate Tribunal was in error in referring to Section 238 of the Code. Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act in the present case. We see no such inconsistency. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one. 23) We are also of the view that the Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations (supra). Even if it be 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 23 Mobilox Innovations (supra), an insolvency petition cannot be proceeded with further. For all these reasons, we are of the view that the judgment of the Appellate Tribunal needs to be set aside and is therefore reversed.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 21824 OF 2017

K. KISHAN …APPELLANT

VERSUS

M/S VIJAY NIRMAN COMPANY PVT. LTD. …RESPONDENT

WITH

CIVIL APPEAL NO. 21825 OF 2017

J U D G M E N T

R.F. Nariman, J.

1. The present appeals raise an important question as to

whether the Insolvency and Bankruptcy Code, 2016

(hereinafter referred to as “the Code”) can be invoked in respect

of an operational debt where an Arbitral Award has been

passed against the operational debtor, which has not yet been

finally adjudicated upon.

1

2. The brief facts necessary to appreciate the controversy at

hand are as follows:-

i) In the present case, M/s Vijay Nirman Company Pvt. Ltd.

(the Respondent) entered into a sub-Contract Agreement with

one M/s Ksheerabad Constructions Pvt. Ltd. (for short ‘KCPL’)

on 01.02.2008, to undertake 50% of Section 2 work of

‘Construction and widening of the existing two lane highway to

four lanes on NH 67 at KM 190000 to KM 218215 admeasuring

a total of 28.215 KM for and on behalf of KCPL.’

ii) Apart from this Agreement, a separate agreement of the

same date was entered into between the said KPCL and one

M/s SDM Projects Private Limited, Bangalore, as a result of

which, a tripartite Memorandum of Understanding was entered

into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd.

and the Respondent.

iii) During the course of the project, disputes and differences

arose between the parties and the same were referred to an

Arbitral Tribunal, which delivered its Award on 21.01.2017. One

of the claims that was allowed by the said Award was in favour

2

of the respondent for a sum of Rs.1,71,98,302/- which arises

out of certain interim payment certificates. Another claim that

was allowed related to higher rates of payment in which a sum

of Rs.13,56,98,624/- was awarded. Three cross claims that

were made by the Respondent were rejected.

iv) It is pertinent to note that, at this stage, a notice dated

06.02.2017 was sent by the Respondent to KCPL to pay an

amount of Rs. 1,79,00,166/-. This notice was stated to be a

notice under Section 8 of the Code. Within 10 days, by a letter

dated 16.02.2017, KCPL disputed the invoice that was referred

to in the said notice, stating that the said amount was, in fact,

the subject-matter of an arbitration proceeding, and as per

KCPL’s accounts, the Respondent was liable to pay larger

amounts to them.

v) It may be noted that after the notice and reply, on

20.04.2017, a Section 34 petition was filed by KCPL under the

Arbitration and Conciliation Act, 1996 (hereinafter referred to as

“the Act”) challenging the aforesaid Award. Needless to add,

3

this petition was filed within the period of limitation set down in

Section 34(3) of the Act.

vi) It is only thereafter that a petition was filed under Section

9 of the Code, on 14.07.2017. In the gist of the case presented

to the National Company Law Tribunal (‘NCLT’), it was clearly

stated as follows:-

“The above amount was included in the Statement of

Claims filed before the Arbitral Tribunal duly constituted

on 17.8.2014 along with other claims. The Tribunal

gave its award on 21.1.2017 and upheld the above

claim of VNCPL and awarded the above amount in

favour of VNCPL and against KCPL. (Award copy

enclosed)

Thus, the above amount has become an ‘Operational

Debt’ to be paid by the corporate debtor M/s KCPL as

defined u/Sec. 3(11) of the I&B Code 2016.

A notice in Form-3 U/Sec. 8(1) of the I&B Code 2016

has already been served on the Corporate Debtor, M/s

KCPL and a reply received from KCPL is also enclosed

herewith for ready reference.”

In the Counter Affidavit before the NCLT, it was stated:

“10. I respectfully submit that the case of the petitioner

in short is that since an award has been passed against

the respondent here in an arbitration proceeding,

though a petition U/Sec 34 of the Arbitration and

Conciliation Act, has been filed by the respondent

4

before the competent court challenging the award the

present application is maintainable U/Sec. 9 of the code

though the respondent had raised a dispute in its

replies dated 06-02-2017 & 05-06-2017 to the notice

issued U/Sec.8(2) of the code by the applicant.

11. I respectfully submit that a dispute had been

raised by the respondent company even before the

present application has been filed, in the arbitration

proceedings by way of a counter claim and presently the

same is sub judice before the Hon’ble Commercial Court

cum XXIV Additional Chief Judge, City Civil Court at

Hyderabad in petition filed U/Sec. 34 of the Act. Copy of

the section 34 application filed and pending before the

Hon’ble Court is enclosed herewith as Annexure R-6.”

vii) The NCLT, by its order dated 29.08.2017, referred to the

aforestated facts, and also referred to the fact that the Award

which was challenged under Section 34 specifically stated that

learned counsel for the first Respondent (i.e. the corporate

debtor) was fair enough to admit that the claimant is entitled to

the said sum of Rs.1,71,98,302/-. According to the NCLT, the

fact that a Section 34 petition was pending was irrelevant for

the reason that the claim stood admitted, and there was no stay

of the Award. For these reasons, therefore, the Section 9

petition was admitted.

5

viii) An appeal filed to the Appellate Tribunal met with the

same fate, as according to the Appellate Tribunal, the nonobstante

clause contained in Section 238 of the Code would

override the Arbitration Act. Also, according to the Appellate

Tribunal, since Form V of Part 5 of the Insolvency & Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 requires

particulars of an order of an arbitral panel adjudicating on the

default, this would have to be treated as “a record of an

operational debt”, as a result of which the petition would have to

be admitted, as was correctly done by the NCLT. The appeal

was, accordingly, dismissed.

3) Mr. Gourab Banerji, learned Senior Advocate, appearing

on behalf of the appellant has relied upon certain observations

made in our judgment in Mobilox Innovations Private Limited

vs. Kirusa Software Private Limited, (2018) 1 SCC 353 and

argued that the object of the Code is not to replace debt

adjudication and enforcement under other Acts including the

Arbitration Act, 1996. He has relied, in particular, on para 51

under which, according to him, the moment there is a real

6

dispute between the parties, which need not be a “bona fide

dispute” which is likely to succeed in point of law, the

Insolvency Code cannot be applied. In the present case,

according to him, the very fact that a Section 34 petition is

pending is reflective of a real dispute between the parties,

which was pre-existing, and which culminated in an Arbitral

Award which has yet to attain finality. Also, according to the

learned Senior Advocate, the cross-claims that were rejected by

the learned Arbitral Tribunal far exceeded the amounts awarded

against his client, and if any one of them were to be held to be

wrongly dismissed, in particular, counter claim No.3 of Rs.

19,88,20,475/-, it is obvious that his client would not owe any

sum of money to the operational creditor. He also relied upon

certain judgments, which we will discuss later. To further

buttress his submissions, he argued that all that is necessary is

that there be a dispute in some form which would include cross

claims made by the corporate debtor against the operational

creditor. According to him, the Appellate Tribunal was wholly in

error in applying Section 238 of the Code as, according to Mr.

Banerji, there is nothing inconsistent between the adjudication

7

and enforcement process under the Arbitration Act and the

application of Sections 8 & 9 of the Code. In fact, according to

the learned Senior Advocate, the fact of pending proceedings,

whether they be proceedings culminating in an Award, or

challenge proceedings thereafter, would, in fact, show that

there is a dispute insofar as an operational debt that is stated to

be owed, and that therefore, the Arbitration Act can be relied

upon for this purpose, there being nothing inconsistent between

it and the Code.

4) Dr. P.V. Amarnadha Prasad, learned Advocate, appearing

on behalf of the respondent has argued in reply that according

to the law in the United Kingdom, and Practice Directions

thereunder, an insolvency process does not get stultified

because an application to set aside the judgment, order or

decision is pending in an appeal or otherwise. He also referred

to the law in Singapore, and relied upon a judgment of the

Singapore High Court to the effect that once it is found that

there is a primary adjudication between the parties which

indicates the existence of a debt, any further dispute which may

8

be pending in appeal or otherwise over the debt could not be

said to be bona fide disputed by the debtor. According to him,

the Appellate Tribunal was absolutely correct in applying

Section 238 of the Code, as there would be a direct

inconsistency between the application of the Code and a

Section 34 proceeding which was said to be pending, and

which, according to him, was not relevant in view of the law that

he has cited.

5) Having heard learned counsel for both parties, it is

important to first advert to Section 9(5) of the Code which states

as follows:-

“9(5) The Adjudicating Authority shall, within

fourteen days of the receipt of the application under

sub-section (2), by an order-

(i) admit the application and communicate such

decision to the operational creditor and the

corporate debtor if,-

(a)the application made under sub-section (2)

is complete;

(b) there is no repayment of the unpaid

operational debt;

(c) the invoice or notice for payment to the

corporate debtor has been delivered by the

operational creditor;

9

(d) no notice of dispute has been received by

the operational creditor or there is no record of

dispute in the information utility; and

(e) there is no disciplinary proceeding pending

against any resolution professional proposed

under sub-section (4), if any.

(ii) reject the application and communicate such

decision to the operational creditor and the

corporate debtor, if-

(a) the application made under sub-section (2)

is incomplete;

(b) there has been repayment of the unpaid

operational debt;

(c) the creditor has not delivered the invoice or

notice for payment to the corporate debtor;

(d) notice of dispute has been received by the

operational creditor or there is a record of

dispute in the information utility; or

(e) any disciplinary proceeding is pending

against any proposed resolution professional:

Provided that Adjudicating Authority, shall before

rejecting an application under sub-clause (a) of

clause (ii) give a notice to the applicant to rectify the

defect in his application within seven days of the

date of receipt of such notice from the adjudicating

Authority.”

A reading of Section 9(5)(ii)(d) would show that an application

under Section 8 must be rejected if notice of a dispute has been

received by the operational creditor. In the present case, it is

clear on facts that the entire basis for the notice under Section

10

8 of the Code is the fact that an Arbitral Award was passed on

21.07.2017 against the Appellant. As has been pointed out by

us, this clearly appears from the gist of the case that was filed

along with the insolvency petition. The fact that the reply of

16.02.2017 to the notice given under Section 8 was within 10

days, and raised the existence of a dispute, also cannot be

doubted.

6) However, learned counsel appearing on behalf of the

Respondent strongly relied on the fact that this is not an

ordinary case inasmuch as the amount of Rs.1.71 Crores which

was awarded was admitted by Mr. Banerji’s client in the arbitral

proceedings to be a debt due, and that this being so, there can

be no dispute regarding the same. We are afraid that we are

unable to agree. As was correctly pointed out by Mr. Banerji,

counter claims for amounts far exceeding this were rejected by

the learned Arbitral Tribunal, which rejection is also the subjectmatter

of challenge in a petition under Section 34 of the Act. It

is important to note that unlike counter claim Nos. 1 and 2,

which were rejected by the Arbitral Tribunal for lack of evidence,

11

counter claim No.3 which amounts to Rs.19,88,20,475/-

was rejected on the basis of a price adjustment clause on

merits. Therefore, it is difficult to say at this stage of the

proceedings, that no dispute would exist between the parties.

7) Our recent judgment in Mobilox Innovations (supra)

throws considerable light on the issue at hand. While referring

to the legislative history of the Code, this Court referred to the

Legislative Guide on Insolvency Law of the United Nations

Commission on International Trade Law. One of the things the

Legislative Guide spoke about was whether the debt is subject

to a legitimate dispute or set-off, in an amount equal to or

greater than the amount of the debt. Another thing spoken of

was that improper use of the insolvency process would occur in

cases where a creditor uses insolvency as an inappropriate

substitute for debt enforcement procedures, even though they

may not be well developed. (see para 13 of the judgment)

8) The Notes on Clauses annexed to the Bill of the

Insolvency Code were also referred to by this Court in para 27

12

of the judgment. The important sentence in these Notes on

Clauses needs to be reproduced, which is done herein below:-

“This ensures that operational creditors, whose debt

claims are usually smaller, are not able to put the

corporate debtor into the insolvency resolution

process prematurely or initiate the process for

extraneous considerations.”

9) This Court also noticed that the original Bill which

ultimately became the Code had the expression “bona fide

dispute” contained in an inclusive definition. It is significant to

note that by the time the Code was enacted the expression

“bona fide” was dropped. (See para 32 of the judgment)

10) After referring to Section 8, the judgment 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.

11) The Adjudicating Authority, therefore, when examining an

application under Section 9 of the Act, will have to determine

the following:-

13

(i) Whether there is an “operational debt” as

defined exceeding Rs 1 lakh? (See Section 4 of the

Act)

(ii) Whether the documentary evidence furnished

with the application shows that the aforesaid debt is

due and payable and has not yet been paid?

and

(iii) Whether there is existence of a dispute

between the parties or the record of the 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)

of the Act, and admit or reject the application, as the case may

be, depending upon the factors mentioned in Section 9(5) of

the Act. (Para 34).

12) In para 38, this Court cautioned:

“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

14

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 parties.

Finally, the law was summed up as follows:-

“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 application.”

13) Following this judgment, it becomes clear that operational

creditors cannot use the Insolvency Code either prematurely or

15

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 jeopardize 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 (supra), 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 Rs. two lakhs

even though it may not be finally payable as adjudication

proceedings in respect 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.

16

14) Mr. Banerji referred us to certain judgments of the English

and Singapore Courts. In Re A Company – Victory House

General Partner Ltd. vs. RGB P & C Ltd. [2018] EWHC 1143

(Ch), the Chancery Division of the High Court, in a situation

where a debt has to be “bona fide” disputed in order to attract

the winding up jurisdiction of the Courts in the UK, made it clear

that even in a case where a judgment debt is no longer a

disputed debt, as it has been finally adjudicated upon, yet if

there be a cross-claim which is being adjudicated upon, or

which may not even have reached the adjudicatory process at

all, would be sufficient to stave off a winding up order. The

learned Judge referred to the judgment in Re Bayoil SA [1999]

1 WLR 147 as follows, and concluded:-

“27. This, of course, is not a case of a disputed

debt. There is a judgment debt and it can be

enforced immediately. However, Mr. Chivers draws

attention to Re Bayoil SA [1999] 1 WLR 147, which

deals with a case not involving a disputed debt but

involving a cross-claim by the company, the subject

of the petition or the intended petition, where the

amount of the cross-claim exceeds the petition

debt. The headnote to Re Bayoil recites the

essential facts. The petitioner claimed for freight.

The established law is there is no defence of set-off

available in relation to a claim to freight. The claim

17

went to arbitration and the arbitrators made an

award in favour of the petitioner. The petitioner

then presented a petition on the basis of the sum

determined by the arbitration award. The company

applied for the petition to be dismissed or stayed

on the ground that it had a genuine and serious

counterclaim in an amount which exceeded the

petition debt. It was a matter of detail in that case,

which the company put forward to advance its

case, that it had not been able to litigate that

counterclaim. Later cases discussing Re Bayoil

make it clear that the ability, or inability, to litigate

the counterclaim is not of the essence of the

principle in this case. So I put that on one side……”

“32. I therefore have to ask whether the nascent

cross-claim, the claim in restitution which

MrChivers has explained to me, is a bona fide

cross-claim on substantial grounds. I have no

doubt it is a bona fide claim. I have also no doubt it

is on substantial grounds. At the moment it seems

to me that it is a claim that would succeed but I

need not go that far……”

“34. Nothing which I have said detracts in any way

from the binding character of the judgment which

has been made. It may appear to be a strong thing

to say that the employer, having failed to comply

with a judgment against it, should nonetheless

escape the consequences involved in a winding up,

but it seems to me that that is the very thing which

was considered to be appropriate in the Bayoil

case and, on the facts of this case, I also consider

it is a more just result that the alternative

contended for by the petitioner.”

15) A recent judgment of the Singapore High Court, contained

in Lim PohYeoh (alias Lim Aster) and TS Ong Construction

18

Pte Ltd. [2016] SGHC 179, was also referred to by Mr. Banerji.

Again, in a situation which demands a far higher threshold that

has to be crossed before the Insolvency Law can be said not to

apply, the Singapore High Court referred to Rule 98(2)(a) of the

Rules made under the Bankruptcy Act. The said Rule states

that where a debtor appears to have a valid counter claim or

cross-demand which is equivalent to or exceeds the amount of

debt, the insolvency process will not be put against such debtor.

It also referred to the Supreme Court Practice Directions to the

same effect. (see paras 43 & 45 of the said judgment)

16) We now come to some of the judgments referred to by

learned counsel for the respondent. It is important to note that

both the Practice Directions referred to in the U.K. judgment

and the Singapore High Court judgment, referred to in LKM

Investment Holdings Pte Ltd. vs. Cathay Theatres Pte Ltd.

[2000] SGHC 13, are in situations where the debt needs to be

bona fide disputed, which is not the situation under our Code.

For this reason, it is not possible to agree with learned counsel

for the Respondent that a pending proceeding challenging an

19

award or decree of a tribunal or Court would not make the debt

contained therein a debt that is disputed.

17) The Australian High Court judgment also relied upon by

the respondent in Ramsay Health Care Australia Pty Ltd vs.

Adrian John Compton [2017] HCA 28 was relied upon to

show, in para 111 thereof, that where a judgment debt has

been obtained after testing of the merits in adversarial litigation,

then in the absence of some evidence of fraud, collusion, or

miscarriage of justice, a court exercising bankruptcy jurisdiction

will rarely have substantial reasons to investigate whether the

debt which emerged in the judgment was truly owed. With

respect to the High Court of Australia, we may only state that

following Mobilox Innovations (supra), it would be very

difficult to incorporate the Australian law into our law. This is for

the reason that our judgment in Mobilox Innovations (supra)

has made it clear that the insolvency process, particularly in

relation to operational creditors, cannot be used to bypass the

adjudicatory and enforcement process of a debt contained in

other statutes. We are, therefore, of the view that the higher

20

threshold of fraud, collusion, or miscarriage of justice laid down

by the Australian High Court will have no application to the

situation under our Code.

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) We may hasten to add that 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

21

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.

21) With regard to the submission of learned counsel for the

respondent, that the amount of Rs.1.71 Crores stood admitted

by Mr. Banerji’s client, as was recorded in the Arbitral Award,

suffice it to say that cross-claims of sums much above this

amount has been turned down by the Arbitral Tribunal, which

are pending in a Section 34 petition challenging the said Award.

The very fact that there is a possibility that Mr. Banerji’s client

may succeed on these cross-claims is sufficient to state that the

22

operational debt, in the present case, cannot be said to be an

undisputed debt.

22) We also accept Mr. Banerji’s submission that the

Appellate Tribunal was in error in referring to Section 238 of the

Code. Section 238 of the Code would apply in case there is an

inconsistency between the Code and the Arbitration Act in the

present case. We see no such inconsistency. On the contrary,

the Award passed under the Arbitration Act together with the

steps taken for its challenge would only make it clear that the

operational debt, in the present case, happens to be a disputed

one.

23) We are also of the view that the Appellate Tribunal, when

it relied upon Form V Part 5 of the 2016 Rules to state that the

operational debt would, therefore, be said to have been proved,

missed the vital sub-clause (iii) in para 34 of Mobilox

Innovations (supra). Even if it be 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

23

Mobilox Innovations (supra), an insolvency petition cannot be

proceeded with further.

24) For all these reasons, we are of the view that the

judgment of the Appellate Tribunal needs to be set aside and is

therefore reversed.

25) The appeals are, accordingly, allowed in the aforesaid

terms.

26) Consequently, the bank guarantees that have been

furnished, pursuant to our order dated 15.12.2017, stand

discharged.

………………………………J.

(R.F. Nariman)

………………………………J.

(Indu Malhotra)

New Delhi;

August 14, 2018.

24