Supreme Court upheld NCLAT's order: In existence of 'Pre-Existing Dispute,' no Order of Remand can be made for Reconsideration under Section 9 of IBC

Supreme Court upheld NCLAT's order: In existence of 'Pre-Existing Dispute,' no Order of Remand can be made for Reconsideration under Section 9 of IBC

The Supreme Court while dismissing an appeal filed by Sabarmati Gas Limited observed that, the Tribunals had rightfully held that there existed a 'pre-existing dispute' between the parties and no order of remand can be made to the Tribunal for reconsideration of Section 9 application under Insolvency Bankruptcy Code, 2016 (in short IBC).

Additionally, the Supreme Court also elucidated on the term 'Sufficient Cause' and observed that it is the cause for which a party could not be blamed as per Section 5 of the Limitation Act, 1963.

The facts of the case were that the respondent- Shah Alloys Limited required a commercial supply of natural gas for its manufacturing needs and to facilitate the same, the appellant and the respondent entered into a Gas Sales Agreement (in short GSA) whereby and whereunder the appellant was having the obligation to supply natural gas conforming to the specifications laid down in Annexure-2 forming part of the contract. As per clause 11.2, notwithstanding any dispute in relation to any amount invoiced, the respondent could not withhold payment in accordance with the GSA.

The respondent defaulted on payment of invoices inasmuch as it made only partial irregular payments and approached Board for Industrial and Financial Reconstruction (in short BIFR) to get it declared as a 'sick unit.' The reference was admitted by BIFR and as per order, the respondent was declared as a 'sick company'.

The appellant filed an application under Section 9 of IBC before National Company Law Tribunal, Ahmedabad Bench (in short NCLT) to initiate Corporate Insolvency Resolution Process (in short CIRP) in its capacity as Operational Creditor of the respondent but the same got dismissed on the grounds of being barred by limitation and thereafter, the National Company Law Appellate Tribunal (in short NCLAT) also dismissed the appeal.

Two primary questions were raised before the Apex Court:

1. Whether in computation of the period of limitation in regard to an application filed under Section 9, IBC the period during which the operational creditor's right to proceed against or sue the corporate debtor that remain suspended by virtue of Section 22 (1) of the Sick Industrial Companies (Special Provisions Act, 1985) (in short SICA) can be excluded, as provided under Section 22(5) of SICA?

2. Whether the respondent has raised a dispute which is describable as 'pre-existing dispute' between itself and the appellant warranting dismissal of application under Section 9 of the IBC at the threshold?

The court observed that the appellant was legally barred from initiating proceedings against an industrial company by virtue of Section 22 (1), SICA.

The division bench comprising of Justices Ajay Rastogi and C.T. Ravikumar observed, "Section 5 of the Limitation Act showing 'sufficient cause' is the only criterion for condoning delay. 'Sufficient Cause' is the cause for which a party could not be blamed. We have already taken note of the legal bar for initiation of proceedings against an industrial company by virtue of Section 22 (1), SICA and obviously, when a party was thus legally disabled from resorting to legal proceeding for recovering the outstanding dues without the permission of BIFR and even on application permission therefor was not given the period of suspension of legal proceedings is excludable in computing the period of limitation for the enforcement of such right in terms of Section 22(5), SICA."

The Court noted that in the absence of provisions for exclusion of such period in respect of an application under Section 9, IBC, despite the combined reading of Section 238A, IBC and the provisions under the Limitation Act what was legally available to such a party is to assign the same as a sufficient cause for condoning the delay under Section 5 of the Limitation Act

The Court noted earlier, that the appellant had issued a demand notice under Section 8, IBC read with the Rule 5 of 2016 Rules on 1 April, 2017. The Court opined that obviously, the NCLT and NCLAT referred to a letter dated 4 January, 2013 to hold that existence of a pre-existing dispute between the parties was revealed from the same.

The counsel for the appellant had earlier contended that the respondent had agreed to effect the payments or bills and requested only to wait for the payments of the old bills till restructuring is agreed upon by BIFR per contra, the counsel for the respondent opposed such contention.

Lastly the Court, asserted, that when the arbitration proceedings were pending, the parties shall be left with the liberty to raise all contentions before the arbitrator, except the legal questions discussed and decided in this judgment and accordingly dismissed the appeal.