The IBC is not a substitute for a recovery forum: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in this case reiterated what the Supreme Court has observed, "IBC is not intended to be a substitute to a recovery forum and whenever there is existence of real dispute, the IBC provisions cannot be invoked."

In this case, the Petitioner (Operational Creditor) and the Respondent (Corporate Debtor) had a dispute over non-payment of amount for civil works. The respondent availed the services of the appellant but failed to pay the outstanding amount. The appellant subsequently filed a petition for initiation of Corporate Insolvency Resolution Process (CIRP) against the respondent with the National Company Law Tribunal (NCLT).

The NCLT observed that there was an existing dispute between both the parties which the Petitioner withheld. The NCLT observed, "The Insolvency Resolution Process is not a civil recovery forum and if any alleged amount is payable to the Appellant the same needs to be tried in Arbitration/Civil Court as per the clauses of Work Order/Contract subject to limitation."

On appeal, the NCLAT held that, "Section 9 of the IBC makes it very clear for the Adjudicating Authority to admit the application "if no notice of dispute is received by the Operational Creditor and there is no record of the dispute in the information utility." Whereas, on the other hand, Section 9 also states that the Adjudicating Authority reject the application so filed "if the Operational Creditor has received a notice of a dispute from the Corporate Debtor".

The Corporate Debtor stated that the operational creditor had not approached the Appellate Tribunal with clean hands and had concealed the facts.

According to the NCLAT, the intent of Legislature is very vital for interpreting any law, which can be well deduced from the words of Section 8(2)(a) of I&B Code 'existence of a dispute if any'. It can be easily inferred that dispute shall not be limited to instances specified in the definition as provided under Section 5(6), as it has far arms, apart from pending Suit or Arbitration as provided Under Section 5(6) of IBC. The IBC is not a substitute for a recovery forum. Section 9 of the IBC makes it very clear for the Adjudicating Authority to admit the application "if no notice of dispute is received by the Operational Creditor and there is no record of the dispute in the information utility." Whereas, on the other hand, Section 9 also states that the Adjudicating Authority reject the application so filed "if the Operational Creditor has received a notice of a dispute from the Corporate Debtor."

The appellate authority relied on the Supreme Court judgment in the case of Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. wherein it was held that "once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under S.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 NCLAT concluded that since there was a dispute existing prior to the issuance of Section 8 notice, the insolvency provisions cannot be invoked. The email communication of the Operational creditor dated 23.01.2016 states about operational creditor having knowledge of retention money being adjusted. Whether the corporate debtor was entitled to adjust the retention amount are disputed questions of law and fact and shall be decided by the appropriate forum.

Justice Venugopal M – Member (Judicial) and Mr. Balvinder Singh – Member (Technical) presided  over the case.

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