Article

Hindustan Petroleum Corporation Limited (HPCL) filed an application under section 9 of the Insolvency and Bankruptcy Code, 2016 before National Company Law Tribunal (NCLT), Kolkata, for initiation of the Corporate Insolvency Resolution Process (CIRP) against HPCL Biofuels Ltd. (HBL), a wholly owned subsidiary of HPCL. NCLT allowed the application while rejecting the contention raised by HBL that there were pre-existing disputes between the parties in respect of the claim. National Company Law Appellate Tribunal, Principal Bench, New Delhi, on appeal, set aside the order of NCLT which was challenged before the Hon’ble Supreme Court in M/S S.S. Engineers & Ors. v. Hindustan Petroleum Corporation Ltd. [CIVIL APPEAL NO. 4583 OF 2022].

S.S. Engineers & Ors. (the “Appellant”) and HBL entered into a contract agreement pursuant to tenders floated by HBL for enhancing the capacity of the Boiling Houses. Purchase Orders were issued by HBL to the Appellant for the work on a turnkey basis. The Appellant raised invoices in respect of the purchase orders. HBL, through mails, disputed any liability of payment alleging that Appellant had been violating the terms of the purchase order and backing out from its commitments causing huge losses to HBL as it had to procure materials from other vendors. The Appellant allegedly also raised invoices for material that were not supplied and that did not renew its Bank Guarantee and delivered poor quality materials.

While all this was communicated to the Appellant by HBL, the latter issued Form C to the Appellant under Section 8 of the Central Sales Tax Act read with Rules 12(1) of the Central Sales Tax (Registration and Turnover) Rules, 1957. The Appellant issued a Legal Notice for invocation of arbitration, followed by Demand Notice under section 8 of the IBC. HBL disputed the claim. Nonetheless, the Appellant filed an application for initiation of CIRP against HBL. The NCLT was of the opinion that even if all the amount disputed by HBL is taken into consideration, the amount due to the Appellant shall exceed Rs. 1 Lakh (threshold limit under section 4 of IBC at the relevant time). Moreover, since HBL awarded new work orders to the Appellant subsequently, it meant that all the disputes relating to the contract were resolved. Further, NCLT also underlined the fact that HBL had also issued Form C.

The Hon’ble Supreme Court in the first instance clarified that the statutory duty of issuance of C-forms under the Central Sales Tax, do not and cannot constitute acknowledgment of any liability to make payment. While quoting from the judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353, the Court reiterated the three questions that need to be examined by the Adjudicating Authority in order to determine an application under section 9 of the IBC – (i) whether there was an operational debt exceeding Rupees 1,00,000/( Rupees One Lac); (ii) whether the evidence furnished with the application showed that debt exceeding Rupees one lac was due and payable and had not till then been paid; and (ii) whether there was existence of any dispute between the parties or the record of pendency of a suit or arbitration proceedings filed before the receipt of demand notice in relation to such dispute. Additionally, the adjudicating authority must follow the mandate of Section 9(5) of the IBC. The adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor. What Court has to essentially examine 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.” The Tribunal shall not examine the merits of the dispute and determine if defence is likely to succeed. The Court also referred to its judgment in K Kishan vs. Vijay Nirman Co. (P) Ltd. (2018) 17 SCC 662 wherein the Court ruled that the “Code cannot be used in terrorem” to extract moneys. It held that “operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures.” Applying the law laid previously by the Apex Court, it was observed that HBL had been disputing the claims of the Appellant which evinces a real dispute in terms of the IBC and thus, there was no reason to interfere with the ruling of the NCLAT.