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Whether Section 69A of the Information and Technologies Act, 2002 gives power to the Central Government to issue orders for blocking of social media accounts?

CommonMan, Constitution of India, Information and Technology

Recently, yet another dispute stirred up between the social media giant Twitter and the Indian Government on account of the Ministry of Electronics and Information Technology (MEIT) issuing a series of blocking orders to the former in relation to multiple twitter accounts and tweets posted on the social media page. As a matter of fact, the micro blogging site has been facing the heat from the Ministry since February 2021 where it has been asked to block almost 1500 accounts and 175 tweets till date. The matter precipitated when the Government finally issued notice dated 27.07.2022 to Twitter warning against punitive measures in the event Twitter does not comply with the blocking orders. Challenging the orders and notice, Twitter, which is a Significant Social Media Intermediary (SSMI) the Information Technologies Act, 2002 (2002 Act), filed a petition before the Karnataka High Court seeking to upend 39 blocking orders issued by the MEIT in June this year under section 69A of the 2002 Act.

As per section 69A, the Central Government has power to direct any agency of the Government or intermediary to block the access by the public of any information generated, transmitted, received, stored or hosted in any computer resource in the interest of sovereignty and integrity of India, defence of India, security of the State, friendly relations with foreign States or public order or for preventing incitement to the commission of any cognizable offence relating to the said grounds. The Government while exercising the said power is required to record reasons in writing.

The essential argument of the Petitioner/Twitter before the Karnataka High Court is that the orders blocking contents are “procedurally and substantially deficient of the provision” and the ones blocking user accounts “demonstrate excessive use of powers and are disproportionate”. Further, the blocking orders fail to provide specifics and do not establish “proximate relationship to the grounds under Section 69A” – as to why the contents of tweets or accounts fall within the heads given under Section 69A of the 2002 Act and rather reiterate the grounds stated in the section. In other words the MEIT has not shown how content disrupts sovereignty and integrity of India, defence of India, security of the State, friendly relations with foreign States or public order, as contemplated under Section 69A of the 2002 Act.  Twitter has taken the Constitutional ground of violation of freedom of speech guaranteed to the users of the platform to voice their opinion. Twitter, before the Karnataka High Court, has further claimed that the ‘blocking orders’ are arbitrary and illegal for not being in consonance with the procedure set out in the Information Technology (Procedures and Safeguards for Blocking of Access to Information by Public) Rules, 2009 (2009 Rules) and for not being in line with the ‘least intrusive test’ as recognised by the Supreme Court in the case of Justice K.S. Puttaswamy (Retd.) and Another v. Union of India and Others [Writ Petition (Civil) No. 494 of 2012] (famously known as Adhaar case).

Twitter has also cited the affidavit filed by the MEIT in the matter of Sanjay R Hegde v. Ministry of Electronics and Information Technology and Anr [WP(C) 13275 of 2019] before the Delhi High Court. In this matter it was Twitter that had suspended Mr. Hedge’s twitter account. The issue raised in the writ petition against Twitter (averred to be doing a public function) is regarding permanent suspension of the twitter account of petitioner, Mr. Hedge, being contrary to the Twitter Rules and in violation of rights guaranteed under Article 19(1)(a) and (c) of the Constitution of India. Twitter Rules prohibit contents that exhibit –  a. Violence; b. Terrorism/violent extremism; c. Child sexual exploitation; d. Abuse/Harassment; e. Hateful Conduct; f. Suicide or self-harm; g. Sensitive media, including graphic violence and adult content; h. Illegal or certain regulated goods or services; i. Publication of another person’s private information; j. Publication of Non-consensual nudity; k. Platform manipulation and spam; l. Manipulating with election integrity; m. Impersonation; n. Infringement of Copyright and Trademark. As per the petitioner, Mr. Hedge, the re-post of a poem titled ‘Gorakh Pandey’s poem ‘Unko phaansi de do’ and use of picture of August Landmesser as the ‘header’/ ‘cover picture’ of his Twitter profile was not covered in any of the heads prohibited under Twitter Rules. The Writ Petition prayed for issuing appropriate writ to frame guidelines to ensure that online speech is not arbitrarily censored by social media websites and also for restoring the account.

Clearly, the issues involved in the two matters, presently pending before the high courts, are different. While the petition before the Delhi High Court questions the action of blocking by the social media platform – Twitter, the petition before the Karnataka High Court challenges the orders issued by the Government to Twitter directing it to block the accounts of the users.

Further, the issue before the Delhi High Court is whether Twitter is within its rights and authority to block the account of Mr. Hedge (which perhaps still remains blocked)? This would also necessarily require the finding on whether a writ is maintainable against a private entity like Twitter and whether it is performing a public function so as to be covered under the umbrella of Article 226 of the Constitution of India. The issues before Karnataka High Court, on the other hand, is whether the exercise of power of issuing successive blocking orders by the Government to Twitter under section 69A of the 2002 Act is ultra vires or in other words is excessive and arbitrary? Whether this is a violation of Article 14 and 19 of the Constitution of India?

The MIET has exercised its power under section 69A of the 2002 Act which not only gives an authority to exercise power of blocking but also lays down obligation on the Government to state the reasons to be recorded in writing while issuing the blocking to the intermediary. Further, when the Central Government has satisfied itself that the grounds provided under section 69A are met, it can by order direct the intermediary to block ‘any information generated, transmitted, received, stored or hosted in any computer resource’. It does not state that the power extends to blocking or ordering the blocking of the very social media account permanently or even temporarily, essentially taking away from the account user’s right of any future publication (which changes the nature of order to punitive from protective) and also curbs the right of a reader to have access to the previous and future tweets which were not objectionable under section 69A of the 2002 Act. The power given to the Central Government under section 69A(1) is further subject to section 69A(2) which states that the “procedure and safeguards subject to which such blocking for access by the public may be carried out, shall be such as may be prescribed”. The procedure and safeguards have been provided under Information Technology (Procedures and Safeguards for Blocking of Access to Information by Public) Rules, 2009. Therefore, there are two clear riders to the exercise of power under section 69A(1) of the 2002 Act. Firstly, to follow the procedure as given in the 2009 Rules and secondly, while issuing the order, to record reason for its satisfaction in writing. Since the exercise of power by the Government is subject to these conditions, any order issued without following the due process shall not only render it illegal but also ultra vires and in conflict with fundamental rights guaranteed under Part III of the Constitution of India. The analysis and finding of the same is primarily factual (other than to determine the essential nature of power and its objective given under section 69A) and the Court shall certainly go into the fact finding whether the riders were fulfilled by the Government. With regard to the argument regarding the constitutionality of blocking orders and the same being ‘disproportionate’, Twitter has apparently relied on the ‘least intrusive test’ and ‘proportionality standard of review’ or ‘proportionality test’. It is pertinent to make clear at this point that Twitter is not challenging the constitutionality of the provision under section 69A of 2002 Act. The law is settled and the provision has been upheld in the matter of Shreya Singhal v Union of India [Writ Petition (Criminal) No.167 of 2012 decided on 24th March 2015]. It remains to be seen whether the said tests can be applied in the case of exercise of power by a Government authority under a provision of law that has been held to be constitutional (this not being a case of challenge of the legislative provision itself).

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Refusal of a Contractor to Continue to Execute the Work Unless the Reciprocal Promises are Performed by the Other Party, Cannot Be Termed As Abandonment of Contract

Contracts and Agreements

When the promisor or a promisee refuses to executed his part of the terms in a contract and the other party expressly or impliedly consents to such non-execution, the contract is said to be abandoned. In other words, the contract is said to have been abandoned if both the parties fail to perform or one party fails to perform and the other party does not object or dispute such non-performance or non-fulfillment of obligation within a reasonable time. If the other party objects or disputes such non-performance or non-fulfillment of obligation within a reasonable time, the act of the first party shall then be called breach of contract. ‘Abandonment of contract’ is not defined in the Indian Contract Act, 1872. It is different from breach of contract which has been defined under Section 73 of Indian Contract Act.

In a recent judgment delivered by the Hon’ble Supreme Court of India[1], the Court clarified what shall not be terms as abandonment of contract. The Court held that “It is fundamental to the Law of Contract that whenever a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is open to the other party not to perform the original contract [there is an express provision to this effect under section 67 of the Indian Contract Act, 1872]. Such non-performance will not amount to abandonment.”

As per the facts of the case, the Appellant, a registered contractor with the Government of Maharashtra, entered into a contract for work for Regional Rural Piped Water Supply Scheme to be implemented in certain villages. The Appellant was issued a work order but only to be deferred by the Respondents subsequently that too without conveying any reasons whatsoever. Finally when the Appellant was asked to commence the work, essential material for the execution of work (pipes of a particular diameter) were not made available and the Respondents conveyed their intention to alter the terms of the work order by substituting the original material with an alternative one (i.e. pipes of varied diameter). Therefore, the Appellant demanded modified rate accordingly.  The Respondents, thus, asked the Appellant to discontinue the work related to pipelines and directed to start work of different nature on other work sites. Additionally, although the Appellant executed a part of work, against which the invoices were raised, the Respondent failed to honour the same citing shortage of funds as an excuse.   Therefore, the Appellant did not proceed with the work and on Respondent issuing a threat to withdraw the work order and to levy a fine, the Appellant filed a suit for recovery for a sum that included value of the work done, release of the security deposit, compensation and damages. The Trial Court partially decreed the amount. Aggrieved by the said judgment, the Respondents filed a regular civil appeal before the High Court of Judicature at Bombay. The High Court allowed the appeal partially and reduced the decree amount. The Appellant, thus, approached the Supreme Court.

After examining different heads of claims made by the Appellant before the Trial Court, and the extent to which these heads of claims were allowed by the Trial Court, and the heads of claims allowed by the High Court in the impugned judgment, the Court observed that three heads of claims namely (i) the release of security deposit (ii) overheads for the period from January 1989 to 30.09.1990 and (iii) loss of profits, were disallowed by the High Court mainly because the Appellant had abandoned the work under the main contract per the High Court.

Therefore, the question for consideration before the Hon’ble Supreme Court was whether there was abandonment on the part of the Appellant.

After analyzing the sequence of event, the Court found that the Appellant was not guilty of anything including abandonment. The Court further observed that the Respondents never invoked the clause in the contract which enabled the latter to rescind the contract, forfeit the security deposit and entrust the work to another contractor at the risk and costs of the Appellant. The Respondents did not allege breach of contract on part of the Appellant at any point of time. They even omitted to take any recourse under section 75 of the Contract Act to seek compensation for the damage sustained through the nonfulfillment of the contract. Instead the Respondents attributed abandonment to the Appellant. The Court took note of Section 67 of the Indian Contract Act, 1872 which lays down that if any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal.  Thus the refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as abandonment of contract. After the commencement of work there was a change in the diameter of the pipes supplied by the Respondents for carrying out the contract and the Respondents made request for the performance of additional work without finalization of the modified rates as requested by the Appellant on account of change in the diameter of the pipes. This was held to be a material alteration by the Court on part of the Respondents and when a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is open to the other party not to perform the original contract which shall not amount to abandonment. Further clarifying the concept of ‘abandonment of contract’, the Court explained that “… the abandonment is normally understood, in the context of a right and not in the context of a liability or obligation. Moreover, abandonment is normally understood, in the context of a right and not in the context of a liability or obligation. A party to a contract may abandon his rights under the contract leading to a plea of waiver by the other party, but there is no question of abandoning an obligation. In this case, the appellant refused to perform his obligations under the work order, for reasons stated by him. This refusal to perform the obligations, can perhaps be termed as breach of contract and not abandonment.” The Court therefore allowed the appeal and set aside the order of the High Court.

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If a Statute Prescribes a Method or Modality for Exercise of Power, by Necessary Implication, the Other Methods of Performance are Not Acceptable: SC

Negotiable Instruments

It is well recognized principle of law that if a statute has conferred a power to do an act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any other manner than that which has been prescribed.[1] The Hon’ble Supreme Court has once again affirmed the same. The principle and the verdict of the Apex Court[2] can be understood better in the light of the fact of the matter.

In view of the failure of a person, accused of dishonor of cheque and being prosecuted under section 138 of the Negotiable Instruments Act, 1881 (“1881 Act“), to deposit 20% of the cheque amount as interim compensation in terms of Section 143(A) of the 1881 Act as per the orders passed by the Senior Civil Judge & JMFC, Nagamangala, the application preferred by the accused under Section 145(2) of the 1881 Act seeking permission to cross-examine the opposite party was found non-maintainable. The accused was not allowed to cross-examine the witness and was ultimately found guilty under section 138 of 1881 Act.

In subsequent appeals, the order of conviction and sentence passed by the Trial Court was confirmed with the remarks that accused did not comply with the order of this Court to deposit 20% of cheque amount, hence, it disclosed that the accused was reluctant in complying with the order of the Court and thus the Magistrate had rightly refused the prayer made by accused seeking permission to cross-examine P.W.1 and proceeded to pass impugned order. On the challenge, the Hon’ble High Court also dismissed the Criminal Revision Petition filed by the accused affirming the view taken by the courts below.

On appeal before the Hon’ble Supreme Court, the question for consideration was precisely whether it is within the competence of the court to deprive an accused of his right to cross-examine a witness if the accused has failed to deposit the interim compensation. In other words, whether the court/authority deviate from the method in which that power has to be exercised by the court as expressly laid down in the statute? The Court examined the provision under section 143(A) of the 1881 Act which confers power to direct interim compensation. As per sub-section (5) of section 143(A), the interim compensation payable under the section may be recovered as if it were a fine under section 421 of the Code of Criminal Procedure, 1973. Thus, the remedy for failure to pay interim compensation as directed by the Court and the method to realize the same is provided for in the statute.

In this background, the Court applied the law settled by the Privy Council in Nazir Ahmad vs. King Emperor [AIR 1936 Privy Council 253 (2)] and relied upon by the Supreme Court in its decision in State of Uttar Pradesh vs. Singhara Singh and others [AIR 1964 SC 358] that “where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden”. The law was reiterated in J.N. Ganatra vs. Morvi Municipality [(1996) 9 SCC 495] and Commissioner of Income Tax, Mumbai vs. Anjum M.H. Ghaswala [(2002) 1 SCC 633] where it was held that “It is a normal rule of construction that when a statute vests certain power in an authority to be exercised in a particular manner then the said authority has to exercise it only in the manner provided in the statute itself.” While applying the law to the facts of the case, the Court held that Section 143(A) nowhere contemplates that an accused who had failed to deposit interim compensation could be imposed with any other consequence including foreclosing the right to cross-examine the witnesses examined on behalf of the complainant. As per law, the interim compensation can only be recovered as if it were a fine under section 421 of the Code of Criminal Procedure, 1973. Therefore, any exercise of power by the Courts otherwise, goes beyond the permissible exercise of power given under the section. The Court accordingly ruled that the order of the lower court suffered from an inherent infirmity and illegality and was liable to be set aside.

[1] Taylor v. Taylor [(1875) 1 Ch D 426

[2] Noor Mohammed v. Khurram Pasha [Criminal Appeal No. 2872 of 2022]

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The Power of Adjudicatory Authority under Section 7(5)(a) of Insolvency and Bankruptcy Code is Discretionary

Insolvency and Bankruptcy

The Hon’ble National Company Law Tribunal admitted the application of Axis Bank under section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) of Vidarbha Industries Power Limited, the Appellant who approached the Hon’ble Supreme Court in the matter of Vidarbha Industries Power Limited v. Axis Bank [CIVILAPPEAL NO. 4633 OF 2021] after Hon’ble Appellate Tribunal, NCLAT refused to stay the proceedings initiated by Axis Bank (Respondent).

The Appellant is a Generating Company within the meaning of Section 2(28) of the Electricity Act, 2003.  Under the Act, the business of electricity generating companies is regulated and controlled by the State Electricity Regulatory Commission which determines the tariff chargeable by former. Maharashtra Industrial Development Corporation (MIDC) floated the tender where the Appellant was awarded the contract for implementation of a Group Power Project (GPP). The GPP was later converted into an Independent Power Project (IPP). The Appellant was subsequently permitted to expand the capacity of its power plant by adding a second unit of 300 MW as an IPP. By an order dated 20th February 2013, the Maharashtra Electricity Regulatory Commission (MERC) approved a Power Procurement Agreement between the Appellant and Reliance Industries Limited (RIL) subject to No Objection Certificate (NOC) of MIDC. MIDC granted its NOC to the Power Project Agreement. On 21st June 2013, the Cabinet Committee on Economic Affairs (CCEA) amended the New Coal Distribution Policy 2007. Accordingly, Ministry of Coal (MOC) issued an order directing Coal India Limited (CIL) to sign Fuel Supply Agreements (FSA) with Power Projects with an aggregate capacity of 78,000 MW. The Ministry of Power issued a list of Power Projects with an aggregate capacity of 78,000 MW that were eligible to execute FSAs with CIL. The Appellant was not included in the list.

When the MERC granted approval to RIL to procure power from the Appellant’s Unit, a consolidated Power Purchase Agreement was executed between the Appellant and RIL under which the Appellant agreed to supply and RIL agreed to purchase, power generated from both units of the Appellant’s Power Plant. The agreement was duly implemented by the parties. As a matter of routine in January 2016, the Appellant filed an application before the MERC for the purpose of truing up the three year Aggregate Revenue Requirement and for determination of tariff in terms of MERC (Multi Year Tariff) Regulation 2011, in view of, inter alia, the increase in fuel costs, consequential to the rise in the cost of procuring coal for the purpose of running the power plant. The MERC vide its final order disallowing a substantial portion of the actual fuel costs as claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020. The Appellant filed an appeal being before the Appellate Tribunal for Electricity (APTEL). The APTEL allowed the appeal and directed MERC to allow the Appellant the actual cost of coal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms of the FSA that had been executed, till such time as a FSA was executed in respect of Unit 1.

As per the Appellant a sum of Rs.1,730 Crores was due to the Appellant in terms of the said order of APTEL. When the Appellant filed an application before the MERC for implementation of the directions contained in the APTEL order, MERC filed an appeal before the Supreme Court, challenging the order of APTEL. The Appeal has been pending. In view of the pending appeal of MERC in the Apex Court, the Appellant was unable to implement the directions of APTEL. The Appellant was therefore, for the time being, short of funds. According to the Appellant, implementation of the orders of the APTEL would enable the Appellant to clear all its outstanding liabilities.

Based on this ground of not being able to repay the loan on account of the pending appeal before the Supreme Court and the company being solvent otherwise, the Appellant had filed a Miscellaneous Application before the NCLT when Axis Bank filed a section 7 Application. The MA was rejected and so was the appeal before the NCLAT.

The Appellant approached the Supreme Court mainly contesting the impugned order delivered by NCLAT on the ground that Appellant had been unable to realize the sum of Rs.1,730 Crores and pay the dues of the Respondent, only because an appeal filed by MERC was pending in the Supreme Court. Essentially, the argument of Appellant was that it is in the current situation for no fault of its own, but due to the statutory authorities. MERC had prevented the Appellant from availing the benefit of favourable orders passed by APTEL. While interpreting the provisions of IBC, the Counsel of the Appellant further contended that Section 7(5)(a) of the IBC uses the expression ‘may’ instead of ‘shall’ which has been used in section 9 of the IBC. The word ‘may’  enables NCLT to reject an application, even if there is existence of debt, for any reason that the NCLT may deem fit, for meeting the ends of justice and to achieve the overall objective of the IBC i.e. revival of the company and value maximization. Additionally, NCLT has been given inherent power under rule 11 of the NCLT Rules. Therefore, the Adjudicatory Authority has discretion to admit or not admit an application made under section 7 of the IBC. The given interpretation was strenuously opposed by Axis Bank.

After hearing the arguments on both sides, the Supreme Court observed that the Adjudicating Authority in this matter had found Section 7(5) (a) of the IBC to be mandatory. The NCLAT also indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC. The Apex Court, in principle, agreed to the findings of the NCLT and NCLAT. The Court went on to add that the viability and overall financial health of the Corporate Debtor, however, are not extraneous matters.

While applying the same to the facts of the case, Court held that an award of the APTEL in its favour, where a sum of Rs.1,730 crores (an amount far exceeding the claim of the Financial Creditor), is realisable by the Corporate Debtor, cannot be completely disregarded. The Court applied the rule of literal interpretation and agreed with the interpretation given by the Counsel for the Appellant that the word “may” in section 7(5)(a) confers discretion to admit or reject the application made by a financial creditor even if the dual conditions of debt and default are fulfilled. The Court in this regard referred to the judgments in Lalita Kumari v. Government of Uttar Pradesh and Ors [(2014) 2 SCC 1], B. Premanand v. Mohan Koikal [(2011) 4 SCC 266 ] and Hiralal Rattanlal v. State of Uttar Pradesh [(1973) 1 SCC 216].

The Court then went on to underline the ‘noticeable differences’ between the procedure under section 7 and section 9 of the IBC. After deliberating on the provisions, the Court observed that “Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor” which persuaded the Courts to conclude that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. Therefore, while dealing with an application under section 7 of the IBC, the Adjudicatory Authority may examine the “expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor.”

While reiterating the difference laid down in Swiss Ribbons case between the financial and operational creditors, the Court observed that the Legislature has consciously differentiated the two. While the credits extended by financial creditors are often long term credits which are secured and on which the operation of the corporate debtor depends, operational debts are usually unsecured, of a shorter duration and of lesser amount. The two cannot be equated. Further the financial strength and nature of business of a financial creditor cannot be compared with that of an Operational Creditor, engaged in supply of goods and services as the “impact of the non-payment of admitted dues could be far more serious on an Operational Creditor than on a financial creditor.” Therefore, a little more flexibility has been conferred to admit the application of the financial creditor. The Court held that “If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application.” The Court, however, clarified that once the application under section 7 is rejected by the Adjudicatory Authority but its dues continue to remain unpaid, the financial creditor may apply afresh for initiation of CIRP.

The Court while concluding touched upon the difference between a company temporarily defaulting in repayment of its financial debts and a company which has actually become insolvent or bankrupt. It is only in the latter circumstances that the question of time bound initiation and completion of CIRP shall arise. The Court further clarified that the judgment in Swiss Ribbons case was delivered in the context of a challenge to the vires of the IBC. It does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary and thus shall not be applicable to the issue involved in the case in hand. The Court cautioned that ordinarily the Adjudicatory Authority shall admit the application under section 7 of the IBC where the twin conditions are fulfilled. It is only when there are good reasons not to admit the petition that the NCLT shall exercise its discretion to decide otherwise. The Supreme Court thus gave its judgment setting aside the impugned order and directing the NCLT to reconsider the matter in the light of the prevailing law.

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Object Of IBC is Not To Penalize Solvent Companies For Non-Payment Of Disputed Dues: Reaffirmed by Hon’ble Apex Court

Insolvency and Bankruptcy

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.

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