INTRODUCTION
The Insolvency and Bankruptcy Code, 2016 (IBC) serves as an umbrella legislation designed to manage disputes related to company law and insolvency matters. The need for the IBC, 2016 was evident, as before its implementation, laws related to insolvency were scattered across different statutes, leading to substantial ambiguities. Similar to a coin with two sides, the IBC 2016 has its own set of limitations and merits, and one significant challenge it faces is related to matters of jurisdiction. A recent ruling by the National Company Law Appellate Tribunal (NCLAT) in the case of Rakesh Kumar vs Flourish Paper & Chemicals Ltd.[1](hereinafter referred to as “Rakesh Kumar”) underscores this challenge. According to the NCLAT’s decision, disputes involving claims and counterclaims fall outside the purview of the Adjudicating Authority due to its summary jurisdiction. It’s crucial to recognize that under IBC, the tribunal operates under a constrained summary jurisdiction, a principle correctly reaffirmed in the case. Consequently, it cannot be compelled to conduct proceedings in the same comprehensive manner as Civil Courts.
BACKGROUND OF THE CASE
In Rakesh Kumar, the operational creditor (Respondent) had provided goods to the debtor. Subsequently, it issued a demand notice under Section 8, citing a default that included interest. In response, the corporate debtor requested compensation of Rs. 250,000 to account for the damages incurred due to the inferior quality of goods supplied by the operational creditor. Following these events, a Section 9 application was filed against the corporate debtor, and the adjudicating authority admitted the application. During this period, the tribunal granted permission for the corporate debtor to deposit Rs. 13.42 lakhs in its name without any prejudice to its rights and contentions.
Subsequently, the corporate debtor made an offer to pay Rs. 24.50 lakhs to the operational creditor. However, the operational creditor did not accept this offer, as they insisted on receiving reasonable interest in addition to the operational debt from the commencement of the Corporate Insolvency Resolution Process (CIRP). Aggrieved by this, the corporate debtor chose to file an appeal with the esteemed NCLAT Delhi.
ARGUMENTS
The appellant’s main argument was that the adjudicating authority failed to consider the preexisting disputes between the parties. Additionally, the appellant claimed they had supplied materials and made advance payments to the operational creditor. As a result of these adjustments, nothing was due or payable to the operational creditor. The operational creditor had received an excess amount.
The respondent countered by asserting that the claim made by the corporate debtor regarding the preexisting disputes was a sham and a fabricated defence to avoid payment liabilities. Furthermore, the counterclaim by the corporate debtor, stating that no payment was due, was deemed false. It was argued that the corporate debtor manipulated the ledger and accounts to create disputes to escape insolvency proceedings.
DECISION
In the present case, the NCLAT upheld the decision of the Adjudicating Authority and referred to the guiding principle established in the Mobilox case. The Court, in the Mobilox case, emphasized that it is not the appropriate stage to assess the merits of a dispute. As long as there is a genuine dispute, the adjudicating authority has the right to reject the application.
However, in this specific case, the NCLAT upheld the findings of the adjudicating authority, which stated that the respondent failed to provide any supporting evidence to demonstrate that it had previously raised concerns about the subpar quality of goods. Therefore, it can be inferred that the dispute raised by the Corporate Debtor is a weak argument and lacks merit. The NCLAT relied on the case Deepak Gupta Vs. Ved Contracts Pvt. Ltd. & Ors[2]. and ruled that claims and counterclaims cannot be accepted as the Adjudicating Authority cannot resolve disputes related to claims and counterclaims in an application filed under Section 9 of the IBC.
GENUINE PRE-EXISTENCE MUST EXIST
Section 8 of IBC mandates that a corporate debtor must notify the existence of a dispute in response to a demand notice[3]. This allows the operational creditor to determine their course of action accordingly. It’s important to note that the NCLAT has the authority to reject Section 9 Applications, but only if the claim existed before the issuance of the Section 8 notice[4]. The mere presence of a dispute, especially a preexisting one, demonstrates that IBC cannot be used solely as a tool for creditors to recover their dues[5]. At the same time, merely having a counterclaim doesn’t automatically invalidate Corporate Insolvency Resolution Process (CIRP) proceedings[6]. In Rakesh Kumar, Despite the appellant’s arguments about the existence of disputes, they failed to provide any evidence to support their claims. Consequently, the tribunal had to assume that the corporate debtor only raised concerns about the goods’ quality when faced with the Section 9 application, which could be considered a moon shine defence[7].
In the case of Greymatter Entertainment Private Limited v. Pro Sportify Private Limited[8], NCLAT noted that a corporate debtor’s failure to respond to a demand notice doesn’t preclude them from raising questions about disputes or claiming that no amount is due and payable. NCLAT also acknowledged that the claims and counterclaims regarding the amounts to be paid and the defence are not baseless or without substance. However, it’s clear that simply asserting the existence of a preexisting dispute isn’t sufficient. As established in the case of SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd[9], NCLT cannot be burdened with addressing counterclaims that are uncertain, undetermined, and unknown.
LIMITATION OF JURISDICTION
Under the IBC, the jurisdiction of the adjudicating authority is limited to verifying whether a default has occurred. Based on this verification, the tribunal can decide to either admit or reject an application. The Supreme Court has clearly stated that the National Company Law Tribunal (NCLT) is not empowered to compel parties to settle a dispute[10]. It emphasized that the NCLT and NCLAT are statutory creations with powers confined to the statute’s provisions. Any action beyond what is prescribed by the statute is beyond their jurisdiction.
The question of jurisdiction, whether a Civil Court or the NCLT, was considered in the Delhi High Court case SAS Hospitality Pvt. Ltd v. Surya Constructions Pvt. Ltd.[11] The Court confirmed that the NCLT has exclusive jurisdiction and made notable observations regarding the powers granted to the tribunals are broader than those of a Civil Court and highlighted the point that the NCLT is a specialized tribunal established for expeditiously and effectively regulating company affairs.
Furthermore, without adequate documents, establishing the existence of a dispute is challenging, and the adjudicating authority cannot delve deeply into the details[12]. The tribunal in the case EPC Contracts India Private Limited v. Regenesis Technologies India Private Limited[13] held that intricate details related to work contracts, including material supply and work execution, should be dealt with by civil courts or arbitrators if the dispute is arbitrable. The tribunal also cannot handle complex legal and factual questions under the Code. In ANC Knit Kraft v. Foremost International Private Ltd.,[14] NCLT, the Chandigarh Bench held that when exercising summary jurisdiction under the Code, the adjudicating authority cannot delve into complicated disputes of fact. In a nutshell, if there are preexisting disputes between the parties before the issuance of a demand notice, the Adjudicating Authority or the NCLAT cannot address these disputed issues within their summary jurisdiction as it can’t check the validity of the same.
CONCLUSION
The National Company Law Tribunal (NCLT) is a specialized tribunal with the specific aim of efficiently overseeing and regulating corporate affairs. The IBC indeed imposes certain limitations on its jurisdiction, as held in Rakesh Kumar. When exercising summary jurisdiction, the adjudicating authority is prohibited from conducting a detailed investigation to determine the existence of disputes. This would go beyond the scope of its permitted jurisdiction. Allowing such actions under the IBC would undermine the very purpose of the legislation and result in frivolous and dishonest litigation. One of the primary goals of the IBC is to ensure the resolution of time-bound insolvency. Allowing baseless cases to be entertained would result in excessive delays, create commercial uncertainty, erode the value of the Corporate Debtor, and make the insolvency process both inefficient and costly. Parties with grievances have the option to approach Civil Courts, which conduct comprehensive trials to ascertain the accuracy of claimed debt amounts through a meticulous examination of documents and the testimony of 9 witnesses when a plaintiff initiates a lawsuit. The judgement was, in fact, by the objectives of IBC, and the tribunal cannot be misused to settle and determine the cases of disputed claims.
Author(s) Name: Shani A R (National Law University of Advanced Legal Studies, Kochi)
Reference(s):
[1] Rakesh Kumar vs Flourish Paper & Chemicals Ltd [2022] Company Appeal (At)(Insolvency) 1161 of 2022.
[2] Deepak Gupta Vs. Ved Contracts Pvt. Ltd. & Ors [2019] Company Appeal (At) (Insolvency) Nos. 1262
[3] Henan Boom Gelatin Co. Ltd. vs. Sunil Healthcare Limited [2019] Company Petition No. IB-1263
[4]Ahluwalia Contracts (India) Limited vs Raheja Developers Limited [2018]C.A(At) (Insolvency) No. 703
[5] Tricolite Electrical Industries Ltd. against Wipro Ltd.[2020] Company Appeal (AT) (Ins) No. 326
[6] Innoventive Industries Ltd vs ICICI Bak and Anr [2017] (11) SCALE 4
[7]Deepak Modi v. Shalfeyo Industries (P) Ltd.[2023] SCC OnLine NCLAT 169
[8] Greymatter Entertainment Private Limited v. Pro Sportify Private Limited [2021] Company Appeal (At) (Insolvency) No. 1043
[9] SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd [2017] CS(Comm) 470/2016 & CC(Comm) 73
[10]‘Disney: Disney Gambles on Free Cricket to Turn the Tables in India’s Streaming War – The Economic Times’ <https://economictimes.indiatimes.com/industry/media/entertainment/media/disney-gambles-on-free-cricket-to-turn-the-tables-in-india-streaming-war/articleshow/103157644.cms?from=mdr> accessed 19 April 2024
[11] SAS Hospitality Pvt Ltd v. Surya Constructions Pvt Ltd.[2016] CS (COMM) 1496
[12]N.C. Goel & Maya Goel v. Piyush Infrastructure India Pvt. Ltd.[2022] SCC OnLine NCLT 159
[13] EPC Contracts India Private Limited v. Regenesis Technologies India Private Limited [2019] SCC ONLINE NCLAT 1263
[14] ANC Knit Kraft v. Foremost International Private Ltd [2017] SCC ONLINE NCLT 1634
