K KISHAN VS M/S VIJAY NIRMAN COMPANY PVT LTD : CASE SUMMARY
The Supreme Court in K Kishan Vs M/s Vijay Nirman Company Pvt Ltd (2018) 17 SCC 662 held that if Section 34 Petition has been filed against an award, the same will be treated as dispute.
FACTS OF THE CASE
Vijay Nirman Company Pvt. Ltd. (Respondent) entered into sub-contract Agreement with one M/s Ksheerbad Construction Pvt. Ltd. (KCPL) for construction and widening of certain section of existing two lane highway to four lane highway on NH67. KCPL and SDM Projects Pvt. Ltd. also entered in separate agreement. A tripartite agreement was also entered among Respondent, KCPL and SDM Projects Pvt. Ltd. During course of project, dispute and differences arose between the parties and the same was referred to arbitral tribunal, which delivered award on 21.01.2017. Claim was allowed in favour of the Respondent.
A notice under Section 8 of the Code dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. In its reply KCPL disputed the invoice. KCPL also filed Petition under Section 34 of the Arbitration and Conciliation Act, 1996 challenging the aforesaid award.
Thereafter a petition was filed under Section 9 of the Code on 14.07.2017. NCLT admitted the Petition vide order dated 29.08.2017 and observed that a Section 34 Petition was pending was irrelevant for the reason that the claims stood admitted and there was no stay on the award. NCLAT concurred with NCLT.
FINDINGS OF THE SUPREME COURT
The Supreme Court observed that Section 9 (5) (ii) (d) shows that an application under Section 8 must be rejected if notice of a dispute has been received by the Operational Creditor. In this case entire basis for the notice under Section 8 is the fact that an Arbitral Award was passed on 21.07.2017 against the Appellant. Reply to Section 8 notice was filed within 10 days as provided under the Code.
The Court noted that Counter Claim No. 1 and 2 was rejected for lack of evidence, Counter claim no. 3 was rejected on the basis of price adjustment clause on merits.
The Supreme Court held in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 that what is important is the existence of the dispute and/or a suit or arbitration proceedings must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be.
Operational Creditors cannot use the Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. If an arbitral award is challenged it is sufficient to be covered under dispute. An alarming result of an operational debt contained in arbitral award for a small amount will jeopardize an otherwise solvent company. The Code cannot be used in terrorrem to extract money although adjudication proceedings for the same is still pending.
The Supreme Court held that Judgment of Australian High Court in Ramsay Health Care Australia Pty Ltd Vs Adrian John Compton (2017) HCA 28 is not applicable in Indian insolvency regime. In this judgment it has been held that where judgment debt has been obtained after testing of merits in adversarial litigation, then in absence of fraud, collision, or miscarriage of justice, bankruptcy court will rarely have substantial reasons to investigate regarding debt.
The Supreme Court in Mobilox Innovations has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.
The Supreme Court held that filing of Section 34 Petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an award, continues even after award , at least till the final adjudicatory process under Section 34 & 37 has taken place. If Section 34 petition is barred by limitation and period of 90 days and discretionary period of 30 days are expired, Insolvency proceedings may be put into operation.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.