Summary
The Supreme Court set aside the NCLAT’s direction effectively requiring settlement on pain of insolvency and upheld rejection of the operational creditor’s application. The disputed invoice claims had been rejected in arbitration and no enforceable award or later adjudication supported their recovery. The insolvency process could not replace a recovery forum for a genuinely disputed claim. Having examined the merits, the Court dismissed the creditor’s NCLAT appeal and applications rather than remanding.
Issues
- Whether the operational creditor could invoke insolvency on the disputed invoice claims.
- Whether the NCLAT was justified in pressing for settlement without addressing the earlier proceedings.
- Whether remand was necessary.
Provisions considered
- Section 9, particularly section 9(5)(ii)(d), Insolvency and Bankruptcy Code, 2016A genuine pre-existing dispute defeated the operational-creditor application. The adjudicating authority had to test whether the contention was plausible and supported, rather than decide the underlying dispute as a recovery court. (¶¶ 9, 10, 11, 12, 14, 15)
Held
- The invoice claims at issue had not resulted in an award payable to the creditor. The arbitral rejection, unsuccessful execution attempt and debtor’s express dispute could not be bypassed through an insolvency demand. (¶¶ 4, 5, 6, 7, 12, 14)
- The NCLAT’s order effectively pressed the debtor to settle under threat of insolvency without explaining why the amount was payable despite the prior proceedings. That approach was unsustainable. (¶¶ 1, 2, 13)
- For an operational debt, a real pre-existing dispute supported by a plausible contention requiring investigation barred admission. The defence need not be proved likely to succeed, but could not be spurious, hypothetical or illusory. The Code was not a substitute for a recovery forum. (¶ 15)
- The Supreme Court examined the merits and found the NCLT’s rejection justified. It allowed the appeal, set aside the NCLAT order and dismissed the creditor’s pending company appeal and miscellaneous applications, without costs. (¶ 16)
Result
Appeal allowed; NCLAT order dated 4 September 2018 set aside. Creditor’s NCLAT company appeal and miscellaneous applications dismissed, leaving the NCLT rejection intact. No order as to costs.