Mirza & Associates, Advocates & Attorneys

“Application under Section 9 IBC is maintainable despite proceedings of  execution  pending before Civil Court” – National Company Law Appellate Tribunal [NCLAT]

The NCLAT Principal bench of Justice Ashok Bhushan and Dr Alok Srivastava in a recent case, Mukul Agarwal vs Royale Resinex Pvt. Ltd & Anr decided that the operational creditor is not barred from filing a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 because an execution case is pending.

It was further stated by NCLAT that the mere fact that an execution application is pending does not bar the initiation of proceedings under the code. The petition filed by the Operational Creditor cannot be declared to be non-maintainable simply because the corporate debtor is a going concern.

“14…In the present case, the Application filed by Respondent under Section 9 cannot be said to be filed with malicious intent, when in spite of Decree passed by the Civil Court in favor of the Respondent, no payments were made to it. The Operational Creditor had every right to invoke the provisions of Code. The mere fact that the Execution Application filed by Operational Creditor is pending in Civil Court was no impediment for initiating proceedings under the Code.”

Understanding Section 9 of IBC

According to Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under Section 8(2) after 10 days from the date of delivery of the notice or invoice that demands payment under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), the operational creditor may file an application with the Adjudicating Authority to initiate a corporate insolvency resolution process(CIRP).

An operational creditor may nominate a resolution professional to operate as an interim resolution professional when starting a corporate insolvency resolution process under section 9 of the Insolvency and Bankruptcy Code.

In order to proceed with the lawsuit, the Supreme Court has also provided some crucial ingredients of Section 9 of the IBC, which are as follows:

• In cases of default
• The service of a demand letter for an overdue operational debt or
• The operational creditor has not received payment from the corporate debtor within 10 days of receipt of the demand notice or copy of the invoice demanding payment or received a response from the corporate debtor that does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt.

Legal Standpoint of Section 9 Before This Judgment

Before this judgment was pronounced, it was an established law that the existence of a dispute is in fact a ground to reject such CIRP application. In Kay Bouvet Engineering Ltd. v. Overseas Infrastructure Alliance (India Pvt. Ltd.), the Court granted the appeal against the ruling of the National Company Law Appellate Tribunal (NCLAT), which had overruled the NCLT’s rejection of Overseas’ plea for the commencement of CIRP against Kay Bouvet under section 9 of the IBC.

The purpose of operational debt under the IBC, according to the Court, is to ensure that obligations smaller than financial debts do not bring the corporate debtor into insolvency or enable the beginning of CIRP for non-financial reasons. As a result, the ‘existence of a dispute’ is sufficient, and Section 9 of the IBC would not apply.

Conclusion

Therefore, this order of  NCLAT will be giving a binding precedent that the Application under Section 9 filed by the Operational Creditor cannot be defeated on the ground that any Application for execution was pending and even when a going concern is unable to discharge its debt, the Operational Creditor is entitled to invoke Section 9.

Hence, the Application filed by the Operational Creditor under Section 9 cannot be said to be non-maintainable solely on the ground that the Corporate Debtor is a going concern.