Thursday, March 21, 2024

PRE-EXISTING DISPUTES, FRAUD: WHTHER NCLT HAS JURISIDCTION UNDER IBC 2016?

 


PRE-EXISTING DISPUTES, FRAUD: WHTHER NCLT has jurisidction under IBC 2016?

The Kolkata bench of NCLT in a recent judgment i.e in  Company Petition (IB) No. 154/KB/2022 in a matter captioned as Abdul Hannan Vs  M/s. Jai Jute and Industries Limited has deliberated upon the effect of pre-existing dispute in preferring Insolvency petition u/s 9 of Insolvency & Bankruptcy Code 2016 and also if the allegation of fraud or forgery could be deliberated and decided by the NCLT.  It is pertinent to mention that whether the Insolvency Petition is preferred by Financial Creditor (FC) u/s 7 of Insolvency & Bankruptcy Code (In short IBC 2016) or u/s 9 of the IBC 2016 preferred by Operational Creditor (OC), disputed claim are not required to be considered in the aforesaid petitions. The NCLT Kolkata in Abdul Hannan (Supra) case has revisited the judicial precedents and adjudicated the issues as framed hereunder effectually. Moreover, whether the Tribunal shall be competent to deal with the allegation of fraud or forgery has also been dealt with. In the backdrop of given facts, the issues that fell for determination:

(i) Whether a Police Complaint can be considered as preexisting dispute.

(ii) Whether the issue relating to forgery and fabrication can be decided in a summary proceeding under I&B Code.

Before delving further it may be apt to peruse the terms of Section 9 of the IBC 2016, more particularly, sub-clauses (1) to (3). The same is as under:

(1)  After the expiry of the period of Ten (10) days from the date of delivery of the notice or invoice demanding payment under sub-Section (1) of Section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a Corporate Insolvency resolution Process (CIRP).

(2)  The application under sub-section (1) be field in such form and manner and accompanies with such fee as may be prescribed.

(3)   The operational creditor shall, along with the application shall furnish-  

(a)         A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b)         An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c)          A copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available.

The perusal of the aforesaid shall itself reveal the emphasis to the effect that there is no pre-existing dispute and the corporate debtor shall have to be notified and it is to be further specified that no notice of dispute from the corporate dispute was received. Therefore, the emphasis on no dispute is the basic limb for preferring application under section 9 of the Insolvency & Bankruptcy Code (IBC) 2016. Thus, if any disputes existed, from the bare terms of section 8 & 9 of IBC, the application by the Operational Creditor may not pass muster. The law elucidated has reinforced this.

                                           LAW

The NCLT, Kolkata had relied upon various judgments of NCLAT before adjudicating the aforesaid issues.

1.   Hon’ble NCLAT in Sherbahadur D. Yadav Vs. M/s. Rohan Dyes and Intermediates Ltd. in Company Appeal (AT) (Ins) No. 472 of 2021 reported in (2022) ibclaw.in 78 NCLAT wherein the Hon’ble NCLAT, held that:

“8. When the allegations against each other are serious allegations including allegations of offence against each other, we are not convinced by the Appellant that police complaint do not evidence any dispute between the parties. It is to be noted that all the aforesaid complaints are much before initiation of proceedings u/s 9 by the Appellant. The Adjudicating Authority has not committed any error in relying of the facts and materials on record to come to the conclusion that there was pre-existing dispute between the parties.’

“9. We are of the view that IBC proceedings are not for the purposes of adjudicating such dispute between the parties and are not the recovery proceedings to recover the unpaid amount by the official creditor whose claim is disputed by the ‘Corporate Debtor’.’

2.   Hon’ble NCLAT in Mr. Anil J. Nemaavarkar vs. M/s. Kumar Builders Mumbai Realty Pvt. Ltd. in Company Appeal (AT) (Insolvency) No. 330 of 2022 reported in (2022) ibclaw.in 270 NCLAT that:

“5. We are not convinced with the submissions of the Learned Counsel for the Appellant that there was no dispute raised before the Demand Notice under Section 8 was issued by the Appellant. Appellant himself has filed large number of complaints including Police Complaint and Complaint before the Labour Authority regarding his claim and making other serious allegations against the Corporate Debtor. We are of the view that Insolvency and Bankruptcy Code is not for resolving such dispute, the remedy of the Appellant with regard to his services benefits if any, lies elsewhere and Adjudicating Authority has rightly rejected the Application noticing the ‘pre-existing dispute’ between the parties.’

“The Appeal is dismissed.”

The overwhelming view therefore is that the Police Complaint, prior to the issuance of the statutory notice of demand under Section 8 of the I&B Code, prosecuting a dispute regarding the supply of inferior goods and/or service shall be  a “pre-existing dispute” and application under section 9 of IBC 2016 shall not be maintainable. It is consistently held that the Tribunals under IBC 2016 is not a recovery court for adjudication of disputes and only the admitted liability shall fall within the domain of the Tribunal and adjudication of disputes shall be the domain of civil courts.

Issue of fraud and its adjudication by NCLT

 

The second issue framed in the above reference relates to fraud and whether NCLT shall be competent to adjudicate about it.

1.   That in a matter captioned as Radha Exports (India) Pvt. Limited vs. K.P. Jayaram reported at MANU/SC/0646/2020: (2020) 10 SCC 538, wherein the Hon’ble Apex Court held that:

“16. Allegations of forgery and fraud are not decided in proceedings Under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports.’

2.   That in Jaginder Singh Lather v. AU Small Finance Bank Ltd. reported at 2018 SCC OnLine NCLAT 706, the Hon’ble NCLAT held that:

“3. In the present appeal this Appellate Tribunal cannot decide issue such as whether the document produced by a party is forged and fabricated or not, though it is always open to aggrieved person to file an application under Section 65 of the I & B Code with such allegation.”

3.   That in Shelendra Kumar Sharma v. DSC Ltd., reported in 2019 SCC OnLine NCLAT 1274, it is laid down that:

“5. In view of such infirmity, we observe that the application was filed by the Appellant with an intent to receive the dues from the Corporate Debtor and not with intention for resolution or liquidation, therefore, we hold that the Adjudicating Authority rightly rejected the prayer of the Appellant. So far as the question as to whether the documents are forged or not is concerned, it cannot be determined by the Adjudicating Authority (National Company Law Tribunal) or this Appellate Tribunal and therefore, the Adjudicating Authority rightly not deliberated on such issue.”

4.    That in Satori Global Limited v. Shailja Krishna reported at 2023 SCC OnLine NCLAT 249, the Hon’ble NCLAT has further held that:

“15. We are conscious of the fact that the ‘Gift Deed’ was not challenged which is of significance more so when the ‘title of Shares’ is relevant to decide the issue of the maintainability. At the cost of repetition, any dispute with respect to issues relating to ‘fraud’, ‘manipulation’, and ‘coercion’, and false statements cannot be decided in a summary jurisdiction. The contentions of the Learned Counsel for the Respondent that there is ‘over writing on the certificates’, signatures were taken on blank forms, there is mala fide suppression of some documents all require examination of evidence and hence cannot be decided by the NCLT in a summary fashion.”

5.    That the NCLT, New Delhi Bench in the case of Shri T.R. Arya v. Dilawari Motors Pvt. Ltd. reported in (2024) ibclaw.in 44 NCLT has held that:

“32. We are therefore of the considered view that the judgment passed by Hon’ble NCLAT in M/s. Satori Global Case (supra) will apply to the present case. This Tribunal is not empowered to adjudicate the issues relating to serious allegations of fraud and forgery.”

 

Therefore, it emanates from the aforesaid discussion that in a summary proceeding under the I&B Code, the dispute relating to forgery and fabrication of document cannot be adjudicated by the Adjudicating Authority. To examine an application under Section 9 of the I&B Code, the Adjudicating Authority requires to determine whether there is an “operational debt” exceeding the threshold limit as prescribed, whether the documentary evidence furnished with the application substantiating the debt is due and payable and whether there is existence of a dispute between the parties before the receipt of the demand notice of the unpaid operational debt in relation to such dispute. The same is deliberated in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited reported in (2018) 1 SCC 353. The Mobilox (Supra) clearly provides that the expression “and” occurring in section 8(2)(a) may be read as “or” in order to further the object of the statute and/ or to avoid an anomalous situation. It thus follows that, once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority, if it finds that there is a record of dispute , must reject the application under Section 9(5)(2)(d), more so,  if notice of dispute has been received by the operational creditor or there is a record of dispute. So long as a dispute truly exists in fact and is not otherwise spurious, or illusory, the Adjudicating Authority has to reject the application. Needless to say that a “dispute” is said to exist, so long as there is a real dispute that would fall within the inclusive definition contained in Section 5(6) of the Code. It shall also be worthwhile to refer to a Supreme Court judgment reported as Transmission Corporation of Andhra Pradesh Limited Vs. Equipment Conductors and Cables Limited 2018 ibclaw.in 33 SC. The Supreme Court has held that the IBC is not intended to substitute a recovery forum & whenever there is existence of real disputes, the IBC provisions cannot be invoked.

                                   ------

                            Anil K Khaware

Founder & senior Associate

Societylawandjustice.com

 

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