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Invocation of Arbitration Clause Sufficient to Prove Pre-Existing Dispute: National Company Law Appellate Tribunal, Principal Bench, New Delhi

Whether the factum of invocation of an arbitration clause in pursuance of fulfilment of contractual obligations pertaining to operational creditor and corporate debtor, was a question considered by the NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI, before a bench consisting of Justice Anant Bijay Singh, Member (Judicial) and Ms. Shreesha Merla, Member (Technical), in the matter of Hindustan Petroleum Corporation Ltd. & Anr. vs. S S Engineers & Anr. [COMPANY APPEAL (AT) (INSOLVENCY) No. 332 of 2020], on 10.01.22.

The facts of the case were that considering the legal framework as a whole, i.e., provisions of Section 3(23) along with other provisions of the Insolvency and Bankruptcy Code, 2016, Learned Adjudicating Authority (National Company Law Tribunal, Kolkata Bench, Kolkata), held that the term “person” in would include sole proprietorship firm as well being eligible to file petition under Section 7 or 9. Additionally, it was held that an analysis of the genuineness of the claim of pre-existing dispute, and amount of outstanding debt, was necessary in the facts and circumstances of the case, hence, it has been so analysed on the basis of the provisional statement prepared and filed by the Corporate Debtor itself. Aggrieved by the Order dated 12.02.2020 passed by the Adjudicating Authority, the appellant preferred this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016.

The Learned Counsel for the Appellants, contended that the Application for initiation of CIRCorporate Insolvency Resolution Process (CIRP) was barred by limitation. Additionally, it was argued that various Form-C’s issued by the Corporate Debtor would not amount to an ‘Acknowledgement of Debt’ so as to extend the period of limitation. Further, it was asserted that the project in question was a turnkey project and the bifurcation given in the said Purchase Order was for the purpose of calculation of tax and not otherwise. The said Purchase Orders were under the same tender and the disputes which arose were under the same tender. It was contended that the Adjudicating Authority failed to take note that the Purchase Order and the tender documents provide for a turnkey based project. Further, it was contended that there is a ‘Pre-Existing Dispute’ between the parties as the first Respondent failed to honour the terms of the Purchase Order and its terms and conditions and delayed the supply of material, failed to deploy completion contractors, delayed the execution of the project and rendered inferior and substandard quality of work and finally withdrew from the Project abandoning the site as can be seen from the correspondence and the Minutes of the Meetings held with the Operational Creditor. It was also averred that It is on account of abandoning of the project by the Operational Creditor that the Corporate Debtor had suffered huge losses and made excess payments to the sub-contractors. The Corporate Debtor had cleared all outstanding dues in a timely manner as was agreed to by the first Respondent in the Minutes of the Meetings. It was also submitted that the Corporate Debtor invoked the Arbitration clause seeking to refer the ‘disputes for adjudication by an Arbitrator’. It was also contended that the Application for initiation of CIRP was not properly authorised as the business of the sole proprietorship is not a legal entity; and that the Corporate Debtor acts as the extended limb of the Central Government and cannot be put under CIRP.

The Learned Counsel for the Respondents, contended that the work is divided into three parts (a) supply (b) works contract (c) services. He contended that the C Forms/Sales Tax declaration were given for the entire supply portions and this amounts to liability and admission as stipulated under Section 18 of the Limitation Act, 1963. Reliance was placed on various precedents in order to affirm that submission of Form-C is a significant element itself as the same signifies a jural relationship between the parties. It was submitted that when liability is shown in the Balance Sheet, it itself is a clear ‘Acknowledgement of Debt’ by the Company and has the effect of extending the period of limitation under Section 18 of the Limitation Act, 1963. Additionally, it was contended that there is no ‘Pre-Existing Dispute’ and that in the provisional Financial Statement given by the Corporate Debtor, there is a clear admission of debt owed to the Operational Creditor. It was also asserted that the Arbitration Notice issued on 09.07.2016 was for the recovery of the amount as there was an Arbitration clause in the tender and does not in any manner bar any initiation of Insolvency Proceedings.

The National Company Law Appellate Tribunal, Principal Bench, New Delhi, considered the relevant facts and arguments, and perused the precedents relied on, in order to come to a conclusion. It was noted from the subject matter of the tender that the execution of the Project is on a lumpsum turnkey basis, whereby and whereunder the contractor was responsible for the entire execution of the work in accordance with the specifications and to the satisfaction of the Corporate Debtor. It was acknowledged that the issue raised in the current appeal needs to be adjudicated on the touchstone of the ratio laid down by the Hon’ble Supreme Court in a catena of judgements with respect to ‘Pre-Existing Dispute’. It was noted that the law was clear that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. In the present case, it was noted that, the correspondence on record evidences that there indeed was a delay in the performance of the Contract and the final Notice was issued on 01.12.2013 by the Corporate Debtor to complete the work. It was noted that instead of payment of dues, several allegations of inadequacies were raised by the Corporate Debtor on the work. The Tribunal found it pertinent to note that on 09.07.2016, ‘prior to the issuance of the Demand Notice under Section 8 of the Code’, the ‘Operational Creditor’ invoked Arbitration pursuant to the 8 project orders issued by the ‘Corporate Debtor’, which itself substantiates the ‘Existence of a Dispute’. It was also opined that regarding whether ‘C’ Forms, issued in acknowledgement of completion of sale, would amount to ‘Acknowledgement of Debt’ as envisaged under Section 18 of the Limitation Act, 1963, the Tribunal did not wish at this juncture, to go into those aspects as it was of the considered view that there is a ‘Pre-Existing Dispute’ between the parties. The appeal was accordingly allowed, and the Order of the Adjudicating Authority was Set Aside.

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Judgement reviewed by Bhargavi

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