By an order rendered in the case of Kay Bouvet Engineering Limited v. Overseas Infrastructure Alliance (India) Private Limited [Civil Appeal No. 1137 of 2019], decided on August 10, 2021 ("Judgement"), the Supreme Court ("SC") has upheld the decision made by the National Company Law Tribunal ("NCLT") on July 26, 2018, in which the SC found that the application for corporate insolvency resolution process will be denied so long as a dispute actually exists and is being litigated.
In the instant case titled Kay Bouvet Engineering Limited v. Overseas Infrastructure Alliance (India) Private Limited the issue raised for clarification before the Apex Court was:
Whether the Appellant's claim that there is a dispute can be deemed to be fictitious, illusory, or unsupported by any evidence?
With regard to this issue, The SC stated that upon the occurrence of a default, an operational creditor is required to provide to the corporate debtor a demand notice of unpaid operational debt or a copy of an invoice, seeking payment of the amount involved in the default. The corporate debtor is obligated to either notify the operational creditor of a disagreement or settle any outstanding operational debt within ten days of receiving the demand notice or copy of the invoice. According to Section 9 of the IBC, if the operational creditor does not receive payment from the corporate debtor within ten days of the date of delivery of the notice or invoice demanding payment under Section 8(1) of the IBC, or notice of the dispute under Section 8(2) of the IBC, the operational creditor is then entitled to file an application before the NCLT for initiating the CIRP.
The SC pointed out that in the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353, it was noted that one of the goals of the IBC regarding operational debts is to make sure that the amount of such debts, which is typically lower than that of financial debts, does not enable operational creditors to put the corporate debtor into the CIRP prematurely or initiate the process for unrelated reasons. Therefore, it is enough that a despite exists between the parties.
The SC also clarified the NCLT's function in deciding disputes under Section 8(2)(a) of the IBC and the parameters of the statutory phrase "presence of a dispute." The SC believed that once the operational creditor submitted an otherwise complete application, the NCLT was required to deny the application in accordance with Section 9(5)(ii)(d) of the IBC if the operational creditor had received a notice of dispute or if there was a record of dispute in the information utility. The SC emphasised that notice of the existence of a disagreement or the pending status of a lawsuit or arbitration proceedings relating to a dispute between the parties must be provided by the corporate debtor to the operational creditor. The SC confirmed the NCLT's decision and ruled that it had correctly dismissed the Respondent's motion on the basis that the Appellant had created a disagreement. The SC ruled that the NCLAT erred in overturning the NCLT's order because it had blatantly misapplied the law and the facts. The NCLAT's order was thereby overturned by the SC.
The Court categorically stated that,
“It is thus abundantly clear that the case of Kay Bouvet that the amount of Rs.47,12,10,000/ which was paid to it by Overseas, was paid on behalf of Mashkour from the funds released to Overseas by Exim Bank on behalf of Mashkour, cannot be said to be a dispute which is spurious, illusory or not supported by the evidence placed on record. The material placed on record amply clarifies that the initial payment which was made to Kay Bouvet as a subContractor by Overseas who was a Contractor, was made on behalf of Mashkour and from the funds received by Overseas from Mashkour. It will also be clear that when a new contract was entered into between Mashkour and Kay Bouvet directly, Mashkour had directed the said amount of Rs.47,12,10,000/ to be adjusted against the supplies to be made to Mashkour Sugar Company Ltd. for the purpose of completing the Project. On the contrary, the documents clarify that the termination of the contract with Overseas would not absolve Overseas of any liability for the balance of the LoC 1st tranche of 25 Million disbursed to them other than USD 10.62 paid to Kay Bouvet.”