# M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR

- **Citation:** [2021] 11 S.C.R. 350
- **Court:** Supreme Court of India
- **Decided:** 2021-10-01
- **Case number:** Civil Appeal No. 5899 of 2021
- **Bench:** Dinesh Maheshwari, Vikram Nath
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-jai-balaji-industries-v-d-k-mohanty-anr-34755
- **Pages:** 27

## Headnote

Insolvency and Bankruptcy Code, 2016 - ss. 8, 9, 62 -
Arbitration and Conciliation Act, 1996 - The appellant and
respondent no.2 entered into Memorandums of Understanding,
whereby the respondent no.2 agreed to supply, 1 lakh and 7 lakh
metric tons of iron ore per month to the appellant - Dispute arose
between the parties as regards the requisite supply and payment -
Arbitration clause was invoked - In arbitral awards the respondent
company was held liable to make payment - Respondent company
filed petition u/s. 34 of the 1996 Act, which were dismissed by the
District Court - Appeals were filed before the High Court u/s.37 of
the 1996 Act - On 22.11.2019, the appeals were dismissed in default
for non-appearance of the respondent - On 17.12.2019, the
respondent filed restoration applications - These applications were
allowed on 02.03.2020 by the High Court - Before such restoration
of appeals, the appellant had sent two demand notices u/s.8 of the
2016 Code on 14.02.2020 - Appellant moved NCLT u/s. 9 seeking
initiation of CIRP against respondent company - NCLT took the
view that on the day the appellant served demand notices to the
respondent u/s. 8 and the date when the application u/s. 9 was filed,
no proceedings were pending and hence no dispute was pending -
Therefore, the NCLT admitted applications made by the appellant
u/s.9 of the Code in its capacity as an operational creditor; initiated
CIRP in relation to the respondent company - However, the NCLAT
held that a dispute was in existence prior to the issuance of demand
notices and applications for restoration were filed with advance
notice to the appellant- operational creditor - On appeal, held: On
facts, it remains indisputable that even if appeals were dismissed in
default on 22.11.2019, the respondent company indeed moved an
applications for restoration on 17.12.2019 with advance notice to
the appellant - Thus, on date of issuance of demand notices
(i.e.14.02.2020), the appellant was well aware that appeals u/s. 37
of the 1996 Act had not been decided on merits - This moving of
application for restoration of appeal u/s.37 of the 1996 Act and
[2021] 11 S.C.R. 350
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bringing it to the notice of the operational creditors is sufficient to
bring the matter within the four corners of 'pre-existing dispute',
so as to negate any attempt by the operational creditor to seek
insolvency resolution - Also, the default dismissal of the appeal
could only be regarded as a partial eclipse, which momentarily puts
dispute in hibernation - When restoration of appeal is granted, it
definitely re-activates the dispute - For the purpose and in scheme
of the Code, even pendency of an application for restoration is
sufficient to bring the matter within the four corners of "pre-existing
dispute" - The applications moved by the appellant for initiation of
CIRP were required to be rejected in terms of s.9(5)(ii)(d) of the
2016 Code - The NCLAT had rightly set aside the orders passed by
the NCLT.
Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt.
Ltd.: (2018) 1 SCC 353 : [2017] 10 SCR 1006; Swiss
Ribbons Private Limited & Anr. v. Union of India &
Ors.: (2019) 4 SCC 17: [2019] 3 SCR 535 - relied on.
K. Kishan v. Vijay Nirman Company Pvt. Ltd.: (2018)
17 SCC 662 : [2018] 10 SCR 959; Vareed Jacob v.
Sosamma Geevarghese & Ors.: (2004) 6 SCC 378 :
[2004] 1 Suppl. SCR 534; Addagada Raghavamma &
Anr. v. Addagada Chenchamma & Anr.: AIR 1964 SC
136 - referred to.
Case Law Reference
[2018] 10 SCR 959
referred to
Para 7.3
[2017] 10 SCR 1006
relied on
Para 8.2
[2004] 1 Suppl. SCR 534
referred to
Para 8.2
[2019] 3 SCR 535
relied on
Para 12

## Text

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SUPREME COURT REPORTS
[2021] 11 S.C.R.
350
M/S. JAI BALAJI INDUSTRIES
v.
D.K. MOHANTY & ANR.
(Civil Appeal No. 5899 of 2021)
OCTOBER 01, 2021
[DINESH MAHESHWARI AND VIKRAM NATH, JJ.]
Insolvency and Bankruptcy Code, 2016 - ss. 8, 9, 62 -
Arbitration and Conciliation Act, 1996 - The appellant and
respondent no.2 entered into Memorandums of Understanding,
whereby the respondent no.2 agreed to supply, 1 lakh and 7 lakh
metric tons of iron ore per month to the appellant - Dispute arose
between the parties as regards the requisite supply and payment -
Arbitration clause was invoked - In arbitral awards the respondent
company was held liable to make payment - Respondent company
filed petition u/s. 34 of the 1996 Act, which were dismissed by the
District Court - Appeals were filed before the High Court u/s.37 of
the 1996 Act - On 22.11.2019, the appeals were dismissed in default
for non-appearance of the respondent - On 17.12.2019, the
respondent filed restoration applications - These applications were
allowed on 02.03.2020 by the High Court - Before such restoration
of appeals, the appellant had sent two demand notices u/s.8 of the
2016 Code on 14.02.2020 - Appellant moved NCLT u/s. 9 seeking
initiation of CIRP against respondent company - NCLT took the
view that on the day the appellant served demand notices to the
respondent u/s. 8 and the date when the application u/s. 9 was filed,
no proceedings were pending and hence no dispute was pending -
Therefore, the NCLT admitted applications made by the appellant
u/s.9 of the Code in its capacity as an operational creditor; initiated
CIRP in relation to the respondent company - However, the NCLAT
held that a dispute was in existence prior to the issuance of demand
notices and applications for restoration were filed with advance
notice to the appellant- operational creditor - On appeal, held: On
facts, it remains indisputable that even if appeals were dismissed in
default on 22.11.2019, the respondent company indeed moved an
applications for restoration on 17.12.2019 with advance notice to
the appellant - Thus, on date of issuance of demand notices
(i.e.14.02.2020), the appellant was well aware that appeals u/s. 37
of the 1996 Act had not been decided on merits - This moving of
application for restoration of appeal u/s.37 of the 1996 Act and
[2021] 11 S.C.R. 350
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bringing it to the notice of the operational creditors is sufficient to
bring the matter within the four corners of 'pre-existing dispute',
so as to negate any attempt by the operational creditor to seek
insolvency resolution - Also, the default dismissal of the appeal
could only be regarded as a partial eclipse, which momentarily puts
dispute in hibernation - When restoration of appeal is granted, it
definitely re-activates the dispute - For the purpose and in scheme
of the Code, even pendency of an application for restoration is
sufficient to bring the matter within the four corners of "pre-existing
dispute" - The applications moved by the appellant for initiation of
CIRP were required to be rejected in terms of s.9(5)(ii)(d) of the
2016 Code - The NCLAT had rightly set aside the orders passed by
the NCLT.
Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt.
Ltd.: (2018) 1 SCC 353 : [2017] 10 SCR 1006; Swiss
Ribbons Private Limited & Anr. v. Union of India &
Ors.: (2019) 4 SCC 17: [2019] 3 SCR 535 - relied on.
K. Kishan v. Vijay Nirman Company Pvt. Ltd.: (2018)
17 SCC 662 : [2018] 10 SCR 959; Vareed Jacob v.
Sosamma Geevarghese & Ors.: (2004) 6 SCC 378 :
[2004] 1 Suppl. SCR 534; Addagada Raghavamma &
Anr. v. Addagada Chenchamma & Anr.: AIR 1964 SC
136 - referred to.
Case Law Reference
[2018] 10 SCR 959
referred to
Para 7.3
[2017] 10 SCR 1006
relied on
Para 8.2
[2004] 1 Suppl. SCR 534
referred to
Para 8.2
[2019] 3 SCR 535
relied on
Para 12
CIVIL APPELLATE JURISDICTION: Civil Appeal No.5899 of
2021.
From the Judgment and Order dated 17.08.2021 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No.889 of 2020.
With
Civil Appeal No.5904 of 2021
Diwakar Maheshwari, Karun Mehta, Advs. for the Appellant.
M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR.
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The following Order of the Court was passed :
ORDER
1. By way of these appeals under Section 62 of Insolvency and
Bankruptcy Code, 2016,1 the appellant, said to be an operational creditor
of the respondent No. 2 company, seeks to question the common order
dated 17.08.2021 passed by the National Company Law Appellate
Tribunal, Principal Bench, New Delhi,2 in Company Appeal (AT)
(Insolvency) No. 888/2020 and Company Appeal (AT) (Insolvency) No.
889/2020, whereby the Appellate Tribunal, after holding that the
operational debt claimed by the appellant was not free from pre-existing
dispute, set aside the orders dated 30.09.2020 passed by the National
Company Law Tribunal, Kolkata Bench, Kolkata,3 in admitting the
application made by the appellant for initiation of Corporate Insolvency
Resolution Process4 concerning the respondent No. 2 company.
2. Having regard to the questions sought to be raised, elaboration
on all the factual aspects pertaining to the claim of the appellant and the
dispute raised by the respondents is not necessary. Only a brief reference
to the relevant background would suffice.
3. The appellant M/s. Jai Balaji Industries is engaged in the
business of manufacturing and supply of iron and steel products, having
its plants in the States of West Bengal and Chhattisgarh.5 The respondent
No. 2 Orissa Minerals Development Company Limited is a company
engaged in the business of selling iron ore, having its mines in the State
of Orissa.6 The respondent No. 1 is the Managing Director of this
company.
3.1. The appellant and the respondents entered into two
Memorandums of Understanding7 on 13.08.2003 and 11.03.2004, whereby
the respondent No. 2 agreed to supply, respectively, 1 lakh and 7 lakh
metric tons of iron ore per month to the appellant. A dispute ensued
1 Hereinafter also referred to as 'IBC' or 'the Code'.
2 Hereinafter also referred to as 'NCLAT' or 'the Appellate Tribunal'.
3 Hereinafter also referred to as 'NCLT' or 'the Tribunal'.
4 'CIRP' for short.
5 The appellant is also referred hereinafter as 'the operational creditor', as per the
context.
6 The respondent No. 2 company is also referred hereinafter as 'the respondent company'
or 'the corporate debtor', as per the context.
7 'MOU' for short.
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between the parties, as regards the requisite supply and payment, leading
the appellant to invoke the arbitration clause and the matter was taken
up in arbitration proceedings.
4. Two separate arbitral awards dated 22.02.2010 and 15.02.2010
were passed in relation to the respective MOUs in favour of the appellant
whereunder the respondent company was held liable to make payment
of Rs. 4.44 crores and Rs. 2.79 crores respectively.
4.1. The respondent company challenged the legality and validity
of the awards so made by way of petitions under Section 34 of the
Arbitration and Conciliation Act, 1996.8 These petitions were, however,
dismissed by the District Court, Barasat by its orders dated 27.02.20129
and 29.02.201210 respectively. These orders were challenged by the
respondent company by way of two appeals11 under Section 37 of the
Act of 1996 before the High Court of Calcutta on 07.08.2012. The appeals
remained pending for long but, on 22.11.2019, the same were dismissed
in default because of non-appearance of the appellant therein (i.e., the
respondent company).
4.2. On 17.12.2019, the respondent company moved respective
applications for restoration of appeals;12 and these applications were
allowed by the High Court on 02.03.2020, after finding sufficient cause
for non-appearance on the date of hearing. Consequently, both the appeals
under Section 37 of the Act of 1996 stood revived and are said to be
pending yet.
5. In the meantime and before such restoration of appeals, the
appellant sent two separate demand notices under Section 8 of the Code
[read with Rule 5 of the Insolvency and Bankruptcy Code (Application
to Adjudicating Authority) Rules, 2016] to the respondent company on
14.02.2020, claiming operational debts to the tune of Rs. 7,75,13,684/-
and Rs. 5,62,01,258/- under the respective arbitral awards, for the appeals
having been dismissed by the High Court.
8 Hereinafter also referred to as 'the Act of 1996'.
9 In Miscellaneous Case No. 159 of 2010 pertaining to MOU dated 13.08.2003.
10 In Miscellaneous Case No. 173 of 2010 pertaining to MOU dated 11.03.2004.
11 Being FMA 941 of 2012 pertaining to MOU dated 13.08.2003 and FMA 939 of 2012
pertaining to MOU dated 11.03.2004.
12 Being CAN No. 12338 of 2019 in FMA 941 of 2012 and CAN No. 12333 of 2019 in
FMA 939 of 2012.
M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR.
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5.1. In terms of Section 8(2)(a) of the Code, the respondent
company sent its replies to the demand notices on 25.02.2020, asserting,
inter alia, that there existed a dispute and the matter was pending in
arbitration proceedings, which pre-dated the receipt of demand notice.
Substantiating this assertion, the respondent company stated that the
applications for restoration of appeals were pending in the High Court,
which werefiled much before the receipt of demand notices and with
advance notice to the appellant. Thus, the respondent company asserted,
within 10 days of service of the demand notices, that the matter of debt
owed was sub judice and no operational debt was payable to the appellant.
6. Notwithstanding the replies so sent by the respondent company,
the appellant proceeded to move the National Company Law Tribunal,
Kolkata Bench, Kolkata, seeking initiation of Corporate Insolvency
Resolution Process against the respondent company for non-payment
of the aforementioned operational debts and filed two applications under
Section 9 of the Code.13 It would be apposite to indicate at this stage
itself that NCLAT took note of the fact that such applications, though
sworn on 29.02.2020, were filed only on 02.03.2020; however, NCLT
had proceeded on the assumption that the applications were filed on
29.02.2020. As would be noticed hereafter later, the date of filing of
such applications under Section 9 of the Code has its own bearing in the
matter because the aforesaid appeals of the respondent company under
Section 37 of the Act of 1996 were restored by the High Court on
02.03.2020.
7. The Adjudicating Authority, i.e., NCLT, dealt with the
applications so made by the appellant under Section 9 of the Code by its
common order dated 30.09.2020; and proceeded to examine the question
as to whether the appeals under Section 37 of the Act of 1996 were
pending on the day the operational debt owed to the appellant became
due.
7.1. The NCLT took the view that on the day the appellant served
demand notices to the respondent company under Section 8 of the Code
and on the date of filing of applications under Section 9 of the Code, no
proceedings were pending in challenge to the arbitral awards and hence,
no dispute as to the debt owed to the appellant was existing on the
relevant dates. The NCLT further observed that although the High Court
13 Being CP (IB) No. 676/KB/2020 and CP (IB) No. 688/KB/2020 respectively.
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allowed the applications for restoration of appeals under Section 37 of
the Act of 1996, this was belatedly done, only on 02.03.2020. The relevant
observations of NCLT could be usefully extracted as under: -
"7.....On 14.02.2020, the Operational Creditor sent Corporate
Debtor notice under Section 8 of Insolvency and Bankruptcy Code,
2016. It was received by the Corporate Debtor on 18/2/2020 and
Corporate Debtor replied vide letter dated 25.02.2020. This
application to initiate CIRP of the Corporate Debtor has been
filed by the Operational Creditor on 29.02.2020. On that day, no
Appeal under Section 37 of A & C Act, 1996 was pending because
the Hon'ble High Court restored the Appeal on 02.03.2020."
7.2. The NCLT, thereafter, referred to the requirements of Section
9(5)(ii)(d) of the Code and meaning of the expression "dispute" as per
Section 5(6) of the Code, and observed as under: -
"8....From the plain reading of un-disputed facts in this proceeding,
it is clear that on the date on which the Corporate Debtor was
served with demand notice under Section 8 of the Insolvency and
Bankruptcy Code, 2016 or on the date on which the application is
filed against the Corporate Debtor, no arbitration proceedings was
pending challenging the award."
7.3. The NCLT also referred to the decision of this Court in the
case of K. Kishan v. Vijay Nirman Company Pvt. Ltd.: (2018) 17
SCC 662 and observed that the enunciations therein rather operated in
favour of the operational creditor, because the operational debt became
due and payable when the award was confirmed by the District Judge;
and even though an appeal was filed by the corporate debtor, the same
was dismissed in default; and notice was given by the creditor only 90
days after dismissal of the appeal. The NCLT even sensed mala fide in
the corporate debtor's application for restoration and observed that its
officers were using the proceedings in law either to delay or to avoid the
legitimate dues. The NCLT, inter alia, observed as under: -
"10. It has been held by the Apex Court that if it is shown that the
application under Section 34 of A & C Act, 1996 is pending or
Appeal under Section 37 of the Act is pending, then insolvency
proceedings cannot be initiated. In this case, on the date of filing
of this application under Section 9 of Insolvency and Bankruptcy
Code, 2016 i.e on 29.02.2020, no proceeding under Section 34 or
M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR.
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[2021] 11 S.C.R.
Appeal under Section 37 of the Act was then pending against the
Operational Creditor (although restoration application of Appeal
was pending). So on the facts, we hold that above ruling is in
favour of the Operational Creditor rather than the Corporate
Debtor. In short, Operational debt become due and payable on
29.02.2012 i.e on the date of which the Learned District Judge
confirmed the award under Section 34 of A & C Act. The Corporate
Debtor filed Appeal under Section 37 of the Act. It was dismissed
in default. 90 days thereafter, on 14.02.2020, Operational Creditor
gave the Corporate Debtor notice under Section 9 of the Insolvency
and Bankruptcy Code, 2016. On 28.02.2020 (sic).
11. What we gathered from the above facts is that the operational
creditor sent a demand notice three months after the Corporate
debtor's appeal was dismissed by Hon'ble high Court. As soon as
the Corporate Debtor received the demand notice, its officers
swung into action and get the appeal restored. Meantime, the
operational creditor had filed this application. It appears from record
that the officers of the Corporate Debtor using the proceedings
under the law either to delay or to avoid the legitimate dues of the
Corporate Debtor on one or the other ground."
7.4. In view of the above, the NCLT held that the corporate debtor
had committed default in payment of operational debts in spite of the
receipt of demand notice; and that there was no dispute pending, by way
of arbitral proceedings or otherwise, on the date on which default occurred
or the date on which application was filed to initiate CIRP of the corporate
debtor. With these observations, the NCLT admitted the applications
made by the appellant under Section 9 of the Code in its capacity as an
operational creditor; initiated CIRP in relation to the respondent company;
declared moratorium; appointed Interim Resolution Professional; and
issued further consequential directions.
8. Being aggrieved by the orders so passed by the Adjudicating
Authority (NCLT), the present respondents preferred respective appeals
before the Appellate Tribunal (NCLAT) under Section 61 of the Code
contending, inter alia, that the applications under Section 9 of the Code
were actually filed only on 02.03.2020 but, on that date, the appeals had
been restored by the High Court and such restoration related back to the
date of filing of appeals. On the other hand, it was contended on behalf
of the appellant that on the date of issuance of the demand notice
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(14.02.2020), no arbitration proceedings were pending as the appeals
were restored only on 02.03.2020 and, therefore, the Adjudicating
Authority had rightly admitted the applications for CIRP in the present
case.
8.1. The core of rival contentions came to be noticed by the
Appellate Tribunal in the following words: -
"6. Subsequently, the Application for restoration, filed on 17.12.2019
was restored on 02.03.2020. It is the case of the 'Operational
Creditor' that 'as on the date of the issuance of the Demand
Notice' under Section 8 of the Code i.e. on 14.02.2020 there was
no Arbitration proceeding pending, as the Appeal under Section
37 was restored only on 02.03.2020. As against these submissions,
Learned Solicitor General representing the 'Corporate Debtor'
submitted that once the Application for restoration is allowed, it
relates back to the original date of filing. It is also submitted that
the Section 9 Application was affirmed on 29.02.2020 but was
actually filed on 02.03.2020 and therefore as on the date of filing
of the Application, the Appeal was already restored."
8.2. The NCLAT referred to the decision of this Court in the case
of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.:(2018)
1 SCC 353 and, in keeping with the principles enunciated therein,
proceeded to examine as to whether there was a pre-existing dispute
concerning the debt in question on the date of receipt of demand notice.
Thereafter, NCLAT referred to the decision of this Court in the case of
Vareed Jacob v. Sosamma Geevarghese & Ors.: (2004) 6 SCC 378,to
observe that as per the view of the majority therein, once an appeal is
restored to its original number, the interlocutory orders therein stand
revived unless otherwise directed. By applying these principles, the
NCLAT held that once the appeal under Section 37 of the Act of 1996
was restored, it related back to the original date of filing in the following
words: -
"9. What can be gleaned from the majority decision is that upon
restoration of Appeal to its original number, the Appellant is restored
to the position when the Court has initially dismissed the Appeal
for default, unless the Court expressly or by implication excludes
the operation of any Orders passed during the period between the
dismissal of the restoration.
M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR.
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10. The minority view relied upon by the Learned Counsel
appearing for 'Operational Creditor' is not applicable to this case.
The binding Judicial Precedent is the view taken by the majority.
That constitutes the Rule of the Court. Having regard to the
interpretation of the ratio laid down in the aforenoted Judgement
that once an Appeal is restored to its original number, the fact that
Interlocutory Orders would stand revived unless otherwise
directed, further strengthens the case of the Appellant herein. We
are of the considered view that the ratio of majority view of 'Vareed
Jacob' (Supra) is applicable to the facts of this case and hence,
we hold that once an Appeal under Section 37 of the A&C Act,
1996, is restored it relates back to the original date of filing."
8.3. A question regarding effect of pendency of the proceedings
for execution of award also cropped up, to which, the NCLAT observed
that the execution would come into picture if the appeals under Section
37 had been decided; and 'money recovery' and 'triggering of insolvency'
were not parallel proceedings. The NCLAT also observed that, in fact,
IBC discourages recovery proceedings; and the practice of using this
Code towards execution of decree or money recovery is rather
deprecated.
8.4. Moving on, the Appellate Tribunal referred to Section 8 of
the Code and observed that the requirement was to see as to whether
there existed a dispute or record of pendency of the suit or arbitration
proceedings; and with reference to the facts of the present case,
construed that a dispute was in existence prior to the issuance of demand
notices. It was also observed that the applications for restoration were
filed with advance notice to the operational creditor. Having said that,
the Appellate Tribunal referred to the enunciations of this Court in the
case of Mobilox Innovations and K. Kishan (supra) and held that it
was a clear case of a pre-existing dispute between the parties prior to
the issuance of demand notice and hence, the operational debt cannot
be said to be an undisputed one. The relevant part of observations and
findings of the Appellate Tribunal (NCLAT) in its impugned common
order dated 17.08.2021 could be usefully extracted as under: -
"15. Section 8(2)(a) provides that Existence of a Dispute, [if
any, or] record of the pendency of the suit or Arbitration
Proceedings filed before the receipt of such Notice or invoice
in relation to such Dispute. At the outset, what has to be seen
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is 'whether there is any Existence of Dispute', 'if any or'
record of the pendency of the suit or Arbitration Proceedings.
In the instant case, it is an admitted fact by both the parties
that disputes arose way back in the year 2003 and 2004, and
based on the terms of MoU entered into, the 'Operational
Creditor' themselves invoked the Arbitration Proceedings. Both
the Arbitral Awards were assailed by the 'Corporate Debtor'
under Section 34 of A&C Act, 1996 and were dismissed by
separate Orders dated 27.02.2012 and 29.02.2012 respectively.
The Appeals preferred by the 'Corporate Debtor' under Section
37 of A&C Act, 1996, stood pending till 22.11.2019 on which
date they were dismissed for non-prosecution. So even if
22.11.2019 is taken as the date of NPA as contended by the
Learned Counsel for the 'Operational Creditor', the fact
remains that till that date there is an ongoing Dispute. It can be
safely construed that there was a 'Dispute' in Existence prior
to the issuance of the Demand Notice. Subsequently, the
Appeal under Section 37 was restored on 02.03.2020. The
Application for restoration CAN No. 12333 of 2019 was filed
by the 'Corporate Debtor' on 17.12.2019 with an advance
Notice to the 'Operational Creditor'. Thereafter the Demand
Notice was issued on 14.02.2020. The Application was filed
on 02.03.2020. We have already observed that upon restoration,
the Appeal relates back to the original date of filing and therefore
we note that there was a Pre-Existing Dispute prior to the
date of issuance of the Demand Notice.
16. To view it in a narrow compass and interpret Section
8(2) (a) that an Arbitral Award ought to be pending as on the
exact date of the issuance of the Demand Notice, amounts to
mistaking/misconstruing the said Section. The Hon'ble
Supreme Court in 'Mobilox Innovations Pvt. Ltd.' (Supra) has
clearly laid down that 'the test for determination for the
Adjudicating Authority is to see at the stage of Admitting/
rejecting the Application is whether there is a plausible
contention which requires further investigation and that the
'Dispute' is not a patently feeble legal argument or an
assertion of fact unsupported by evidence. It is important to
separate the grain from the chaff and to reject a spurious
defence which is mere bluster'. It is observed that the
M/S. JAI BALAJI INDUSTRIES v. D.K. MOHANTY & ANR.
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Adjudicating Authority does not need to be satisfied whether the
defence is likely to succeed so long as a Dispute truly Exists in
fact and is not spurious, hypothetical or illusory. In the instant
case, the Existence of a 'Dispute' is evident in the Arbitration
Proceedings pending from 2004 till 29.11.2019...
17. The ratio in the aforenoted Judgement is squarely applicable
to the fact of the instant case as it can be seen from the record
that the entire basis for the Section 8 Notice is that the Appeals
preferred by the 'Corporate Debtor' under Section 37 of the A&C
Act, 1996 were dismissed for default on 22.11.2019...
18. There is a possibility that the 'Corporate Debtor' may succeed
on any claim or part of the claim. Hence, it is apposite to observe
that the 'Operational Debt' herein, could not be said to be an
'undisputed debt'. Following the ratio in 'Mobilox Innovations
Pvt. Ltd.' (Supra) wherein it was inter alia held that so long as
a dispute truly exists in fact and is not spurious, the Adjudicating
Authority ought to have dismissed the Application. Hence, for all
the aforenoted reasons these Appeals are allowed and the
Impugned Order is set aside. No Order as to costs."
(emphasis in the original)
9. Seeking to question the aforesaid common order dated
17.08.2021, the appellant (operational creditor) has preferred these
appeals under Section 62 of the Code.
9.1. It is strenuously contended on behalf of the appellant that to
operate against maintainability of an application by the operational creditor
for initiation of CIRP under Section 9 of the Code, there ought to be a
dispute existing prior to the service of demand notice. It is submitted that
as per the plain language of Section 8(2)(a) of the Code, the dispute, as
defined in Section 5(6) of the Code, must strictly be existing as a matter
of fact on the date of service of demand notice, as explained and laid
down in Mobilox Innovations (supra). The contention is that any later
development in relation to the claim under the demand notice cannot
have a bearing on an adjudication of the application filed under Section 9
of the Code. While emphasising on the phraseology of Section 8(2)(a)
of the Code, it is contended that the provision specifically seeks to negate
and nullify the effect of any post-facto development with respect to the
default amount for which demand notice had been issued. It is submitted
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that in the present case, subsequent restoration of appeal under Section
37 of the Act of 1996, post service of demand notice, cannot have any
bearing on the maintainability of the application filed under Section 9 of
the Code.
9.2. As regards the doctrine of 'relation back', it is contended that
this doctrine cannot be applied universally and, in any case, cannot be
applied in adjudication of an application filed under Section 9 of the Code.
It is also contended that NCLAT has wrongly relied upon the majority
judgment in the case of Vareed Jacob (supra), wherein it was held on
the facts of the case that the interim order was revived automatically
upon restoration of the suit; and has failed to appreciate the other
observations in the majority judgment itself, positing that all interim orders
cannot be put on the same pedestal. It is further submitted that the minority
view in Vareed Jacob (supra), dealing with the issue pertaining to the
legal treatment of rights accrued in the interregnum, i.e., between dismissal
of proceedings in default and restoration, could not have been ignored
for the reason that such an issue was not dealt with by the majority
judgment. Further, a decision of this Court in the case of Addagada
Raghavamma & Anr. v.Addagada Chenchamma & Anr.: AIR 1964
SC 136 has also been referred, to submit that the doctrine of relation
back cannot be invoked without limitations, and retroactivity must not
affect any vested rights.
10. Having given thoughtful consideration to the submissions made
on behalf of the appellant and having examined the record with reference
to the law applicable, we are clearly of the view that these appeals
remain totally bereft of substance and do not merit admission.
11. In comprehension of the relevant background aspects of the
present case, it is clear that the appellant asserts itself to be an operational
creditor, for the reason of having a claim against the respondent company,
which was the subject matter of arbitration proceedings and led to the
arbitral awards in its favour. According to the appellant, challenge to
arbitral awards came to an end with dismissal of appeals filed under
Section 37 of the Act of 1996 and hence, the notices were sent demanding
payment of the amount due, for which the corporate debtor was in default;
and any event occurring post issuance of demand notices cannot have
any bearing on adjudication of the applications moved for initiation of
CIRP.
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12. We are impelled to observe at the outset that the entire approach
of the appellant seems to be founded on a basic misconception that the
Code has provided another avenue for enforcing money recovery by a
creditor against the corporate debtor; and the submissions on behalf of
the appellant, seeking to maintain its application under Section 9 of the
Code for initiation of CIRP against the respondent company, proceed
squarely contrary to the elementary principles concerning the object and
purpose of the Insolvency and Bankruptcy Code, 2016. In the case of
Swiss Ribbons Private Limited & Anr. v. Union of India & Ors.:(2019)
4 SCC 17, this Court has highlighted the fact that in its scheme and
framework, the Code is a beneficial legislation to put the corporate debtor
on its feet, and not a mere recovery legislation for the creditors. This
Court has observed, -
"28.It can thus be seen that the primary focus of the legislation is
to ensure revival and continuation of the corporate debtor by
protecting the corporate debtor from its own management and
from a corporate death by liquidation. The Code is thus a beneficial
legislation which puts the corporate debtor back on its feet, not
being a mere recovery legislation for creditors. The interests of
the corporate debtor have, therefore, been bifurcated and
separated from that of its promoters/those who are in management.
Thus, the resolution process is not adversarial to the corporate
debtor but, in fact, protective of its interests....."
(underlining supplied for emphasis)
12.1. Moreover, as we shall see in necessary details a little later,
this Court has consistently made it clear that an operational creditor
cannot use the Code for extraneous considerations or as a substitute for
debt enforcement procedures; and the object of the Code is to allow the
insolvency process against the corporate debtor to be taken up at the
instance of an operational creditor only in the clear case, where a real
dispute between the parties as to the alleged debt does not exist.
13. As regards legal principles applicable to the questions at hand,
we may usefully refer to the relevant provisions of law before adverting
to the decisions of this Court.
13.1. Part II of the Code deals with insolvency resolution and
liquidation of corporate persons and Chapter II thereof deals with
Corporate Insolvency Resolution Process. The root provisions relating
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to insolvency resolution by operational creditor are contained in Sections
8 and 9 of the Code.
 The inclusive definition of the expression "dispute", for the purpose
of Part II, as contained in Section 5(6) of the Code, reads as under: -
"5(6). "dispute" includes a suit or arbitration proceedings relating
to -
(a) the existence of the amount of debt;
(b) the quality of goods or service; or
(c) the breach of a representation or warranty;"
 The relevant provisions concerning insolvency resolution by an
operational creditor, as contained in Sections 8 and 9 of the Code, read
as under: -
"8. Insolvency resolution by operational creditor. - (1) An
operational creditor may, on the occurrence of a default, deliver a
demand notice of unpaid operational debtor copy of an invoice
demanding payment of the amount involved in the default to the
corporate debtor in such form and manner as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of the
receipt of the demand notice or copy of the invoice mentioned in
sub-section (1) bring to the notice of the operational creditor-
(a)
existence of a dispute, [if any, or]14 record of the pendency
of the suit or arbitration proceedings filed before the receipt
of such notice or invoice in relation to such dispute;
(b)
the payment of unpaid operational debt-
(i)
by sending an attested copy of the record of
electronic transfer of the unpaid amount from the
bank account of the corporate debtor; or
(ii)
by sending an attested copy of record that the
operational creditor has encashed a cheque issued
by the corporate debtor.
14 The expression 'if any, or" as now occurring in Section 8 (2) (a) of the Code was
substituted by Act 26 of 2018 w.r.e.f. 06.06.2018 for the earlier expression "if any,
and". However, even before this amendment, this Court, in the case of Mobilox
Innovations (supra) read down "and" as "or", keeping in mind the legislative intent
behind this provision.
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Explanation.- For the purposes of this section, a "demand notice"
means a notice served by an operational creditor to the corporate
debtor demanding payment of the operational debt in respect of
which the default has occurred.
9. Application for initiation of corporate insolvency
resolution process by operational creditor. - (1) After the
expiry of the period of ten 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 subsection (2) of section 8, the operational creditor may file an
application before the Adjudicating Authority for initiating a
corporate insolvency resolution process.
(2) The application under sub-section (1) shall be filed in such
form and manner and accompanied with such fee as may be
prescribed.
(3) The operational creditor shall, along with the application 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;
(d)
a copy of any record with information utility confirming that
there is no payment of an unpaid operational debt by the
corporate debtor, if available; and
(e)
any other proof confirming that there is no payment of an
unpaid operational debt by the corporate debtor or such
other information, as may be prescribed.
(4) An operational creditor initiating a corporate insolvency
resolution process under this section, may propose a resolution
professional to act as an interim resolution professional.
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(5) The Adjudicating Authority shall, within fourteen days of the
receipt of the application under sub-section (2), by an order-
(i)
admit the application and communicate such decision to the
operational creditor and the corporate debtor if,-
(a)
the application made under sub-section (2) is
complete;
(b)
there is no payment of the unpaid operational debt;
(c)
the invoice or notice for payment to the corporate
debtor has been delivered by the operational creditor;
 (d)
no notice of dispute has been received by the
operational creditor or there is no record of dispute
in the information utility; and
(e)
there is no disciplinary proceeding pending against
any resolution professional proposed under subsection (4), if any.
(ii)
reject the application and communicate such decision to
the operational creditor and the corporate debtor, if-
(a)
the application made under sub-section (2) is
incomplete;
(b)
there has been payment of the unpaid operational
debt;
(c)
the creditor has not delivered the invoice or notice
for payment to the corporate debtor;
(d)
notice of dispute has been received by the operational
creditor or there is a record of dispute in the
information utility; or
(e)
any disciplinary proceeding is pending against any
proposed resolution professional:
Provided that Adjudicating Authority, shall before rejecting an
application under sub-clause (a) of clause (ii) give a notice to the
applicant to rectify the defect in his application within seven days
of the date of receipt of such notice from the adjudicating
Authority.
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(6) The corporate insolvency resolution process shall commence
from the date of admission of the application under sub-section
(5) of this section."
14. The entire scheme of the Code in relation to the insolvency
resolution by an operational creditor initially came up for exposition by
this Court in the case of Mobilox Innovations (supra), decided on
21.09.2017.
14.1. In that case, the appellant had sub-contracted certain work
to the respondent and entered into a non-disclosure agreement. The
appellant withheld certain payments against invoices raised by the
respondent while alleging that certain actions of the respondent were in
breach of the non-disclosure agreement. A demand notice was sent by
the respondent under Section 8 of the Code and in response thereto, the
appellant maintained that there existed serious and bonafide disputes
and the notice was issued as a pressure tactic. Thereafter, the respondent
filed an application before the Adjudicating Authority under Section 9 of
the Code, stating that operational debt was owed by the appellant. The
Adjudicating Authority dismissed this application by holding that the claim
of the operational creditor was hit by Section 9(5)(ii)(d) of the Code
since the payment was being disputed by the corporate debtor. However,
the Appellate Tribunal allowed the appeal preferred by the operational
creditor and remitted the matter to the Adjudicating Authority to consider
admission of the application if it was otherwise complete. The order so
passed by the Appellate Tribunal was challenged in appeal before this
Court.
14.2. In the backdrop as aforesaid, this Court traversed through
the scheme of the Code and particularly, the provisions relating to
insolvency resolution by an operational creditor, including the history of
making of such provisions. Thereafter, this Court summarised the course
of action by the Adjudicating Authority on receiving an application under
Section 9 of the Code and the questions to be determined as follows: -
"34. Therefore, the adjudicating authority, when examining an
application under Section 9 of the Act will have to determine:
(i) Whether there is an "operational debt" as defined exceeding
Rs 1 lakh? (See Section 4 of the Act)
(ii) Whether the documentary evidence furnished with the
application shows that the aforesaid debt is due and payable and
has not yet been paid? and
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(iii) Whether there is existence of a dispute between the parties
or the record of the pendency of a suit or arbitration proceeding
filed before the receipt of the demand notice of the unpaid
operational debt in relation to such dispute?
If any one of the aforesaid conditions is lacking, the application
would have to be rejected..."
14.3. As indicated hereinbefore, at the relevant time of decision in
Mobilox Innovations, the expression occurring in Section 8(2)(a) of
the Code was "and", which was required to be read as "or" looking to
the object of the Code and purpose of the provision.