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TMI Blog2017 (5) TMI 1774X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Rule 6 of the Insolvency and bankruptcy (Application to Adjudicating Authority), Rules 2016 (hereinafter referred to as 'Adjudicating Authority') Rules 2016 for initiation of Corporate Insolvency Resolution Process has been admitted. The Adjudicating Authority while declaring moratorium also passed certain directions, ordered to issue public announcement of the corporate insolvency resolution process and appointed an Interim Resolution Professional to carry the function of the company in terms of 'I & B Code'. 2. Learned counsel for the appellant while assailing the impugned order taken following plea and grounds:- (i) The impugned ex parte order was passed by 'Adjudicating Authority without prior notice or intimation of hearing to the Appellants-Corporate Debtors against the principles of rules of natural justice. (ii) Learned Adjudicating Authority' has failed to notice that existence of dispute between the parties which 'Operational Creditor' did not brought to the notice of the Adjudicating Authority' while getting an ex parte order. If notice would have been served on 'Corporate Debtor' this fact would hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri an Officer working in the Accounts Department of 'Corporate Debtor' by e-mail dated 21st November 2015 intimated the 'Operational Creditor' that he will be paid its dues for its services. Moreover, no such payment was made. The 'Corporate Debtor' had agreed to make part payment by 1st December 2015 which again it failed to pay and all the time the 'Corporate Debtor' neglected to repay the unpaid amount to the 'Operational Creditor'. 6. Learned counsel for the respondent while submitted that demand notice under sub-section (1) of Section 8 was sent in Form-3/Form-4 of the Rules on 28th December 2016, as per the Rule, the 'Corporate Debtor' failed to provide a record of the pendency of legal proceedings with regard to alleged dispute. On the other hand, upon receipt of Demand Notice, the 'Corporate Debtor' addressed a letter dated 3rd January 2017 and, inter alia, admitted that the 'Corporate Debtor' is presently under distress and seeking its rehabilitation and restructuring of loans given by the banks and financial institutions. 7. It was contended that as per the scheme of the Code particularly subsection (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that dispute is in existence, mere mentioning in the notice that dispute is in existence in relation to impugned debt is not sufficient, the corporate debtor has to prove that the Company already raised such dispute either in court proceeding or Arbitration before receipt of notice u/s. 8 of the Code, here no such proceeding being pending before any court of law or in Arbitration proceeding before receipt of the notice supra, the debtor company merely mentioning dispute in the reply to the notice u/s. 8 will not amount to dispute in existence, hence the counsel for the petitioner prays this Bench to admit the petition by construing no dispute is in existence against the debtor as on the date of receipt of notice u/s. 8 of the Code. 7. Since the Corporate Debtor, as stated by the Petitioner, admitted issuing invoices in relation to the amount mentioned, the grievance remained in the reply would be regarding quality of construction, the timeline of construction, loss due to delay in construction etc. Since the same is not disputed before any court of law before receipt of notice issued u/s. 8 of the Code, the dispute raised in the corporate debtor reply to the notice u/s. 8 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to appeal and amended Section 424 of the Companies Act, 2013 and by judgment dated 7th April, 2017 held as follows:- "....... However, it is to apply the principles of natural justice in the proceedings before it. It can regulate it own procedure, however, subject to the other provisions of the Act of 2013 or the Insolvency and Bankruptcy Code of 2016 and any Rules made thereunder. The Code of 2016 read with the Rules 2016 is silent on the procedure to be adopted at the hearing of an application under section 7 presented before the NCLT, that is to say, it is silent whether a party respondent has a right of hearing before the adjudicating authority or not. Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to adhere to the principles of the natural justice above anything else. It also allows the NCLT and NCLAT the power to regulate their own procedure. Fetters of the Code of Civil Procedure, 1908 does not bind it. However, it is required to apply its principles. Principles of natural justice require an authority to hear the other party. In an application under Section 7 of the Code of 2016, the financial creditor is the applicant while the corporate debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 2016 are notified, an application made under Sub-section (1) of Section 7 of the Code of 2017 is required to be filed before the adjudicating authority in accordance with Rules 20, 21, 22, 23, 24 and 26 or Part-III of the National Company Law Tribunal Rules, 2016. Adherence to the principles of natural justice by NCLT or NCLAT would not mean that in every situation, NCLT or NCLAT is required to afford a reasonable opportunity of hearing to the respondent before passing its order. In a given case, a situation may arise which may require NCLT to pass an ex-parte ad interim order against a respondent. Therefore, in such situation NCLT, it may proceed to pass an ex-parte ad interim order, however, after recording the reasons for grant of such an order and why it has chosen not to adhere to the principles of natural justice at that stage. It must, thereafter proceed to afford the party respondent an opportunity of hearing before confirming such ex-parte ad interim order. In the facts of the present case, the learned senior advocate for the petitioner submits that, orders have been passed by the NCLT without adherence to the principles of natural justice. The respondent was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate debtor before admitting a case under section 7 and 9 of the 'I & B Code', 2016. 53. In view of the discussion above, we are of the view and hold that the Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default based on material submitted by the financial creditor and to find out whether the application is complete and or there is any other defect required to be removed. Adherence to Principles of natural justice would not mean that in every situation the adjudicating authority is required to afford reasonable opportunity of hearing to the Corporate debtor before passing its order. 15. In the aforesaid case of "M/s. Innoventive Industries Limited", the Appellate Tribunal also noticed the purpose of issuance of notice and held:- "55. Process of initiation of Insolvency Resolution process by a financial creditor is provided in Section 7 of the I & B Code. As per sub-section (1) of Section 7 of the I & B Code, the trigger for filing of an application by a financial creditor before the Adjudicating Authority is when a default in respect of any financial debt has occurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reading of the Code as a whole, the width of "dispute" should cover all disputes on debt, default etc. and not be limited to only two ways of disputing a demand made by the operational creditor, i.e. either by showing a record of pending suit or by showing a record of a pending arbitration. The intent of the Legislature, as evident from the definition of the term "dispute", is that it wanted the same to the illustrative (and not exhaustive). If the intent of the Legislature was that a demand by an operational creditor can he disputed only by showing a record of a suit or arbitration proceeding, the definition of dispute would have simply said dispute means a dispute pending in Arbitration or a suit. 21. Admittedly in sub-section (6) of Section 5 of the 'I & B Code', the Legislature used the words 'dispute includes a suit or arbitration proceedings'. If this is harmoniously read with Section (2) of Section 8 of the 'I & B Code', where words used are 'existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings,' the result is disputes, if any, applies to all kinds of disputes, in relation to debt and default. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereto, and would bar Operational Creditor from invoking Sections 8 and 9 of the Code. 27. Sub-section (6) of Section 5 read with sub-section (2)(a) of Section 8 also cannot be confined to pending arbitration or a civil suit. It must include disputes pending before every judicial authority including mediation, conciliation etc. as long there are disputes as to existence of debt or default etc., it would satisfy sub-section (2) of Section 8 of the 'I & B Code'." 18. The Appellate Tribunal also noticed various natures of "existence of dispute in "Kirusa Software Private Limited Vs. Mobilox Innovations Private Limited" and held:- "31. The dispute under I & B Code, 2016 must relate to specified nature in clause (a), (b) or (c) i.e. existence of amount of debt or quality of goods or service or breach of representation or warranty. However, it is capable of being discerned not only from in a suit or arbitration from any document related to it. For example, the 'operational creditor' has issued notice under Code of Civil Procedure Code, 1908 prior to initiation of the suit against the operational creditor which is disputed by 'corporate debtor. Similarly no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitration proceedings. Mere a dispute giving a colour of genuine dispute or illusory, raised for the first time while replying to the notice under Section 8 cannot be a tool to reject an application under Section 9 if the operational creditor otherwise satisfies the adjudicating authority that there is a debt and there is a default on the part of the corporate debtor." 19. What appears from the present case is that much before enactment of the Insolvency and Bankruptcy Code 2016, in or around 2013, the Appellant-Corporate Debtor' entered with respondent M/s. Essar Projects India Limited and Another Memorandum of Understanding for construction of work at 0.2MTPA Steel Melt Shop Complex at Pithampur, Dist. Dhar, Madhya Pradesh. For one or other reason the outstanding dues in connection with construction work were alleged to have not been paid by appellant to the Respondent - Operational Creditor. The respondent by a notice dated 26th October 2016 while referred to a Memorandum of Understanding dated 27th June 2013 mentioned:- "7. We state that the Work Orders issue by MCL in connection with the Project were duly completed by our Client as per the work set out in each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt seriously dispute the amount sought to be recovered by your client under the terms of MOU dated 27.06.2013. ii. There are very serious disputes between your client and my client about the outstanding amount sought to be recovered by your client. iii. There are serious disputes between your client and my client regarding qualify of construction and time line within which construction was to be completed. iv. My client has made huge payments in-between 30.10.2012 to 03.11.2014. Accounts of your client have not been reconciled with my client. v. Due to delayed construction, my client has suffered losses. No completion certificate is issued. Outstanding bills are not verified and certified. vi. There are very serious disputes about enforceability of the Contract between my client and your client. vii. Amount sought to be recovered is not admitted by my client as alleged by you. 3. In addition to above issues there are various other issues which are involved in the matter which are seriously opposed by my client. My client opposes the endeavour/effort on the part of your client to recover money from my client. 4. It is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfy nature of clause (a), (b) or (c) of sub-section (6) of Section 5 i.e. existence of amount of debt or quality of goods or services or breach of representation or warranty. It can be of being discerned not only from a suit or arbitration from documents related to it but from other factors like notice issued under Section 8 of Code of Civil Procedure, 1908 prior to initiation of suit against 'Operational Creditor' which is disputed by 'Corporate Creditor' etc. 26. In the present case as admittedly a notice was issued by Respondent-Operational Creditor under Section 433(e) and 434 of the Companies Act 1956 in 28th October 2016 which was disputed by Appellant - 'Corporate Debtor' objecting quality of service and non-completion of the work within time which is much prior to enactment of 'I & B Code', 2016, and notice under Section 8 of the I & B code', we hold that there is an "existence of dispute" for which the petition under Section 9 preferred by Respondent - Operational Creditor was not maintainable. 27. Further, as the impugned order dated 6th March 2017 was passed by 'Adjudicating Authority without notice to the Appellant - Corporate d ..... 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