Decided on 10 August 2021| Supreme Court of India
The division bench of the Hon’ble Supreme Court (“the Court”) comprising of Justice RF Nariman and Justice BR Gavai in Kay Bouvet Engineering Ltd. vs. Overseas Infrastructure Alliance (India) Private Limited. [2021 SCC OnLine SC 570] allowed an appeal against the order of the NCLAT that held that the Adjudicating Authority must reject an Application seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) under Section 9 of Insolvency and Bankruptcy Code,2016 (“IBC”) only if a dispute truly exists in fact and is not spurious, hypothetical or illusory.
In this case, Mashkour Sugar Company Limited, Sudan (“Mashkour”) entered into an Agreement with Overseas Infrastructure Alliance (India) Private Limited(“Overseas”) involving a sum of money to be financed by EXIM Bank. As per this Agreement, Mashkour was to nominate a sub-contractor, and accordingly a tripartite Agreement was executed vide which, the Appellant, Kay Bouvet Engineering Ltd (“Kay Bouvet”)was appointed as a subcontractor for executing the whole work assigned. Subsequently, disputes occurred between the Parties, and Mashkour terminated the contract with Overseas for failure to perform its obligations under the Agreement and in turn appointed Kay Bouvet as a Contractor. Overseas filed a Civil Suit seeking specific performance of the contract and an order of injunction from appointing Kay Bouvet as a contractor in the Mashkour Project. However, the prayer for ad-interim relief made by Overseas was rejected. Mashkour informed Kay Bouvet about the developments and termination of contract and further informed them that the advance payment received by Kay Bouvet from Overseas, was to be adjusted against supplies to be made to Mashkour for completion of the Project, and accordingly an Agreement was also executed between Kay Bouvet and Mashkour.
A Demand Notice under Section 8 of the IBC was served upon Kay Bouvet by Overseas alleging default under the tripartite agreement, and the same was disputed by Kay Bouvet stating that the amount received was on behalf of Mashkour and it was only routed through Overseas and thereafter adjusted under a new Agreement. Overseas however filed a Section 9 Application as an Operational Creditor before NCLT, which was rejected. Subsequently the same was successfully appealed before the NCLAT. Hence the present appeal was filed again in the (Supreme) Court.
Judgment of the Court
The Court, upon appeal, quashed and set aside the order passed by the NCLAT and upheld the Order passed by the NCLT, rejecting the Section 9 Application filed by Overseas. The Court also observed that, the adjudicating authority at that stage need only identify if there is a “plausible contention” requiring further investigation and that the dispute is “not patently feeble legal argument or an assertion of fact unsupported by evidence”. The authority is not required to be satisfied as to whether the defence is likely to succeed or not and it need not go into the merits of the dispute.In this case, the amount paid by Overseas was paid on behalf of the Mashkour from the funds released to Overseas by EXIM Bank on behalf of Mashkour, hence the Court was of the opinion that the same cannot be a dispute that is spurious, illusory, or not supported by the evidence on record. Furthermore, the said amount was adjusted against the supplies to be made by Mashkour to complete the Project. In these circumstances, the Court allowed the Appeal. The Court referred to the judgment in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, Greenwood Manor Pty Ltd vs. Woodlock and the Australian judgment of Spencer Constructions Pty vs. G &M Aldridge to further interpret the terms “existence”, “genuine dispute” and “ ‘genuine’ as being in this context ‘not spurious ..real or true’ ” to derive this conclusion.
The Court shed light on the meaning of “existence of a dispute” under Section 8(2)(a) of the IBC, clarifying that the adjudicating authority need not delve into the merits of the dispute but merely has to ensure that the dispute was not a feeble argument unsupported by evidence, to reject an application under Section 9 of the IBC. Moreover, the Court provided its interpretation of “genuine” dispute which requires that the:
- The dispute be bona fide and truly exist in fact;
- The grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived in nature.