The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT) directs admission of CIRP against cotton supplier, ruling that statutory remedy under IBC overrides private arbitration arrangement and that dispute raised only in reply to demand notice does not qualify as pre-existing dispute. The NCLAT clarified that an arbitration clause in a contract is a private legal remedy based on consensus and cannot deprive an Operational Creditor of the statutory remedy under Section 9 of the Insolvency and Bankruptcy Code, 2016, since the IBC has overriding effect under Section 238.
The Tribunal held that a person to whom an operational debt is owed qualifies as an Operational Creditor under Section 5(20) of the IBC, and where the underlying transaction involves supply of goods, the resulting claim assumes the character of operational debt under Section 5(21), entitling the creditor to invoke Section 9. The phrase ‘in respect of’ in Section 5(21) of the IBC must be interpreted in a broad and purposive manner to include all persons who provide or receive operational services from the corporate debtor, and the interpretation cannot be restricted.
A dispute raised for the first time in reply to a demand notice under Section 8 of the IBC does not qualify as a pre-existing dispute, and the mere existence of communications between parties referring to inter-se claims, without any material showing that the dispute was agitated before any adjudicatory platform, is insufficient to establish a pre-existing dispute, added the Tribunal.
The Division Bench comprising Justice Sharad Kumar Sharma (Judicial Member) and Jatindranath Swain (Technical Member) observed that the existence of an arbitration clause in a contract is a private legal remedy based on consensus between the contracting parties and is not statutorily prescribed to be mandatorily resorted to, and therefore, the availability of such private remedy would not deprive the Appellant of the statutory remedy under the IBC. The Appellate Tribunal relied on the Principal Bench’s decision in Hasan Shafiq vs. CT Technologies [(CA (AT) (Ins) No. 802/2020)], where it was held that the proceedings under the Code having been given overriding effect, the right to initiate an application under Section 9 cannot be taken away by any agreement of arbitration in the contract when the Operational Creditor elects to initiate proceedings under Section 9.
On the question of whether the Appellant qualifies as an Operational Creditor, the NCLAT held that under Section 5(20) of the IBC, an Operational Creditor means a person to whom an operational debt is owed, and under Section 5(21), operational debt includes a claim arising out of provision of goods, services, employment, or government dues. Since the parties were engaged in the transaction of supply of raw cotton, which amounts to provision of goods, the amount that fell due in the course of such transaction would assume the character of operational debt, and the Appellant would have the status of an Operational Creditor.
On the question of pre-existing dispute, the NCLAT applied the Mobilox principle that the dispute as claimed must not be a patently feeble legal argument or an assertion of fact unsupported by evidence, and held that the Respondent had not brought on record any material to show that the actual dispute was ever agitated before any other adjudicatory platform.
Briefly, Posco International Corporation, a Korean international trading company, entered into a contract with Mohana Cotton Ginning Private Limited for the supply of 300 Metric Tonnes of Indian raw cotton Grade SLM, valued at USD 453,177.57, intended for shipment to M/s Ada Fios in Portugal, pursuant to an international shipment contract dated Dec 16, 2016. During execution, disputes arose regarding the quality of 291 Metric Tonnes of goods supplied, and the parties agreed to settle the controversy with the Respondent undertaking to pay USD 74,342 to the Appellant.
The Appellant raised a debit note for USD 74,342, which was acknowledged by the Respondent vide email dated July 28, 2017. Subsequently, the parties entered into a settlement agreement dated Sep 01, 2017, under which the Respondent was to pay the amount by Sep 20, 2017, failing which default interest at 15% per annum would accrue.
Despite repeated assurances, the Respondent defaulted in payment, prompting the Appellant to issue notices, followed by emails from the Respondent acknowledging the debt and promising payment of USD 73,000 plus amend charges. A legal notice demanded USD 128,845.48, and a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 was issued on Feb 12, 2018.
The Respondent replied to the Section 8 notice, raising a dispute alleging that the Appellant had breached the Purchase Agreement dated Oct 10, 2016, by contacting the Respondent’s buyers directly, claiming that the Appellant was liable to pay USD 22,005 after adjustment. The Appellant thereafter filed Company Petition seeking initiation of CIRP, and the NCLT rejected the Section 9 application, holding that a pre-existing dispute existed and that the matter should be resolved through arbitration.
