NCLT Chennai Rejects Jyoti Ltd's Insolvency Plea Against Marg Ltd Over Pre-Existing Dispute
The National Company Law Tribunal (NCLT) at Chennai on 7 August dismissed an insolvency application filed by Jyoti Limited against Marg Limited under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), over an operational debt of Rs. 22.67 crore.
A Bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy held that Marg had raised a genuine pre-existing dispute regarding its liability, which had continued through the arbitral proceedings and subsequent challenge to the award. It observed
“The dispute cannot be characterised as a sham, moonshine, hypothetical or illusory dispute raised merely to evade payment.”
Jyoti Limited entered into a contract with Marg Limited on 15 March 2012 for the design, procurement, manufacture, supply, installation and commissioning of electro-mechanical systems for a power plant project awarded to Marg by Bhavnagar Energy Company Limited.
Disputes arose over unpaid invoices, invocation of a performance bank guarantee and withholding of retention amounts. Jyoti invoked the arbitration clause under the contract, following which the Madras High Court appointed Justice D. Murugesan, former Chief Justice of the Delhi High Court, as the Sole Arbitrator. Marg also raised counterclaims.
By an arbitral award dated 14 April 2022, the Tribunal allowed Jyoti's claims and rejected Marg's counterclaims, directing Marg to pay Rs. 16.21 crore towards the principal amount, along with interest and arbitration costs.
After Marg failed to pay, Jyoti issued a demand notice under Section 8 of the IBC, which requires an operational creditor to demand payment of an unpaid operational debt before initiating insolvency proceedings. Jyoti subsequently filed the insolvency application before the Tribunal, claiming Rs. 22.67 crore, including interest. Marg opposed the application, contending that a dispute concerning its liability had existed before the demand notice.
The Tribunal noted that Section 8(2)(a) of the IBC requires a corporate debtor to bring the existence of a dispute to the operational creditor's notice. Section 5(6) defines "dispute" inclusively to cover disputes relating to the existence or amount of debt, quality of goods or services, and breach of representation or warranty.
It observed that Marg had disputed its liability throughout the arbitral proceedings. It held:
“The mere fact that the disputes between the parties culminated in an Arbitral Award would not, by itself, obliterate the existence of the dispute for the purposes of Section 8(2)(a) of the Code, particularly where the Award itself continues to be subjected to judicial scrutiny.”
Although Marg challenged the arbitral award after receiving the Section 8 demand notice, the Tribunal held that the challenge was a continuation of the dispute concerning the liability determined under the award.
The Bench observed that the dispute predated the demand notice and that the parties had been involved in prolonged contractual disputes, followed by arbitration, adjudication of their competing claims and judicial proceedings challenging the award. It noted:
“This is therefore not a case where the Corporate Debtor has raised a sham or moonshine defence for the first time upon receipt of the demand notice.”
Applying the test laid down by the Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, the Tribunal held that the dispute was genuine and predated the demand notice.
Accordingly, the NCLT dismissed Jyoti Limited's insolvency application.
For Operational Creditor: Advocates S Arjun Suresh Raghavendra Ross Divakar, Apporva Vinjamur B Gautham
For Corporate Debtor: Advocates B Ramana Kuma and Gajendran Ravi