KAY BOUVET ENGINEERING LTD. vs. OVERSEAS INFRASTRUCTURE ALLIANCE (INDIA) PRIVATE LIMITED

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION  CIVIL APPEAL NO. 1137 OF 2019 KAY BOUVET ENGINEERING LTD.     ...APPELLANT(S) VERSUS OVERSEAS INFRASTRUCTURE  ALLIANCE (INDIA) PRIVATE LIMITED   ...RESPONDENT(S) J U D G M E N T B.R. GAVAI, J. 1. This appeal challenges the judgment and order passed by the   National   Company   Law   Appellate   Tribunal   (hereinafter st referred to as the “NCLAT”) dated 21  December 2018, thereby allowing the appeal filed by respondent herein.  The respondent herein  had   preferred   an  appeal  being   Company   Appeal  (AT) Signature Not Verified (Insolvency) No. 582 of 2018, challenging the order passed by Digitally signed by Jayant Kumar Arora Date: 2021.08.10 15:19:44 IST Reason: the National Company Law Tribunal (hereinafter referred to as 1 th the “NCLT”) dated 26  July 2018, thereby rejecting the petition being   C.P.   (IB)­20(MB)/2018,   filed   by   the   respondent   herein under   Section   9   of   the   Insolvency   and   Bankruptcy   Code (hereinafter referred to as the “IBC”).   By the impugned order st dated   21   December   2018,   the   NCLAT   while   allowing   the appeal,   has   remitted   back   the   matter   to   the   NCLT   with   a direction to admit the petition filed by the respondent herein under Section 9 of the IBC after giving limited notice to the appellant herein so as to enable it to settle the claim.   The facts in brief giving rise to the present appeal are as 2. under:­ The Government of India extended Dollar Line of Credit (hereinafter referred to as the “LoC”) of USD 150 Million to the Republic  of   Sudan  through  Exim  Bank  of   India (hereinafter referred   to   as   the   “Exim   Bank”)   for   carrying   out   Mashkour Sugar Project in Sudan.  This was in two tranches of USD 25 th Million and USD 125 Million.  On 26  January 2009, the first tranche of USD 25 Million was executed between Republic of 2 Sudan   and   Exim   Bank   for   financing   the   Mashkour   Sugar th Project.     On   11   October   2009,   Mashkour   Sugar   Company Limited,   Sudan   (hereinafter   referred   to   as   the   “Mashkour”) entered   into   an   agreement   with   the   respondent­Overseas Infrastructure   Alliance   (India)   Private   Limited   (hereinafter referred   to   as   the   “Overseas”)   for   USD   149,975,000   to   be financed by Exim Bank.  As per the said agreement, Mashkour was to nominate a sub­contractor.   A subsequent agreement th was entered into on 14   April 2010, between Mashkour and Overseas for payment of USD 25 Million to Overseas towards “design   and   engineering   package   and   plant   civil   package including site mobilization”.   In response to the invitation by Mashkour,   the   appellant­Kay   Bouvet   Engineering   Limited (hereinafter referred to as the “Kay Bouvet”) submitted its bid as a sub­contractor for supply, erection and completion of the Sugar Plant at Sudan, which was accepted by Mashkour.  On th 18   December   2010,   a   Memorandum   of   Understanding (hereinafter referred to as the “MoU”) was entered into between Mashkour, Overseas and Kay Bouvet at Khartoum, Sudan.  The 3 said MoU provided that the contract has to be governed by the laws   of   Sudan.     The   same   MoU   also   defined   roles   and responsibilities of each of the parties.   On the same date, a Tripartite Agreement was also executed between all the three parties   vide   which,   Kay   Bouvet   was   appointed   as   a   sub­ contractor   for   executing   the   whole   work   of   designing, engineering,   supply,   installation,   erection,   testing   and completion of Factory Plant for Mashkour Sugar Company for an amount of USD 106.200 Million.   th 3. On   29   March   2011,   Overseas   vide   an   e­mail   sent   to Mashkour   confirmed   that   under   the   Tripartite   Agreement, Mashkour was to release payment of first tranche of LoC to Overseas and the Overseas in turn was to release payment of USD 10.62 Million to Kay Bouvet on submission of Advance Bank   Guarantee   and   Performance   Bank   Guarantee   by   Kay st Bouvet to Mashkour.   Vide letter dated 21   April 2011, Exim Bank informed Overseas that an amount of Rs.46.58 Crore had been remitted to its bank account.  Overseas vide letter of the 4 same date confirmed to Mashkour about receipt of funds and further informed that it will release USD 10.62 Million to Kay th Bouvet on submission of requisite bank guarantees.   On 28 July 2011, Kay Bouvet informed Overseas that it had submitted necessary   Guarantees   to   Mashkour.   On   the   advice   of Mashkour, Overseas paid an amount of Rs.47,12,10,000/­ to Kay   Bouvet.     There   were   certain   disputes   with   regard   to exchange   rate,   on   account   of   which,   Kay   Bouvet   informed Mashkour that it ought to have been paid more amount in Indian Rupees.  After execution of second tranche of USD 125 Million on 4. th 24  July 2013, between Republic of Sudan and Exim Bank, an agreement was executed between Mashkour and Overseas on th 9  February 2014, for balance amount of USD 124,975,000 for th financing the final part of the Sugar Factory Project.  On 30 October 2014, Overseas informed Exim Bank to transfer partial amount of USD 95,580,000 in favour of Kay Bouvet from the funds to be received under the LoC in relation to Sugar Project. 5 5. It   appears   that   in   the   meantime,   there   was   certain exchange of communications between the Ministry of External Affairs,   Government   of   India   (hereinafter   referred   to   as   the “GoI”)   and   the   Sudan   Government.     In   pursuance   to   such th exchange   of   communications,   on   17   April   2017,   the Ambassador of Sudan to India addressed to the Minister of State   of   External   Affairs,   GoI   and   advised   to   terminate   the contract of Mashkour with Overseas and in turn to appoint Kay Bouvet as a Contractor.   In response thereto, the Ministry of External Affairs informed the Ambassador of Sudan that it will be necessary to execute an agreement with Kay Bouvet in order to enable Exim Bank to release funds to Kay Bouvet.   Vide th communication   dated   25   April   2017,   the   Ambassador   of Sudan   informed   Mashkour   to   enter   an   agreement   with  Kay Bouvet as a direct contract for unutilized portion of GoI’s LoC for USD 150 Million.   It was also informed that the advance amount of Rs.47,12,10,000/­ received by Kay Bouvet from the first  tranche   of   USD  25   Million  was   to   be   adjusted   against supplies to be made to Mashkour for completing the project. 6 th 6. On  15   June  2017,  Mashkour  terminated  the   contract with  Overseas   for   failure   on   its   part  to   perform   the   duties. Overseas filed a Civil Suit being No. 785 of 2017 before the High Court of Bombay seeking specific performance of contract and an order of injunction from appointing Kay Bouvet as a Contractor in the Mashkour Project.  Notice of Motion No. 1314 th of 2017 was also moved for injunction. Vide order dated 27 June 2017, prayer for ad interim relief made by Overseas came to be rejected by the Bombay High Court. th Vide   communication   dated   5   July   2017,   Mashkour 7. informed Kay Bouvet about the developments and termination of contract and further informed that the advance payment of Rs.47,12,10,000/­ received by Kay Bouvet from Overseas, was to be adjusted against supplies to be made to Mashkour for completion   of   the   Project.     It   was   further   informed   that Overseas will not claim back the said amount from Kay Bouvet. Accordingly,   on   the   same   day   an   agreement   came   to   be executed between Mashkour and Kay Bouvet. The same was 7 informed   by   the   Ambassador   of   Sudan   to   the   Ministry   of th External Affairs on 11  July 2017. 8. A Demand Notice under Section 8 of the IBC was served upon   Kay   Bouvet   by   Overseas   alleging   default   under   the Tripartite Agreement and claiming an amount of USD 10.62 Million,   paid   by   Overseas   to   Kay   Bouvet.     Kay   Bouvet   vide th communication dated 6   December 2017, denied the claim of Overseas.     It   was   specifically   pointed   out   that   the   amount which was paid to Kay Bouvet by Overseas, was received on behalf of Mashkour and it was only routed through Overseas th and the same stands adjusted under new agreement. On 27 December 2017, Overseas claiming itself to be an Operational Creditor,   filed   a   petition   under   Section   9   of   the   IBC   before NCLT,   Mumbai   being   CP   (IB)   No.20(MB)/2018.     Vide   order th dated   26   July   2018,   the   NCLT   dismissed   the   petition. Overseas carried the same in an appeal being Company Appeal (AT) (Insolvency) No. 582 of 2018 before the NCLAT.   By the st impugned order dated 21  December 2018, NCLAT allowed the 8 appeal as aforesaid.  Being aggrieved thereby, the appellant­Kay Bouvet has approached this Court. 9. Shri Jayant Bhushan, learned Senior Counsel appearing on behalf of the appellant­Kay Bouvet submitted that by no stretch of imagination, the claim made by Overseas could be considered to be an “Operational Debt” and as such, Overseas cannot be an “Operational Creditor”, enabling it to invoke the jurisdiction of NCLT under Section 9 of the IBC.  Shri Bhushan further submitted that Kay Bouvet could not have moved as a Financial Creditor and as such, by stretching the definition of “Operational Creditor”, though it does not fit in the same, has filed the proceedings under Section 9 of the IBC.  The learned Senior   Counsel   submitted   that   no   amount   is   receivable   by Overseas from Kay Bouvet in respect of the provisions of goods or services, including employment or a debt in respect of the payment of dues and as such, it will not fit in the definition of “Operational   Debt”   as   provided   under   sub­section   (21)   of Section 5 of the IBC.   The learned Senior Counsel submitted 9 that by the same analogy, Overseas would also not fall under the definition of “Operational Creditor”. 10. Shri Bhushan further submitted that as a matter of fact, the payment which was made to Kay Bouvet by Overseas, was from the amount received by it from Mashkour.  He submitted that the material placed on record would clearly fortify this position.   The learned Senior Counsel submitted that, in any case, perusal of Clause 14.1 of the Tripartite Agreement would clearly show that the amount so paid, was paid by Mashkour to Overseas.  It is submitted that in any case, the material placed on record and specifically the Demand Notice and reply thereto, clearly showed that there was an “existence of dispute” and as such,   the   NCLT   had   rightly   dismissed   the   petition.   It   is submitted   that,   however,   the   NCLAT   has   misconstrued   the provisions and allowed the appeal and directed admission of Section 9 petition.  It is submitted that the jurisdiction of the adjudicating   authorities   under   IBC   is   limited   and   it   can 10 adjudicate only on the limited areas that are delineated in the Statute.  11. Shri C.A. Sundaram, learned Senior Counsel appearing for respondent–Overseas, on the contrary, asserts that the amount which was paid to Kay Bouvet, was the amount paid from the funds of Overseas and not from Mashkour.  He submitted that perusal  of   material   placed   on   record   would   reveal   that  Kay Bouvet has admitted of receiving the amount from Overseas and once the party admits of any claim, the same would come in the definition of “Operational Debt” as defined under sub­ section (21) of Section 5 of the IBC and enable the party to whom admission is made to file the proceedings under Section 9  of   the   IBC   being   an   “Operational   Creditor”.     The   learned Senior   Counsel   therefore   submitted   that   NCLAT   rightly considered the provisions and allowed the appeal of Overseas and   directed   admission   of   Section   9   petition.     He   therefore submitted that the present appeal deserves to be dismissed.  11 12. Though, elaborate submissions have been made on behalf of both  the   parties,  we   are   of  the   considered   view  that the present appeal can be decided on a short ground without going into the other aspects of the matter.  It will be relevant to refer to Sections 8 and 9 of the IBC:­ “ 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 sub­section (1) bring to the notice of the operational creditor— ( a ) 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; ( 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 12

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14 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; ( )   there   has   been [payment]   of   the b 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 sub­clause ( a ) of clause ( ) give a notice to the applicant to rectify ii the defect in his application within seven days of the   date   of   receipt   of   such   notice   from   the Adjudicating Authority. (6) The corporate insolvency resolution process shall commence from the date of admission of the   application   under   sub­section   (5)   of   this section.” 15 13. Perusal of the aforesaid provisions would reveal that an “Operational Creditor”, on the occurrence of default, is required to deliver a “Demand Notice” of unpaid “Operational Debt” or a copy of invoice, demanding payment of amount involved in the default to the “Corporate Debtor” in such form and manner as may   be   prescribed.    Within   10   days   of   the   receipt   of   such “Demand Notice” or copy of invoice, the “Corporate Debtor” is required   to   either   bring   to   the   notice   of   the   “Operational Creditor” “existence of a dispute” or to make the payment of unpaid “Operational Debt” in the manner as may be prescribed. Thereafter, as per the provisions of Section 9 of the IBC, after the expiry of the period of 10 days from the date of delivery of notice or invoice demanding payment under sub­section (1) of Section 8 and if the “Operational Creditor” does not receive payment from the “Corporate Debtor” or notice of the dispute under sub­section (2) of Section 8 of the IBC, the “Operational Creditor”   is   entitled   to   file   an   application   before   the adjudicating authority for initiating the Corporate Insolvency Resolution Process. 16 14. The issue is no more  res integra . It will be relevant to refer to paragraph 38 of the judgment of this Court in the case of Mobilox   Innovations   Private   Limited   v.   Kirusa   Software 1 Private Limited :­

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the objects of the IBC  qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate   debtor   into   the   insolvency   resolution   process prematurely   or   initiate   the   process   for   extraneous considerations. It has been held that it is for this reason that it is enough that a dispute exists between the parties.

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“existence”, “genuine dispute” and “genuine claim” and various authorities construing the said terms:­  The   expression   “existence”   has   been “45. understood as follows: “ Shorter Oxford English  Dictionary  gives  the following meaning of the word “ existence ”: ( ) Reality, as opp. to appearance. a ( b ) The fact or state of existing; actual possession of being. Continued being as a living creature, life, esp. under adverse conditions. Something that exists; an entity, a being. All that exists. (P. 894,  Oxford English Dictionary )” 46.  Two extremely instructive judgments, one of the Australian High Court, and the other of the Chancery Division in the UK, throw a great deal of light on the expression “existence of a dispute” contained   in   Section   8(2)( a )   of   the   Code.   The Australian   judgment   is   reported   as  Spencer Constructions   Pty   Ltd.  v.  G   &   M   Aldridge   Pty Ltd.  [ Spencer   Constructions   Pty   Ltd.  v.  G   &   M 19

“Finn,   J.   was   content   to   adopt   the explanation   of   “genuine   dispute”   given   by McLelland,   C.J.   in   Eq   in  Eyota   Pty Ltd.  v.  Hanave   Pty   Ltd.  [ Eyota   Pty Ltd.  v.  Hanave Pty Ltd. , (1994) 12 ACSR 785 (Aust)]   ACSR   at   p.   787   where   his   Honour said: ‘In my opinion [the] expression connotes a   plausible   contention   requiring investigation, and raises much the same sort   of   considerations   as   the   “serious question   to   be   tried”   criterion   which arises   on   an   application   for   an interlocutory   injunction   or   for   the extension  or   removal   of   a  caveat.   This 20

21 claims   is   to   be   expected   but   must   be excluded from consideration.’ There   have   been   numerous   decisions   of Single   Judges   in   this   Court   and   in   State Supreme   Courts   which   have   analysed,   in different ways, the approach a court should take   in   determining   whether   there   is   “a genuine dispute” for the purposes of Section 459­H of the Corporations Law. What is clear is   that   in   considering   applications   to   set aside a statutory demand, a court will not determine   contested   issues   of   fact   or   law which have a significant or substantial basis. One finds formulations such as: ‘…   at   least   in   most   cases,   it   is   not expected that the court will embark upon any   extended   enquiry   in   order   to determine   whether   there   is   a   genuine dispute   between   the   parties   and certainly will not attempt to weigh the merits   of   that   dispute.   All   that   the legislation   requires   is   that   the   court conclude that there is a dispute and that it is a genuine dispute.’ See  Mibor Investments Pty Ltd.  v.  Commonwealth Bank   of   Australia  [ Mibor   Investments   Pty Ltd.  v.  Commonwealth Bank of Australia , (1993) 11   ACSR   362   (Aust)]   ACSR   at   pp.   366­67, followed   by   Ryan,   J.   in  Moyall   Investments Services   Pty   Ltd.  v.  White  [ Moyall   Investments Services Pty Ltd.  v.  White , (1993) 12 ACSR 320 (Aust)] ACSR at p. 324. 22 Another formulation has been expressed as follows: ‘It is clear that what is required in all cases   is   something   between   mere assertion   and   the   proof   that   would   be necessary in a court of law. Something more   than   mere   assertion   is   required because if that were not so then anyone could merely say it did not owe a debt.…’ See  John   Holland   Construction   and   Engg.   Pty Ltd.  v.  Kilpatrick   Green   Pty   Ltd.  [ John   Holland Construction   and   Engg.   Pty   Ltd.  v.  Kilpatrick Green Pty Ltd. , (1994) 12 ACLC 716 (Aust)] ACLC at p. 718, followed by Northrop, J. in  Aquatown Pty Ltd.  v.  Holder Stroud Pty Ltd.  [ Aquatown Pty Ltd.  v.  Holder Stroud Pty Ltd. , Federal Court of Australia, 25­6­1996, Unreported] In  Morris Catering (Australia) Pty Ltd.  [ Morris , (1993) 11 Catering (Australia) Pty Ltd., In re ACSR 601 (Aust)] ACSR at p. 605, Thomas, J. said: ‘There   is   little   doubt   that   Div   3   is intended   to   be   a   complete   code   which prescribes   a   formula   that   requires   the court to assess the position between the parties, and preserve demands where it can   be   seen   that   there   is   no   genuine dispute   and   no   sufficient   genuine offsetting claim. That is not to say that the   court   will   examine   the   merits   or settle the dispute. The specified limits of 23

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25 Hayne,   J.   in  Mibor   Investments   Pty Ltd.  v.  Commonwealth   Bank   of   Australia  [ Mibor Investments   Pty   Ltd.  v.  Commonwealth   Bank   of Australia , (1993) 11 ACSR 362 (Aust)] , where he noted   the   dictionary   definition   of   “genuine”   as being   in   this   context   “not   spurious   …   real   or true” and concluded (at p. 234): ‘Although  it  is  true   that  the   Court,   on  an application under Sections 459­G and 459­H is   not   entitled   to   decide   a   question   as   to whether a claim will succeed or not, it must be satisfied that there is a genuine dispute between   the   company   and   the   respondent about the existence of the debt. If it can be shown that the argument in support of the existence of a genuine dispute can have no possible   basis   whatsoever,   in   my   view,   it cannot   be   said   that   there   is   a   genuine dispute.   This   does   not   involve,   in   itself,   a determination   of   whether   the   claim   will succeed or not, but it does go to the reality of the dispute, to show that it is real or true and not merely spurious'. In our view a “genuine” dispute requires that: ( i )   the   dispute   be   bona   fide   and   truly exist in fact; ( ii ) the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. 26

27 from the chaff and to reject a spurious defence which is a mere

Court is not required to be satisfied as to whether the defence is likely to succeed or not.   The Court also cannot go into the merits   of   the   dispute   except   to   the   extent   indicated hereinabove.  It has been held that so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has no other option but to reject the application. 18. In the  light of  the  law laid  down by  this  Court  stated hereinabove, we will have to examine the facts of the present case.  We clarify that though arguments have been advanced at the Bar with regard to the questions as to whether the so­called claim   made   by   Overseas   would   be   considered   to   be   an “Operational   Debt”   and   as   to   whether   Overseas   could   be considered to be an “Operational Creditor”, we do not find it necessary to go into said questions, inasmuch as the present appeal can be decided only on a short question as to whether 28

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31 4.   We state that on 05.07.2017 Mashkour has entered into a fresh contract with Key Bouvet.  In the said Agreement Mashkour has considered the earlier Advance Payment of USD 10.62 Million equivalent   to   Rs.47,12,10,000/­   (Rupees   47 Crores Twelve Lakhs Ten Thousand Only) made to Key Bouvet from Mashkour.  The execution of the fresh contract in favour of Kay Bouvet in no manner   creates   an   automatic   liability   on   Kay Bouvet to refund any amount.   There is no such legal   and   contractual   monetary   liability between the OIA and Kay Bouvet. The very perusal   of   the   definition   of   “debt”   and “operational Creditors” would establish that termination   of   contract   by   Mashkour   with you does not create any debt due from Key Bouvet towards OIA.  It expressly denied that Kay   Bouvet   is   an   Operational   Creditor towards OIA. 5.  We state that, as per the pleadings in the Suit (L) No. 382 of 2017, you have sought a relief of release   of   the   amount   of   USD   10,745,000/­ under the letter of agreement of 2th March 2014. Thereafter there is an existence of dispute of the existence of such amount of debt claimed    In such event your demand notice is by you. erroneous,   illegal   and   bad   in   law   considering provisions of Insolvency and Bankruptcy Code, 2016 and more particularly Section 5(6), Section 9(5)(i)(d) and Section 9(5)(ii)(d).” 32

33

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2.   The breakup of the disbursement made as follows:­

3.  Please confirm receipt of the credit.”  [emphasis supplied] 37

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41

42 was a Contractor, was made on behalf of Mashkour and from the funds received by Overseas from Mashkour.  It will also be clear   that   when   a   new   contract   was   entered   into   between Mashkour and Kay Bouvet directly, Mashkour had directed the said amount of Rs.47,12,10,000/­ to be adjusted against the supplies to be made to Mashkour Sugar Company Ltd. for the purpose   of   completing   the   Project.     On   the   contrary,   the documents   clarify   that   the   termination   of   the   contract   with Overseas would not absolve Overseas of any liability for the st balance of the LoC 1  tranche of 25 Million disbursed to them other than USD 10.62 paid to Kay Bouvet. 32. In  these circumstances, we  find  that NCLT  had rightly rejected   the   application   of   Overseas   after   finding   that   there existed a dispute between Kay Bouvet and Overseas and as such, an order under Section 9 of the IBC would not have been passed.   We find that NCLAT has patently misinterpreted the factual as well as legal position and erred in reversing the order of NCLT and directing admission of Section 9 petition.   43 33. Resultantly,   this   appeal   is   allowed   and   the   impugned st order dated 21  December 2018, passed by NCLAT is quashed th and set aside.  The order passed by NCLT dated 26  July 2018, is maintained.  34. In   view   of   the   above,   all   the   pending   IAs   shall   stand disposed of. …..….......................J. [R.F. NARIMAN] …….........................J.        [B.R. GAVAI] NEW DELHI; AUGUST 10, 2021. 44