India: 'Dispute' Not Raised in the Earlier Application Cannot be Raised in the Second Application

Last Updated: 24 September 2018
Article by AMLEGALS  

IN NATIONAL COMPANY LAW TRIBUNAL

M/s DBM Geotechnics & Constructions Pvt. Ltd. v. Dighi Port Ltd.

C.P. No. 1382/I&BC/2017

FACTS OF THE CASE

The Operational Creditor rendered services for the construction of multi-purpose berths No. 1 & 2 at Dighi, Maharashtra for which the Corporate Debtor failed to make payment to the Operational Creditor.

Therefore, the Operational Creditor filed an application seeking recovery of Rs 22,41,37,054/- plus interest @ 24%.

However, the same was subsequently withdrawn by the Operational Creditor as the consent terms were signed between the parties.

The Corporate debtor, thereafter, again failed to pay the debt and on account of fresh default, an Application was re-filed by the Operational Creditor.

This time the Corporate Debtor replied with objections and raised a new dispute that the project was left incomplete by the Petitioner. This resulted in no certification by the engineers in terms of the contract and huge amount of expenses were incurred by the Corporate Debtor by making direct payment to the sub-contractors of the petitioner which itself shows the existence of dispute between the parties. The Corporate Debtor further contended that one shareholder had already raised the objection by way of letter dated 24.03.2017 i.e. before signing the consent terms with the Petitioner.

The Corporate Debtor further pleaded that the Petitioner has already filed an arbitration application in the year 2016 under Section 11 of the Arbitration and Conciliation Act and an element of dispute was pre-existing.

The Corporate Debtor further relied upon the ruling of Supreme Court in Mobilox Innovation Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353 to the effect that IBC proceeding cannot be invoked where is a pre-existence of a dispute between the Operation Creditor and Corporate Debtor.

ISSUES BEFORE NCLT

1. Whether entering into consent terms over an operational debt for dismissal of earlier company petition will change the nature of the claim?

2. Whether withdrawal of arbitration proceeding subsequent to issue of Demand Notice amounts to Existence of Dispute?

OBSERVATION & CONCLUSION

With respect to the consent terms, NCLT took a view that whatever dispute, either in relation to any of services provided by the petitioner or the arbitration proceeding, has resulted into an understanding that whatever disputes were there, they would also be merged as part of consent terms.

Therefore, corporate debtor now cannot claim that there is a pre-existing dispute in as much as whatever dispute existed before the consent terms, they have to be treated as resolved by the consent terms subsequently arrived.

The Petitioner withdrew the company petition believing that the Corporate Debtor would make the payment as agreed in the consent terms.

But on the contrary the corporate debtor now has taken a U-turn to the effect that the corporate debtor has already terminated the consent terms and also that the petitioner has not provided the services as per the terms agreed between the parties.

Arbitration application filled by the Petitioner would be treated as withdrawn in view of the consent terms arrived between the parties and therefore withdrawal of proceeding afterwards does not have any validity.

NCLT held that all these issues should have been raised by the corporate debtor in the previous petition filed by the Operational Creditor but it was never raised at that time. Hence, they are stopped from raising the same towards establishing a dispute in the subsequent proceeding.

Also the court held that merely because the parties entered into consent terms, the operational debt will not get converted into a financial debt as the nature of the claim will remain the same.

AMLEGALS REMARKS

In any judicial proceeding, one should take care to bring every aspect on record irrespective of the fact that they are going to pursue the matter or withdraw and/or settle the matter with each other.

AMLEGALS observes that the order passed by the Hon'ble tribunal will be helpful for all the operational creditors who are withdrawing the application after execution of consent terms and will affect to those corporate debtor who are raising dispute after execution of consent terms.

AMLEGALS always advises to Corporates that communication is very important in Applications filed under Section 8 of IBC. Whenever there is a dispute the party has to communicate it as soon as the dispute arises. Any dispute raised afterwards will be treated as a made to believe dispute.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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