NCLAT Provides Clarity That IBC Is Not A Debt-Recovery Mechanism

The National Company Law Appellate Tribunal has refused to entertain an insolvency petition filed by Tricolite Electrical Industries Ltd. against Wipro Ltd., offering clarity that the bankruptcy law can't be used as a means to recover debt against solvent companies.

The Chennai bench of the NCLAT, in its order last week, observed that there was a pre-existing dispute between the two parties regarding payment dues and, hence, the Insolvency and Bankruptcy Code was not made to be used as a "mere recovery legislation for creditors".

While the IBC deals with financially distressed corporate entities unable to repay debts, it excludes solvent companies and cases stemming from pre-existing disputes.

Earlier, under the Companies Act, the courts tested the solvency of the corporate debtor and its ability to pay its debt, according to Padmaja Kaul, partner at IndusLaw. However, Kaul explained, under the IBC the test is limited to the existence of a debt and a default, and not a pre-existing dispute between the parties.

The Supreme Court has repeatedly held that the provisions of IBC cannot be used as a means to recover dues.

In the Mobilix Innovations vs Kirusa Software case, the apex court decided that in a pre-existing dispute that is not spurious, hypothetical or illusionary, the court has to reject the insolvency application filed against an entity.

In the Swiss Ribbons vs Union of India case, the top court highlighted that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the entity from its own management and from a corporate death by liquidation. 

Given the law laid down in the Swiss Ribbon case, it becomes clear that rather than the "inability to pay debts", it is the "determination of default" that is relevant for allowing or disallowing an application filed for initiation of corporate insolvency resolution process under the IBC, according to Piyush Mishra, partner at Luthra and Luthra.

In the case of SS Engineers vs Hindustan Petroleum Corp., the Supreme Court had held that the exercise of powers by the NCLT under the IBC is not like that of debt-collecting forum and it is not the object of the IBC to penalise solvent companies for non-payment of disputed dues claimed by an operational creditor.

According to Mukesh Chand, partner at ELP, the IBC is established to manage the insolvency of a corporate debtor. Therefore, if a company remains solvent and non-payment of dues arises from a pre-existing dispute, such cases should and do remain outside the purview of the IBC's insolvency mechanism, he said.

It is not the object of the IBC that the CIRP should be initiated to penalise solvent companies for non-payment of disputed dues claimed by an operational creditor, according to Chand.

Amir Bavani, founder of AB Legal, said, "It has been made very explicit by tribunals and courts that insolvency should not be initiated to chastise the solvent companies for non-payment of disputed dues as claimed by the operational creditor, as the same is against the intent and object of the code."

Allowing insolvency applications when the corporate entity is financially stable also risks putting strain on the already overwhelmed tribunals.

According to Shashank Agarwal, a corporate law consultant, though the IBC does not provide for any such defence that is allowed to be taken by a corporate debtor, this judgment would serve as a defence for the solvent companies that have defaulted payments to their operational creditors.