whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon. = The very fact that there is a possibility that Mr. Banerji’s client may succeed on these cross-claims is sufficient to state that the 22 operational debt, in the present case, cannot be said to be an undisputed debt. = We also accept Mr. Banerji’s submission that the Appellate Tribunal was in error in referring to Section 238 of the Code. Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act in the present case. We see no such inconsistency. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one. 23) We are also of the view that the Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations (supra). Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in 23 Mobilox Innovations (supra), an insolvency petition cannot be proceeded with further. For all these reasons, we are of the view that the judgment of the Appellate Tribunal needs to be set aside and is therefore reversed.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 21824 OF 2017
K. KISHAN …APPELLANT
VERSUS
M/S VIJAY NIRMAN COMPANY PVT. LTD. ...RESPONDENT
WITH
CIVIL APPEAL NO. 21825 OF 2017
J U D G M E N T
R.F. Nariman, J.
1. The present appeals raise an important question as to
whether the Insolvency and Bankruptcy Code, 2016
(hereinafter referred to as “the Code”) can be invoked in respect
of an operational debt where an Arbitral Award has been
passed against the operational debtor, which has not yet been
finally adjudicated upon.
1
2. The brief facts necessary to appreciate the controversy at
hand are as follows:-
i) In the present case, M/s Vijay Nirman Company Pvt. Ltd.
(the Respondent) entered into a sub-Contract Agreement with
one M/s Ksheerabad Constructions Pvt. Ltd. (for short ‘KCPL’)
on 01.02.2008, to undertake 50% of Section 2 work of
‘Construction and widening of the existing two lane highway to
four lanes on NH 67 at KM 190000 to KM 218215 admeasuring
a total of 28.215 KM for and on behalf of KCPL.’
ii) Apart from this Agreement, a separate agreement of the
same date was entered into between the said KPCL and one
M/s SDM Projects Private Limited, Bangalore, as a result of
which, a tripartite Memorandum of Understanding was entered
into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd.
and the Respondent.
iii) During the course of the project, disputes and differences
arose between the parties and the same were referred to an
Arbitral Tribunal, which delivered its Award on 21.01.2017. One
of the claims that was allowed by the said Award was in favour
2
of the respondent for a sum of Rs.1,71,98,302/- which arises
out of certain interim payment certificates. Another claim that
was allowed related to higher rates of payment in which a sum
of Rs.13,56,98,624/- was awarded. Three cross claims that
were made by the Respondent were rejected.
iv) It is pertinent to note that, at this stage, a notice dated
06.02.2017 was sent by the Respondent to KCPL to pay an
amount of Rs. 1,79,00,166/-. This notice was stated to be a
notice under Section 8 of the Code. Within 10 days, by a letter
dated 16.02.2017, KCPL disputed the invoice that was referred
to in the said notice, stating that the said amount was, in fact,
the subject-matter of an arbitration proceeding, and as per
KCPL’s accounts, the Respondent was liable to pay larger
amounts to them.
v) It may be noted that after the notice and reply, on
20.04.2017, a Section 34 petition was filed by KCPL under the
Arbitration and Conciliation Act, 1996 (hereinafter referred to as
“the Act”) challenging the aforesaid Award. Needless to add,
3
this petition was filed within the period of limitation set down in
Section 34(3) of the Act.
vi) It is only thereafter that a petition was filed under Section
9 of the Code, on 14.07.2017. In the gist of the case presented
to the National Company Law Tribunal (‘NCLT’), it was clearly
stated as follows:-
“The above amount was included in the Statement of
Claims filed before the Arbitral Tribunal duly constituted
on 17.8.2014 along with other claims. The Tribunal
gave its award on 21.1.2017 and upheld the above
claim of VNCPL and awarded the above amount in
favour of VNCPL and against KCPL. (Award copy
enclosed)
Thus, the above amount has become an 'Operational
Debt' to be paid by the corporate debtor M/s KCPL as
defined u/Sec. 3(11) of the I&B Code 2016.
A notice in Form-3 U/Sec. 8(1) of the I&B Code 2016
has already been served on the Corporate Debtor, M/s
KCPL and a reply received from KCPL is also enclosed
herewith for ready reference.”
In the Counter Affidavit before the NCLT, it was stated:
“10. I respectfully submit that the case of the petitioner
in short is that since an award has been passed against
the respondent here in an arbitration proceeding,
though a petition U/Sec 34 of the Arbitration and
Conciliation Act, has been filed by the respondent
4
before the competent court challenging the award the
present application is maintainable U/Sec. 9 of the code
though the respondent had raised a dispute in its
replies dated 06-02-2017 & 05-06-2017 to the notice
issued U/Sec.8(2) of the code by the applicant.
11. I respectfully submit that a dispute had been
raised by the respondent company even before the
present application has been filed, in the arbitration
proceedings by way of a counter claim and presently the
same is sub judice before the Hon'ble Commercial Court
cum XXIV Additional Chief Judge, City Civil Court at
Hyderabad in petition filed U/Sec. 34 of the Act. Copy of
the section 34 application filed and pending before the
Hon'ble Court is enclosed herewith as Annexure R-6.”
vii) The NCLT, by its order dated 29.08.2017, referred to the
aforestated facts, and also referred to the fact that the Award
which was challenged under Section 34 specifically stated that
learned counsel for the first Respondent (i.e. the corporate
debtor) was fair enough to admit that the claimant is entitled to
the said sum of Rs.1,71,98,302/-. According to the NCLT, the
fact that a Section 34 petition was pending was irrelevant for
the reason that the claim stood admitted, and there was no stay
of the Award. For these reasons, therefore, the Section 9
petition was admitted.
5
viii) An appeal filed to the Appellate Tribunal met with the
same fate, as according to the Appellate Tribunal, the nonobstante
clause contained in Section 238 of the Code would
override the Arbitration Act. Also, according to the Appellate
Tribunal, since Form V of Part 5 of the Insolvency & Bankruptcy
(Application to Adjudicating Authority) Rules, 2016 requires
particulars of an order of an arbitral panel adjudicating on the
default, this would have to be treated as “a record of an
operational debt”, as a result of which the petition would have to
be admitted, as was correctly done by the NCLT. The appeal
was, accordingly, dismissed.
3) Mr. Gourab Banerji, learned Senior Advocate, appearing
on behalf of the appellant has relied upon certain observations
made in our judgment in Mobilox Innovations Private Limited
vs. Kirusa Software Private Limited, (2018) 1 SCC 353 and
argued that the object of the Code is not to replace debt
adjudication and enforcement under other Acts including the
Arbitration Act, 1996. He has relied, in particular, on para 51
under which, according to him, the moment there is a real
6
dispute between the parties, which need not be a “bona fide
dispute” which is likely to succeed in point of law, the
Insolvency Code cannot be applied. In the present case,
according to him, the very fact that a Section 34 petition is
pending is reflective of a real dispute between the parties,
which was pre-existing, and which culminated in an Arbitral
Award which has yet to attain finality. Also, according to the
learned Senior Advocate, the cross-claims that were rejected by
the learned Arbitral Tribunal far exceeded the amounts awarded
against his client, and if any one of them were to be held to be
wrongly dismissed, in particular, counter claim No.3 of Rs.
19,88,20,475/-, it is obvious that his client would not owe any
sum of money to the operational creditor. He also relied upon
certain judgments, which we will discuss later. To further
buttress his submissions, he argued that all that is necessary is
that there be a dispute in some form which would include cross
claims made by the corporate debtor against the operational
creditor. According to him, the Appellate Tribunal was wholly in
error in applying Section 238 of the Code as, according to Mr.
Banerji, there is nothing inconsistent between the adjudication
7
and enforcement process under the Arbitration Act and the
application of Sections 8 & 9 of the Code. In fact, according to
the learned Senior Advocate, the fact of pending proceedings,
whether they be proceedings culminating in an Award, or
challenge proceedings thereafter, would, in fact, show that
there is a dispute insofar as an operational debt that is stated to
be owed, and that therefore, the Arbitration Act can be relied
upon for this purpose, there being nothing inconsistent between
it and the Code.
4) Dr. P.V. Amarnadha Prasad, learned Advocate, appearing
on behalf of the respondent has argued in reply that according
to the law in the United Kingdom, and Practice Directions
thereunder, an insolvency process does not get stultified
because an application to set aside the judgment, order or
decision is pending in an appeal or otherwise. He also referred
to the law in Singapore, and relied upon a judgment of the
Singapore High Court to the effect that once it is found that
there is a primary adjudication between the parties which
indicates the existence of a debt, any further dispute which may
8
be pending in appeal or otherwise over the debt could not be
said to be bona fide disputed by the debtor. According to him,
the Appellate Tribunal was absolutely correct in applying
Section 238 of the Code, as there would be a direct
inconsistency between the application of the Code and a
Section 34 proceeding which was said to be pending, and
which, according to him, was not relevant in view of the law that
he has cited.
5) Having heard learned counsel for both parties, it is
important to first advert to Section 9(5) of the Code which states
as follows:-
“9(5) The Adjudicating Authority shall, within
fourteen days of the receipt of the application under
sub-section (2), by an order-
(i) admit the application and communicate such
decision to the operational creditor and the
corporate debtor if,-
(a)the application made under sub-section (2)
is complete;
(b) there is no repayment of the unpaid
operational debt;
(c) the invoice or notice for payment to the
corporate debtor has been delivered by the
operational creditor;
9
(d) no notice of dispute has been received by
the operational creditor or there is no record of
dispute in the information utility; and
(e) there is no disciplinary proceeding pending
against any resolution professional proposed
under sub-section (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;
(b) there has been repayment of the 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 sub-clause (a) of
clause (ii) give a notice to the applicant to rectify the
defect in his application within seven days of the
date of receipt of such notice from the adjudicating
Authority.”
A reading of Section 9(5)(ii)(d) would show that an application
under Section 8 must be rejected if notice of a dispute has been
received by the operational creditor. In the present case, it is
clear on facts that the entire basis for the notice under Section
10
8 of the Code is the fact that an Arbitral Award was passed on
21.07.2017 against the Appellant. As has been pointed out by
us, this clearly appears from the gist of the case that was filed
along with the insolvency petition. The fact that the reply of
16.02.2017 to the notice given under Section 8 was within 10
days, and raised the existence of a dispute, also cannot be
doubted.
6) However, learned counsel appearing on behalf of the
Respondent strongly relied on the fact that this is not an
ordinary case inasmuch as the amount of Rs.1.71 Crores which
was awarded was admitted by Mr. Banerji’s client in the arbitral
proceedings to be a debt due, and that this being so, there can
be no dispute regarding the same. We are afraid that we are
unable to agree. As was correctly pointed out by Mr. Banerji,
counter claims for amounts far exceeding this were rejected by
the learned Arbitral Tribunal, which rejection is also the subjectmatter
of challenge in a petition under Section 34 of the Act. It
is important to note that unlike counter claim Nos. 1 and 2,
which were rejected by the Arbitral Tribunal for lack of evidence,
11
counter claim No.3 which amounts to Rs.19,88,20,475/-
was rejected on the basis of a price adjustment clause on
merits. Therefore, it is difficult to say at this stage of the
proceedings, that no dispute would exist between the parties.
7) Our recent judgment in Mobilox Innovations (supra)
throws considerable light on the issue at hand. While referring
to the legislative history of the Code, this Court referred to the
Legislative Guide on Insolvency Law of the United Nations
Commission on International Trade Law. One of the things the
Legislative Guide spoke about was whether the debt is subject
to a legitimate dispute or set-off, in an amount equal to or
greater than the amount of the debt. Another thing spoken of
was that improper use of the insolvency process would occur in
cases where a creditor uses insolvency as an inappropriate
substitute for debt enforcement procedures, even though they
may not be well developed. (see para 13 of the judgment)
8) The Notes on Clauses annexed to the Bill of the
Insolvency Code were also referred to by this Court in para 27
12
of the judgment. The important sentence in these Notes on
Clauses needs to be reproduced, which is done herein below:-
“This ensures that operational creditors, whose debt
claims are usually smaller, are not able to put the
corporate debtor into the insolvency resolution
process prematurely or initiate the process for
extraneous considerations.”
9) This Court also noticed that the original Bill which
ultimately became the Code had the expression “bona fide
dispute” contained in an inclusive definition. It is significant to
note that by the time the Code was enacted the expression
“bona fide” was dropped. (See para 32 of the judgment)
10) After referring to Section 8, the judgment went on to hold
that what is important is that the existence of the dispute and/or
a suit or arbitration proceeding must be pre-existing i.e. it must
exist before the receipt of the demand notice or invoice, as the
case may be.
11) The Adjudicating Authority, therefore, when examining an
application under Section 9 of the Act, will have to determine
the following:-
13
(i) Whether there is an “operational debt” as
defined exceeding Rs 1 lakh? (See Section 4 of the
Act)
(ii) Whether the documentary evidence furnished
with the application shows that the aforesaid debt is
due and payable and has not yet been paid?
and
(iii) Whether there is existence of a dispute
between the parties or the record of the pendency
of a suit or arbitration proceeding filed before the
receipt of the demand notice of the unpaid
operational debt in relation to such dispute?
If any one of the aforesaid conditions is lacking, the application
would have to be rejected. Apart from the above, the
adjudicating authority must follow the mandate of Section 9, as
outlined above, and in particular the mandate of Section 9(5)
of the Act, and admit or reject the application, as the case may
be, depending upon the factors mentioned in Section 9(5) of
the Act. (Para 34).
12) In para 38, this Court cautioned:
“We have also seen that one of the objects of the
Code 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
14
insolvency resolution process prematurely or initiate
the process for extraneous considerations. It is for
this reason that it is enough that a dispute exists
between the parties.
Finally, the law was summed up as follows:-
“51. It is clear, therefore, that once the operational
creditor has filed an application, which is otherwise
complete, the adjudicating authority must reject the
application under Section 9 (5)(2)(d) if notice of
dispute has been received by the operational
creditor or there is a record of dispute in the
information utility. It is clear that such notice must
bring to the notice of the operational creditor the
“existence” of a dispute or the fact that a suit or
arbitration proceeding relating to a dispute is
pending between the parties. Therefore, all that the
adjudicating authority is to see at this stage is
whether there is a plausible contention which
requires further investigation and that the “dispute” is
not a patently feeble legal argument or an assertion
of fact unsupported by evidence. It is important to
separate the grain from the chaff and to reject a
spurious defence which is mere bluster. However, in
doing so, the Court does not need to be satisfied that
the defence is likely to succeed. The Court does not
at this stage examine the merits of the dispute
except to the extent indicated above. So long as a
dispute truly exists in fact and is not spurious,
hypothetical or illusory, the adjudicating authority has
to reject the application.”
13) Following this judgment, it becomes clear that operational
creditors cannot use the Insolvency Code either prematurely or
15
for extraneous considerations or as a substitute for debt
enforcement procedures. The alarming result of an operational
debt contained in an arbitral award for a small amount of say,
two lakhs of rupees, cannot possibly jeopardize an otherwise
solvent company worth several crores of rupees. Such a
company would be well within its rights to state that it is
challenging the Arbitral Award passed against it, and the mere
factum of challenge would be sufficient to state that it disputes
the Award. Such a case would clearly come within para 38 of
Mobilox Innovations (supra), being a case of a pre-existing
ongoing dispute between the parties. The Code cannot be
used in terrorem to extract this sum of money of Rs. two lakhs
even though it may not be finally payable as adjudication
proceedings in respect thereto are still pending. We repeat that
the object of the Code, at least insofar as operational creditors
are concerned, is to put the insolvency process against a
corporate debtor only in clear cases where a real dispute
between the parties as to the debt owed does not exist.
16
14) Mr. Banerji referred us to certain judgments of the English
and Singapore Courts. In Re A Company - Victory House
General Partner Ltd. vs. RGB P & C Ltd. [2018] EWHC 1143
(Ch), the Chancery Division of the High Court, in a situation
where a debt has to be “bona fide” disputed in order to attract
the winding up jurisdiction of the Courts in the UK, made it clear
that even in a case where a judgment debt is no longer a
disputed debt, as it has been finally adjudicated upon, yet if
there be a cross-claim which is being adjudicated upon, or
which may not even have reached the adjudicatory process at
all, would be sufficient to stave off a winding up order. The
learned Judge referred to the judgment in Re Bayoil SA [1999]
1 WLR 147 as follows, and concluded:-
“27. This, of course, is not a case of a disputed
debt. There is a judgment debt and it can be
enforced immediately. However, Mr. Chivers draws
attention to Re Bayoil SA [1999] 1 WLR 147, which
deals with a case not involving a disputed debt but
involving a cross-claim by the company, the subject
of the petition or the intended petition, where the
amount of the cross-claim exceeds the petition
debt. The headnote to Re Bayoil recites the
essential facts. The petitioner claimed for freight.
The established law is there is no defence of set-off
available in relation to a claim to freight. The claim
17
went to arbitration and the arbitrators made an
award in favour of the petitioner. The petitioner
then presented a petition on the basis of the sum
determined by the arbitration award. The company
applied for the petition to be dismissed or stayed
on the ground that it had a genuine and serious
counterclaim in an amount which exceeded the
petition debt. It was a matter of detail in that case,
which the company put forward to advance its
case, that it had not been able to litigate that
counterclaim. Later cases discussing Re Bayoil
make it clear that the ability, or inability, to litigate
the counterclaim is not of the essence of the
principle in this case. So I put that on one side……”
“32. I therefore have to ask whether the nascent
cross-claim, the claim in restitution which
MrChivers has explained to me, is a bona fide
cross-claim on substantial grounds. I have no
doubt it is a bona fide claim. I have also no doubt it
is on substantial grounds. At the moment it seems
to me that it is a claim that would succeed but I
need not go that far……”
“34. Nothing which I have said detracts in any way
from the binding character of the judgment which
has been made. It may appear to be a strong thing
to say that the employer, having failed to comply
with a judgment against it, should nonetheless
escape the consequences involved in a winding up,
but it seems to me that that is the very thing which
was considered to be appropriate in the Bayoil
case and, on the facts of this case, I also consider
it is a more just result that the alternative
contended for by the petitioner.”
15) A recent judgment of the Singapore High Court, contained
in Lim PohYeoh (alias Lim Aster) and TS Ong Construction
18
Pte Ltd. [2016] SGHC 179, was also referred to by Mr. Banerji.
Again, in a situation which demands a far higher threshold that
has to be crossed before the Insolvency Law can be said not to
apply, the Singapore High Court referred to Rule 98(2)(a) of the
Rules made under the Bankruptcy Act. The said Rule states
that where a debtor appears to have a valid counter claim or
cross-demand which is equivalent to or exceeds the amount of
debt, the insolvency process will not be put against such debtor.
It also referred to the Supreme Court Practice Directions to the
same effect. (see paras 43 & 45 of the said judgment)
16) We now come to some of the judgments referred to by
learned counsel for the respondent. It is important to note that
both the Practice Directions referred to in the U.K. judgment
and the Singapore High Court judgment, referred to in LKM
Investment Holdings Pte Ltd. vs. Cathay Theatres Pte Ltd.
[2000] SGHC 13, are in situations where the debt needs to be
bona fide disputed, which is not the situation under our Code.
For this reason, it is not possible to agree with learned counsel
for the Respondent that a pending proceeding challenging an
19
award or decree of a tribunal or Court would not make the debt
contained therein a debt that is disputed.
17) The Australian High Court judgment also relied upon by
the respondent in Ramsay Health Care Australia Pty Ltd vs.
Adrian John Compton [2017] HCA 28 was relied upon to
show, in para 111 thereof, that where a judgment debt has
been obtained after testing of the merits in adversarial litigation,
then in the absence of some evidence of fraud, collusion, or
miscarriage of justice, a court exercising bankruptcy jurisdiction
will rarely have substantial reasons to investigate whether the
debt which emerged in the judgment was truly owed. With
respect to the High Court of Australia, we may only state that
following Mobilox Innovations (supra), it would be very
difficult to incorporate the Australian law into our law. This is for
the reason that our judgment in Mobilox Innovations (supra)
has made it clear that the insolvency process, particularly in
relation to operational creditors, cannot be used to bypass the
adjudicatory and enforcement process of a debt contained in
other statutes. We are, therefore, of the view that the higher
20
threshold of fraud, collusion, or miscarriage of justice laid down
by the Australian High Court will have no application to the
situation under our Code.
18) We repeat with emphasis that under our Code, insofar as
an operational debt is concerned, all that has to be seen is
whether the said debt can be said to be disputed, and we have
no doubt in stating that the filing of a Section 34 petition against
an Arbitral Award shows that a pre-existing dispute which
culminates at the first stage of the proceedings in an Award,
continues even after the Award, at least till the final adjudicatory
process under Sections 34 & 37 has taken place.
19) We may hasten to add that there may be cases where a
Section 34 petition challenging an Arbitral Award may clearly
and unequivocally be barred by limitation, in that it can be
demonstrated to the Court that the period of 90 days plus the
discretionary period of 30 days has clearly expired, after which
either no petition under Section 34 has been filed or a belated
petition under Section 34 has been filed. It is only in such clear
21
cases that the insolvency process may then be put into
operation.
20) We may hasten to add that there may also be other cases
where a Section 34 petition may have been instituted in the
wrong court, as a result of which the petitioner may claim the
application of Section 14 of the Limitation Act to get over the
bar of limitation laid down in Section 34(3) of the Arbitration Act.
In such cases also, it is obvious that the insolvency process
cannot be put into operation without an adjudication on the
applicability of Section 14 of the Limitation Act.
21) With regard to the submission of learned counsel for the
respondent, that the amount of Rs.1.71 Crores stood admitted
by Mr. Banerji’s client, as was recorded in the Arbitral Award,
suffice it to say that cross-claims of sums much above this
amount has been turned down by the Arbitral Tribunal, which
are pending in a Section 34 petition challenging the said Award.
The very fact that there is a possibility that Mr. Banerji’s client
may succeed on these cross-claims is sufficient to state that the
22
operational debt, in the present case, cannot be said to be an
undisputed debt.
22) We also accept Mr. Banerji’s submission that the
Appellate Tribunal was in error in referring to Section 238 of the
Code. Section 238 of the Code would apply in case there is an
inconsistency between the Code and the Arbitration Act in the
present case. We see no such inconsistency. On the contrary,
the Award passed under the Arbitration Act together with the
steps taken for its challenge would only make it clear that the
operational debt, in the present case, happens to be a disputed
one.
23) We are also of the view that the Appellate Tribunal, when
it relied upon Form V Part 5 of the 2016 Rules to state that the
operational debt would, therefore, be said to have been proved,
missed the vital sub-clause (iii) in para 34 of Mobilox
Innovations (supra). Even if it be clear that there be a record
of an operational debt, it is important that the said debt be not
disputed. If disputed within the parameters laid down in
23
Mobilox Innovations (supra), an insolvency petition cannot be
proceeded with further.
24) For all these reasons, we are of the view that the
judgment of the Appellate Tribunal needs to be set aside and is
therefore reversed.
25) The appeals are, accordingly, allowed in the aforesaid
terms.
26) Consequently, the bank guarantees that have been
furnished, pursuant to our order dated 15.12.2017, stand
discharged.
…………………………......J.
(R.F. Nariman)
…………………………......J.
(Indu Malhotra)
New Delhi;
August 14, 2018.
24