When can counter claim against a Corporate Debtor be stayed under Section 14 IBC: Delhi HC answers

The Delhi High Court has held that a counter claim against a corporate debtor, which is integral to a recovery suit initiated by it, would not be hit by Section 14 of the Insolvency and Bankruptcy Code (IBC) until it reaches the stage of execution..The judgment was passed by a Single Judge Bench of Justice Prathiba M Singh..The Plaintiff, SSMP Industries Ltd, had filed a suit seeking recovery of Rs.1,61,47,336.44 from the Defendant, Perkan Food Processors Pvt Ltd.. The Plaintiff had placed an order on the Defendant for purchase of Totapari Mango pulp..As part of this transaction, certain supplies were made and various amounts became due towards excess payments, damages, and other costs..In response, the Defendant filed its counter claim, asserting that it was entitled to recover a sum of Rs.59,51,548 from the Plaintiff and that no amount was due and payable by it to the Plaintiff..Meanwhile, the Plaintiff went into insolvency under the IBC, 2016 and a Resolution Professional was appointed..The question thus arose whether the adjudication of the counter claim was liable to be stayed in view of Section 14 of the IBC..The Plaintiff argued that the claim of Rs.59,51,548 by the Defendant was in the nature of set-off and was intertwined and interlinked with the Plaintiff’s suit..It was stated that the Defendant’s claim was not independent and had to be adjudicated in the light of the claims made by the Plaintiff in the suit..The Plaintiff thus argued that both the suit and the counter claim ought to be adjudicated together by the Court, instead of the Defendant being forced to approach the Resolution Professional for recovery of its claims..Observing that the Defendant’s counter claim from the Plaintiff was not concrete and settled, the Court stated that there was “no doubt” that adjudication of the plaint and counter claim were interlinked with each other..The Court said,.“The transaction between the parties would require to be adjudicated on the basis of correspondence and the agreement, which have been placed on record. This Court would have to first determine the question as to whether any amount at all is payable to the Plaintiff. Even if the counter claim is decreed fully and the claim of the Plaintiff is also allowed, the Plaintiff would, in fact, be entitled to recover and not the Defendant (as the claim of the Plaintiff was higher than the Defendant’s). The possible outcome of the suit and the counter claim is in the realm of uncertainty. The question as to the amount that would be liable to be paid by either party to the other is not something that can be predicted at this point.”.Relying on the High Court’s judgement in Power Grid Corporation of India v. Jyoti Structures Ltd., (2018), the Court noted that until and unless the proceeding had the effect of endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor, it was not prohibited under Section 14(1)(a) of the Code..The Court also perused a decision of the National Company Law Appellate Tribunal (NCLAT) in Jharkhand Bijli Vitran Nigam Ltd. V IVRCL Limited & Anr (2018) and stated that until and unless the counter claim was itself determined, the claim and the counter claim deserved to be heard together and there was no bar on the same in the IBC..In light of the judgments, the Court concluded that in situations where recovery was sought by the Corporate Debtor but there was also a counterclaim against it, which was integral to the recovery suit, the Court could not blindly stay the counterclaim and refer the defendant to the NCLT/RP for filing its claims..“A counter claim would be in the nature of a suit against the Plaintiff which in this case is the `corporate debtor’. Under Section 14(1)(a) of the Code, strictly speaking, a counter claim would be covered by the moratorium which bars `the institution of suits or continuation of pending suits or proceedings against the corporate debtor’. A counter claim would be a proceeding against the corporate debtor. However, the counter claim raised in the present case against the corporate debtor ie., the Plaintiff, is integral to the recovery sought by the Plaintiff and is related to the same transaction. .Section 14 has created a piquant situation i.e., that the corporate debtor undergoing insolvency proceedings can continue to pursue its claims but the counter claim would be barred under Section 14(1)(a). When such situations arise, the Court has to see whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated. A blinkered approach cannot be followed and the Court cannot blindly stay the counter claim and refer the defendant to the NCLT/RP for filing its claims.”.The Court stated that the nature of a counter claim was such that it required proper pleadings to be filed, defences and stands of both parties to be considered, evidence to be recorded and then issues had to be adjudicated..It added that the proceedings before NCLT were summary in nature and the Resolution Professional did not conduct a trial..Therefore, the NCLT/Resolution Professional could not be burdened with the task of entertaining claims of the Defendant which were completely uncertain, undetermined and unknown, the Court opined..Moreover, if the question as to whether the Defendant was in fact entitled to any amounts was determined by the NCLT prior to the adjudication of Plaintiff’s claim for recovery, it would result in the possibility of conflicting views in respect of the same transaction, the Court said..It was thus held that the Plaintiff’s and the Defendant’s claim ought to be adjudicated comprehensively by the same forum i.e. High Court..The Court further held that till the defence is adjudicated, there was no threat to the assets of the corporate debtor and the continuation of the counterclaim would not adversely impact the assets of the corporate debtor, therefore, Section 14 of IBC would not be attracted..Once the counterclaims are adjudicated and the amount to be paid/recovered is determined, at that stage, or in execution proceedings, depending upon the situation prevalent, Section 14 could be triggered, it clarified..The matter was thus directed to be listed before the Joint Registrar for the Plaintiff’s evidence..The Plaintiff was represented by Advocate Umesh Mishra..The Defendant was represented by Advocate Kumar Sudeep..[Read the Judgment]