Interpretation Of The Word ‘Dispute’, And The Phrase ‘Notice Of Dispute’, Under The Insolvency And Bankruptcy Code, 2016

Article by Singh & Associates

 Prior to the enactment of The Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as “Code”), there was no consolidated law in India, that dealt with insolvency and bankruptcy. The primary objective behind the enactment was to consolidate and amend the laws related to the reorganization and the insolvency resolution of corporate persons, firms and individuals in a time bound manner. However, as it exists, the Code is still in a very nascent stage of its operation, and on the perusal of the entire scheme of the Code, while it is clearly evident that time is of the essence for the entire insolvency resolution process, it is no less important that the Code is interpreted in a manner keeping in mind the mischief it seeks to rectify. In this regard, recent judgments passed by different benches of the NCLT gave rise to controversies surrounding the interpretation of the provisions of the Code.Unlike a financial creditor who may directly file an application before the NCLT, the operational creditor has to comply with the requirements of Section 8 of the Code, wherein the operational creditor has to deliver a demand notice or a copy of an invoice to the corporate debtor for the amount of the unpaid operational debt in respect of which the default has occurred. Subsection (2) of Section 8 provides a 10-day window to the corporate debtor to either repay such unpaid amount as stated in the demand notice, or, bring to the notice of the operational creditor an existence of a dispute if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute. In case payment has already been made, the corporate debtor has to send back the proof of such payment to the operational creditor. So basically, what the operational creditor receives is either payment or a ‘notice of dispute’.

This is the question that had arisen before various NCLT’s that whether a corporate debtor can raise all kinds of disputes underthe notice of dispute or can the notice of dispute only refer to pendency of a suit or an arbitration pending before the receipt of the demand notice under section 8 of the Code. Subsequently conflicting interpretations as to what constitutes a ‘dispute’ had arisen. The phrase “existence of disputes” assumes significance as it is largely the only legal defense that a corporate debtor can take to avoid insolvency/liquidation proceedings initiated by an operational creditor. The survival of the corporate debtor therefore to a large extent depends on whether there exists a dispute concerning the claims of the operational creditor because the Code empowers the Tribunal to either admit or reject the operational creditor’s insolvency application based on whether or not a notice of dispute (in existence) has been received by such operational creditor from the corporate debtor.

CONTRADICTORY VIEWS TAKEN BY NCLTs

The Principal Bench, of NCLT, New Delhi, interpreted the term “dispute” in two of its decisions, namely, in One Coast Plaster v. Ambience Private Limited1 and in Philips India Limited v. Goodwill Hospital and Research Centre Limited2. Both applications were filed under Section 9 of the Code by operational creditors of corporate debtors. The Principal Bench vide its separate orders dated March 1, 2017 rejected both applications on the common ground that the concerned corporate debtors in both matters had issued their “notice of dispute” in response to the applicant:s demand notice, and therefore, as per Section 9(5)(ii)(d) of the Code, the tribunal was liable to reject the applications. The Principal Bench, while interpreting the term ≪dispute≫ as defined in Section 5(6) of the Code, observed that the said definition was inclusive and not exhaustive considering the use of the expression ≪includes≫ which immediately succeeds the word ≪dispute.≫ Therefore, the bench was of the view that the legislature intended to give wider connotations to the said term ≪dispute≫ and it cannot be restrictively interpreted to mean a pending suit or an arbitration proceeding in relation to a debt, quality goods/service, or breach of any contractual representation/warranty. From the abovementioned decisions of the Principal Bench it was inferred that as long as a corporate debtor brings to the notice of the applicant the existence of a “dispute” within 10 days of the receipt of the demand notice or copy of the invoice issued by the applicant (or even thereafter)3, the application for corporate insolvency of such corporate debtor is liable to be rejected by the tribunal, unless the said “dispute” can be dislodged on the basis of the evidence submitted by an application.

However, in complete contrast to the abovementioned decisions of the NCLT Principal Bench, Delhi, the learned NCLT Mumbai Bench while deciding a factually similar application filed by an operational creditor in Essar Projects India Limited v. MCL Global Street Private Limited ruled that since the “dispute” raised by the concerned corporate debtor under its reply to the demand notice of the applicant was not raised before any court of law till the receipt of such notice, such “dispute” cannot be treated as a “dispute in existence” at the time of receipt of the demand notice. The learned tribunal under its order dated March 6, 2017 noted that the corporate debtor had never raised any question on the invoices issued by the applicant creditors and rather admitted the same. Therefore, a simple denial of claim by the corporate debtor on grounds not raised previously and only pursuant to the receipt of a demand notice under Section 8(1) of the Code will not amount to a “dispute in existence” as required under Section 8(2)(a) of the Code. Therefore, the NCLT Mumbai Bench interpreted the term “dispute” in light of the statutory mandate provided under Section 8(2)(a) of the Code, i.e., upon receipt of a demand notice/invoice under Section 8(1), a corporate debtor must bring to the notice of the applicant creditor the “existence of a dispute” and any record of proceedings filed in relation thereto before the receipt of such demand notice/ invoice.

CURRENT POSTION OF LAW

Recently the National Company Law Appellate Tribunal, (“NCLAT”) in its order dated May 24, 2017, in the matter of Kirusa Software Pvt Ltd vs Mobilox Innovations Pvt. Ltd3., has now put to rest the controversy as to what would mean dispute and existence of dispute for the purpose of determination of an application under section 9 of the IBC.

The NCLAT drew an interpretational analogy between section 8 and 9 of the IBC and Section 8 of the Arbitration and Conciliation Act, 1996, wherein the judicial authority is required to prima facie determine the existence of an arbitration agreement before it can exercise jurisdiction in relation to a dispute brought before it. The court opined that, “Though the words ‘prima facie’ are missing in Sections 8 and 9 of the Code, yet the Adjudicating Authority would examine whether notice of dispute in fact raises the dispute and that too within the parameters of two definitions – ‘debt’ and ‘default’ and then it has to reject the application if it apparently finds that the notice of dispute does really raise a dispute and no other factual ascertainment is required. On the other hand, if the Adjudicating Authority finds that the notice of dispute lacks in particulars or does not raise a dispute, it may admit the application but in either case, there is neither an ascertainment of the dispute, nor satisfaction of the Adjudicating Authority.” It held that the intent of the Legislature, was clearly evident from the definition of the term “dispute”. If the intent of the Legislature was that a demand by an operational creditor can be disputed only by showing a record of suit or arbitration proceeding, the definition of “dispute” it would have simply said ‘dispute means a dispute pending in arbitration or suit’. Thus, the legislature wanted the same to be illustrative and not exhaustive. Further it also held that Section 8(2) of the IBC cannot be read to mean that a dispute must be pending between the parties prior to the notice of demand and that too in arbitration or a civil court and that even a dispute concerning execution of a judgment or decree passed in a suit or award passed by an arbitral tribunal can be used to prove a dispute under the IBC. The ‘dispute’ must be raised by the corporate debtor prior to the notice for insolvency resolution by an operational creditor under section 8 of the IBC. However it has to be noted that the raising of a pending ‘dispute’ by the corporate debtor cannot be done with a mala fide intention to only stall the insolvency resolution process.

It emerges both from the object and purpose of the IBC and the context in which the expression is used, that disputes raised in the notice sent by the corporate debtor to the operational creditor would be covered within sub-section (2) of Section 8 of the IBC. Applying the aforementioned principles, the NCLAT came to the conclusion that in the instant case, the defense raised for dispute by the operational debtor was vague and motivated to evade liability.

CONCLUSION

Based on the law laid down in the Kirusa case, it can be safely concluded that the definition of “dispute” is “inclusive” and not “exhaustive”. The same has to be given wide meaning provided it is relatable to the existence of the amount of the debt, quality of goods or service or breach of a representation or warranty. Once the term “dispute” is given its natural and ordinary meaning, upon reading of the Code as a whole, the width of “dispute” has to be taken to cover all disputes on debt, default irrespective of the fact that whether there were any pending proceedings or not in front of a court or an arbitral tribunal. Thereby it would be incorrect to construe the word “dispute” in such a way that it limits the interpretation to the extent that only two ways of disputing a demand can be made by the corporate debtor, i.e. either by showing a record of pending suit or by showing a record of a pending arbitration.

Further in the very recent case of, “Penugonda Satish Babu vs. Amarpali Biotech India4” decided on 10/07/2017 before the principal bench of the NCLT at New Delhi, a similar issue was raised before the tribunal. In the aforementioned case, upon the service of the notice of the corporate insolvency proceedings against the corporate debtor, the corporate debtor was given an opportunity to file their reply wherein it was claimed that the creditor had violated several clauses of the agreement signed between them and had failed to discharge its obligations under the said agreement. The corporate debtor also went on to allege that the claim amounts remain totally unsubstantiated and thereby the claims are being vehemently disputed. The debtor argued that in view of the arbitration clause contained in the agreement and a bona fide dispute of the accounts of the parties, the remedy has to be sought elsewhere.

The tribunal after going through the arguments from both the parties held that it was quite evident that the disputes arose from the contractual relationship that the parties were in, and the subsequent transactions arising out of it. The tribunal, while dismissing the petition agreed with the contention of the Corporate Debtor that there was a bona fide dispute between the parties, and held that it would not be appropriate for the tribunal to go into the merits of it since there is a very limited period available for the disposal of such claims. The tribunal held that the Operational Creditor is free to seek any other remedy that may be available to him under law. This case is important as it follows the rationale laid down in the Kirusa case, that it is not mandatory for pending proceedings to exist in order to come under the purview of the word “dispute”. Since in this case, clearly there was no pending arbitral proceeding or any proceeding before any civil court and yet the tribunal held that the dispute raised was bonafide in nature.

Footnotes

1 Company Application No. (I.B.) 07/PB/2017

2 Company Application No. (I.B.) 03/PB/2017

3 MANU/NL/0027/2017

4 C.P. No. (IB)-58/(PB)/2017

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