India: Insolvency And Bankruptcy Code – Meaning Of "Dispute In Existence"

Last Updated: 3 May 2017
Article by Alishan Naqvee, Rupal Bhatia and Monica Benjamin

The recently implemented Insolvency & Bankruptcy Code, 2016 ("Code"), which streamlines the insolvency and liquidation process in India, has lately become the subject of varying interpretations by the National Company Law Tribunal ("Tribunal").

Conflicting interpretations as to what constitutes a "dispute in existence" have surfaced between the Delhi and the Mumbai benches of the Tribunal.

The phrase "dispute in existence" assumes significance as it is largely the only legal defence 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.

Provisions of the Code:

In terms of the Code, an operational creditor can file an insolvency application before the Tribunal against a corporate debtor after the expiry of 10 days of service of the operational creditor's demand notice on the corporate debtor ("Demand Notice"), provided that the operational creditor has, within these 10 days:

  • neither received repayment of the operational debt from the corporate debtor;
  • nor received from the corporate debtor any notice of the "existence of a dispute", if any, and record of the pendency of suit or arbitration proceeding filed before receipt of such notice/invoice.

Further, the Code defines the term "dispute" to include suits or arbitration proceedings relating to existence of the amount of debt, quality of goods/service or breach of a representation/warranty.

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 as aforesaid.

The Judicial Dilemma:

In practice, within a short span of time since operationalization of the Code, many insolvency applications have been preferred before the Tribunal where:

i.     the claims are either not disputed by the corporate debtor (making it easier for the Tribunal to take a judicial call to commence the insolvency resolution process); or

ii.     the claims are already disputed by the corporate debtor in a suit or in an arbitration proceeding (again making it easier for the Tribunal to take a judicial call and reject the insolvency application).

The Tribunal's judicial call however becomes difficult (and has given rise to differing interpretations) in cases where operational creditor's claims are disputed by the corporate debtor, whether before or during the 10 days' response period post service of the Demand Notice, but no suit or arbitration proceeding has been initiated concerning such claim(s) of the operational creditor.

On the one hand, if the Tribunal takes a strict interpretation of the law, and holds that a "dispute in existence" shall necessarily mean pendency of a suit or an arbitration proceeding prior to receipt of the Demand Notice from the operational creditor, the Tribunal is likely to direct commencement of insolvency resolution process even in those cases where genuine disputes exist regarding quality of goods or services or regarding a contractual breach. The insolvency resolution process – coupled with the trauma attached to it for the company, its employees as well as its business relationships, contracts (containing clauses stipulating automatic termination upon commencement of insolvency proceedings) and market sentiments – would make the Code an excellent tool for extortion in cases where the dispute is at pre-adjudication stage (even if it is in mediation/conciliation). A strict interpretation has, however, been taken by the Mumbai Bench of the Tribunal in the case of:

  • Essar Projects India Ltd. vs. MCL Global Steel Pvt. Ltd. - The Tribunal, while interpreting the definition of "dispute" under the Code, held that "dispute in existence" means and includes raising a dispute in a court of law or arbitral tribunal before receipt of the Demand Notice issued under Section 8 of the Code. The Bench also observed that a dispute raised by a corporate debtor for the first time in its reply to the Demand Notice cannot be treated as a dispute in existence in the absence of the same being disputed before any court of law prior to receipt of the Demand Notice. With the above observations, the Bench admitted the insolvency application. 

On the other hand, if the Tribunal takes a liberal interpretation, and only receipt of a notice of dispute is deemed sufficient to reject the application of the operational creditor, all corporate debtors can raise any frivolous dispute, even after receipt of the Demand Notice under the Code, to scuttle the application of the Code. For example, in the case of: 

  • One Coat Plaster vs. Ambience Pvt. Ltd. - The Tribunal, apparently, considering the disputes raised for the first time by the corporate debtor in its reply to the Demand Notice received from the operational creditor, rejected the insolvency application observing that the corporate debtor had vehemently disputed the payment/debt in its aforesaid reply.

However, the Delhi Bench of the Tribunal in One Coat Plaster judgment also observed that the operational creditor had failed to show any evidence of acceptance of the completed work by the corporate debtor or any independent (architect's) certification to demonstrate that the work executed by it was complete in all respects. The reasoning of the same bench of the Tribunal is further amplified in the case of Annapurna Infrastructure Pvt. Ltd. & Ors. vs. Soril Infra Resources Ltd., where it held that:

"21. A co-joint perusal of the aforesaid provisions makes it clear that a corporate debtor has option available under Section 8(2) of the Code. The corporate debtor could either place on record material disclosing the existence of a dispute or to pay the unpaid debt. ...... The definition of the word 'dispute' is not exhaustive but is, in fact illustrative. In other words a corporate debtor is not left with the only option of showing the existence of dispute by way of a pending suit, arbitration or to show the breach of representation or warranty The corporate debtor would be well within his right to show that goods and services were not supplied at all or the supply was far from satisfactory in case of demand raised by an operational creditor. Hence a corporate debtor would be well within his rights to reject the demand on any sustainable grounds. It would therefore, depend on the facts and circumstances of each case."

Conclusion:

The Delhi Bench of the Tribunal seems to be on the right path that existence of a dispute, or in other words a valid dispute, needs to be determined on the facts and circumstances of each case. The Tribunal would need to apply its judicious mind to ascertain each case where the dispute is not pending before any court or arbitral tribunal, to see whether the dispute alleged is prima facie bona-fide or is a sham defence desperately or cleverly put forward by a corporate debtor to avoid corporate insolvency resolution process.

Besides, any other interpretation may either flood the Tribunal with opportunistic insolvency applications (where the disputes may be valid, but no suit/arbitration would have been pending) or leave redundant the provisions of the Code regarding invocation of insolvency proceedings by operational creditors (if all corporate debtors are permitted to raise a dispute, without merits, even if raised for the first time after receipt of the Demand Notice).  

The judgments of Essar Projects India as well as Annapurna Infrastructure, have been challenged before the National Company Law Appellate Tribunal. One can expect a judgment to clarify the position in law and resolve the currently prevalent difference in approach between the Delhi and the Mumbai benches of the Tribunal.

LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alishan Naqvee
Rupal Bhatia
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.