India: The End Of Judicial Vagaries Of The Insolvency & Bankruptcy Code, 2016 – Or Is It?

Introduction

The term 'dispute' assumes great importance under the Insolvency and Bankruptcy Code, 2016 (Code). This is because under Section 9(5)(ii)(d) of the Code, an operational creditor's application for initiating corporate insolvency is liable to be rejected if a 'notice of dispute' in relation to 'existence of a dispute' is received by such an operational creditor from a corporate debtor. The term 'dispute' is defined in Section 5(6) and referred to in Section 8(2) of the Code in the following manner:

Section 5(6):"dispute includes a suit or arbitration proceedings relating to-

  1. the existence of the amount of debt;
  2. the quality of goods or services; or
  3. the breach of a representation or warranty;"

Section 8(2):The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

  1. 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...

There have been inconsistencies in the judicial interpretation of the term 'dispute' under Section 5(6) of the Code, as highlighted in our Ergo Newsflash dated 4 April 2017. This was because on the one hand, the Principal Bench (PB) of the National Company Law Tribunal (NCLT) had interpreted the term 'dispute' in an inclusive and wider manner, by also including within its fold a bare denial of a claim in a demand notice under Section 8 of the Code. In doing so, it left this term open to be decided on the facts and circumstances of each case.

On the other hand, the Mumbai Bench of the NCLT (Mumbai Bench), had taken a much stricter view of the definition of 'dispute', so much so that, in DF Deutsche Forfait AG and Anr v. Uttam Galva Steel Limited, decided on 10 April, 2017 (Uttam Galva Steel matter), it held that the word 'includes' in Section 5(6) of the Code be read as 'means'. Therefore, the Mumbai Bench restricted the meaning of 'dispute' only to a suit or arbitration proceedings, pending as on the date of receipt of a Section 8 notice. Ironically, by taking a stricter view in the Uttam Galva Steel matter, Mumbai Bench contradicted its own order in the matter of Kirusa Software Private Limited v. Mobilox Innovations Pvt. Ltd, decided previously on 27 January 2017 (Mumbai Bench Order), thereby making an exception to the doctrine of 'stare decisis'.

Accordingly, it was imperative that the definition of 'dispute' be settled either by: (i) a larger bench of NCLT in terms of Section 419(5) of the Companies Act, 2013; or (ii) an appeal to the National Company Law Appellate Tribunal (NCLAT).

Background

An appeal before the NCLAT was filed against the Mumbai Bench Order by Kirusa Software Pvt. Ltd. By the said order, the application filed by Kirusa Software (Operational Creditor) under Section 9 of the Code against Mobilox Innovations (Corporate Debtor) was rejected as the Mumbai Bench had treated the 'reply' to Section 8 (2) Notice by the Corporate Debtor, as 'notice of dispute' for the purposes of Section 9(5)(ii)(d) of the Code.

While allowing the appeal against the Mumbai Bench Order, the NCLAT, in its judgment dated on 24 May, 2017 (NCLAT Judgment), attempted to obviate any further interpretational jigsaw surrounding the issue. However, it is yet to be seen how far will the NCLAT Judgment succeed in resolving the issue.

NCLAT Judgment

The question formulated by the NCLAT for adjudication was "What does 'dispute' and 'existence of dispute' mean for the purposes of determination of a petition under Section 9 of the Code?" Following are the key take-aways of the NCLAT Judgment:

  • The definition of 'dispute' is illustrative, thus 'inclusive', and not 'exhaustive'.
  • Corporate Debtor may raise a dispute, by issuing a notice of dispute, in 2 (two) ways, under the Code:

    • By bringing to the notice of the operational creditor, 'existence of a dispute' including as to existence of debt or default; and
    • By bringing to the notice of the operational creditor, a record of the pendency legal proceedings, relating to matters covered in Section 5(6).
  • Dispute as defined in Section 5(6) of the Code cannot be limited to a pending suit or arbitration proceedings but includes proceedings initiated or pending before consumer court, tribunal, court or mediation, conciliation, etc.
  • If any 'dispute' is raised by corporate debtor under any act or law including, inter alia, while replying to a notice under Section 80 of Code of Civil Procedure, 1908 or to a notice under Section 433 of the Companies Act, 1956 or notice under Section 59 of the Sale of Goods Act, 1930, it will fall within the ambit of Section 5(6).
  • However, merely raising a dispute for the sake of it will not suffice, if:

    • such a dispute is not pending before the receipt of Section 8 notice; and
    • the dispute is unrelated to any of the following: (a) the existence of the amount of the debt; (b) the quality of good(s) or service(s), or (c) the breach of a representation or warranty.
  • The onus to prove that there is no default or debt or that there is a dispute pending consideration before a court of law or adjudicating authority, shifts from the operational creditor to corporate debtor.
  • Though the words 'prima facie' are missing in Sections 8 and 9 of the Code, the NCLT would examine whether notice of dispute in fact raises the dispute and that too within the parameters of two definitions - 'debt' and 'default'. Where NCLT finds that the notice of dispute really does raise a dispute, the NCLT has to reject the application.

The NCLAT, while adopting an inclusive definition of 'dispute', held that the Corporate Debtor, in its reply to the Section 8 Notice, had not raised any 'dispute' within the meaning of Section 5(6) of the Code. NCLAT further observed that the reply was 'vague and motivated to evade the liability'. Accordingly, the NCLAT set aside the Mumbai Bench Order and remitted the application to the Mumbai Bench so as to consider the same for admission.

Comment

As is evident from above, the NCLAT has adopted a middle path in interpreting the definition of 'dispute' by simply bridging the two banks of a river, i.e. the inclusive view (taken by the PB) and the restrictive view (taken by the Mumbai Bench).

The NCLAT Judgment has left the interpretation of the existence of 'dispute' to be determined on the basis of subjective criteria, on a case to case basis as it fails to clearly lay down the principles to be followed by the NCLT while deciding this issue. This could potentially open yet another Pandora's box. This is further evident from two judgments of NCLAT, both passed on 31 May 2017, in MCL Global Steel Private Limited vs. Essar Projects India Limited & Ors. and Philips India Limited vs. Goodwill Hospital & Research Centre Limited., where the NCLAT followed subjective criteria, on the basis of the facts and circumstances of the respective cases.

Laying down clear guiding principles, rather than providing subjective criteria, at this nascent stage of the Code, in our view, would have gone a long way in putting this debate to rest. The NCLAT Judgment, therefore, potentially raises more interpretational questions, than it answers. Therefore, the issue which requires serious mulling over is whether by way of the NCLAT Judgment, the judicial vagaries surrounding this aspect will come to an end or not?

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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