India: Interpretation Of The Provisions Of The Insolvency And Bankruptcy Code, 2016 (Code).

Introduction

Recent judgements passed by different benches of the National Company Law Tribunal(NCLT) across the country have given rise to fresh controversies surrounding the interpretation of the provisions of the Insolvency and Bankruptcy Code, 2016 (Code). Such controversies revolve around the interpretation of the term "dispute" as defined under section5(6) of the code. Decisions given by the principle bench (Delhi) and Mumbai bench of the NCLT on claim applications filed by operational creditors under section 9 of the code are completely in contrast with each other and provide starkly opposite interpretations of the term "dispute".

Before we proceed further, let us take a look at the relevant provisions of the Code:

  • Section 5(6) of the Code, which defines the term "dispute"

"5. In this Part, unless the context otherwise requires—

(6) "dispute" includes a suit or arbitration proceedings relating to—

  1. the existence of the amount of debt;
  2. the quality of goods or service; or
  3. the breach of a representation or warranty."
  • Insolvency resolution by operational Creditor

" 8. (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(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—

(a) 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; .."

  • Application for initiation of corporate insolvency resolution process by operational creditor

"9. (1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of Section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under subsection (2) of Section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility;.."

For enhanced clarity on the said dichotomy, this article highlights and discusses the relevant judgments passed by the abovementioned two benches of the NCLT, in the backdrop of the aforesaid applicable provisions of the Code.

Interpretation by NCLT Principal Bench, Delhi

The Principal Bench, Delhi, has 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 facts under both applications were similar and involved unpaid debts against work orders or service contracts executed by applicant service providers. 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. Further, the learned tribunal stated that Section 8(1) of the Code provides "adequate room for the NCLT to ascertain the existence of a dispute." It is also observed that while deciding both applications, the learned Principal Bench appreciated the documentary evidence submitted by the applicant creditors in support of their claim in order to decide whether the "dispute" raised by the corporate debtor under its notice to the applicant can be dislodged or proven to be false or incorrect.

Hence, it transpires from the abovementioned decisions of the Principal Bench 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.

Interpretation by NCLT Mumbai Bench

In complete contrast to the abovementioned decisions of the NCLT Principal Bench, Delhi, while deciding a factually similar application filed by an operational creditor in Essar Projects India Limited v. MCL Global Street Private Limited4, the learned NCLT Mumbai Bench 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.5 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 simpliciter 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.

Subsequently, the NCLT Mumbai Bench reiterated its aforesaid interpretation of the term "dispute" in DF Deutsche Forfait AG & Anr v. Uttam Galva Steel Limited6, wherein the learned tribunal made extensive observations on various provisions of the Code and inter-alia stated that the mandate in Section 8 cannot be understood by reading the term "dispute" as mere assertion and denial because that would in effect oust the remedies available under the Code for an operational creditor and in turn result in defeating the objective of the Code.

In this case, the learned tribunal deliberated whether the expression "includes" in the definition of the term "dispute" under Section 5(6) of the Code should be understood in its general sense or in a specific manner. To decide the same, the tribunal considered the context of the surrounding provisions, namely, Sections 7, 8, 9, and 10 of the Code, and held that "this word 'dispute' nowhere appears except in Sections 8 and 9, therefore this definition is primarily meant for application when notice is issued by the operational creditor under s. 8 and when case is filed by an operational creditor under s. 9 of the Code, therefore the definition has to be understood in a meaningful way to cater to the intent and purpose behind Sections 8 and 9 and not otherwise." The tribunal further observed that the definition clause in the Code itself provided that the definitions are to be understood in their literal sense unless the context otherwise required. Therefore, the context of the substantive provisions surrounding a term was to be looked into for interpreting the definition of such term. The learned tribunal relied upon the judgments of the Supreme Court7 to establish that the term "includes" has to be understood in the context in which it is applied, and in the present case, the term "includes" must be read as "means" to achieve the purpose of the legislation.

Interestingly, the NCLT Mumbai Bench had earlier in Kirusa Software Pvt. Ltd. v. M/s Mobilox Innovations Pvt. Ltd.8 taken a view similar to that of the NCLT Principal Bench, Delhi, and had dismissed the application of an operational creditor on the ground that the corporate debtor had notified a "dispute" to the claim of the applicant by way of its reply. However, in the case of Uttam Galva Steel9, the learned tribunal, while distinguishing the case of Kirusa Software and accepting the error committed therein, clarified that the said judgment was passed in the "formative days when this Code had come into existence" and the counsel for the applicant did not moot the interpretation of the term "dispute."

Comment

The foregoing ambiguity surrounding the interpretation of the term "dispute" in the context of Sections 5(6), 8, and 9 of the Code essentially points out the divergence in the application of the rules of the interpretation of statutes by different tribunals. It appears that whilst the NCLT Principal Bench, Delhi, has applied the golden rule of interpretation, the NCLT Mumbai Bench has relied upon the ejusdem generis rule to interpret the term "dispute" under the Code.

The decision of the NCLT Mumbai Bench in the case of Uttam Galva Steel10 has emerged as a crucial judgment for understanding the new regime envisaged under the Code. It comprehensively discusses and sheds light on the various substantive and procedural aspects of the Code in light of the legislative intent as well as the law of the land, especially pertaining to the interpretation of the term "dispute" as mentioned above. However, given the dichotomy of views between the NCLT Mumbai Bench and NCLT Principal Bench, Delhi, it is evident that sooner or later, the National Company Law Appellate Tribunal (NCLAT) would be encumbered with the task of interpreting the expression "dispute" in order to put an end to the uncertainty surrounding it.

Footnotes

1 Company Application No. (I.B.) 07/PB/2017 and Company Application No. (I.B.) 08/PB/2017. Two separate applications along the same facts were filed against the same corporate debtor in this case, being Ambience Private Limited. Therefore the Principal Bench took up both the applications together.

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

3 as per section 8(2) of the Code.

4 Company Application No. 20/I & BP/ NCLT/MAH/2017.

5 Ibid, see paragraphs 6 and 7.

6 Company Application No. 45/I & BP/ NCLT/MAH/2017.

7 South Gujarat Roofing Tiles Manufacturer Association v. State of Gujarat, (1976) 4 SCC 601; N.D.P. Namboothiripad v. Union of India, (2007) 4 SCC 502; Karnataka Power Transmission Corporation & Anr v. Ashok Iron Works Private Limited (2009) 3 SCC 240.

8 Company Application No. 02/I & BP/ NCLT/MAH/2017.

9 Supra, at 6.

10 Ibid

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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