India: "Existence Of A Dispute" Under The Insolvency And Bankruptcy Code Clarified By The NCLAT

Last Updated: 26 June 2017
Article by Alishan Naqvee, Rupal Bhatia and Monica Benjamin

The issue concerning conflicting interpretations of the phrase "existence of a dispute" under the Insolvency & Bankruptcy Code, 2016 ("Code") by the Delhi and Mumbai benches of the National Company Law Tribunal ("Tribunal") (see One Coat Plaster vs. Ambience Pvt. Ltd., Annapurna Infrastructure Pvt. Ltd. & Ors. vs. Soril Infra Resources Ltd. and Essar Projects India Ltd. vs. MCL Global Steel Pvt. Ltd.), seems to have been put to rest by the National Company Law Appellate Tribunal ("Appellate Tribunal") for the time being.

The Appellate Tribunal recently had the opportunity to interpret the terms "dispute" and "existence of a dispute" in the case of Kirusa Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd., and clarified the legal position inter alia as under:

  1. "Dispute" cannot be limited to a pending proceeding or "lis" within the limited ambit of suit or arbitration proceedings. It also includes proceedings initiated or pending before consumer courts, tribunals, labour courts, mediation, conciliation, etc.;
  2. Any action taken by a corporate debtor under any act or law, including reply to a notice issued under Section 80 of the Code of Civil Procedure, 1908 or Section 59 of the Sale of Goods Act, 1930 or regarding quality of goods and services provided by operational creditor, will come within the meaning and ambit of "dispute";
  3. Merely raising a dispute for the first time while replying to the demand notice issued under the Code by the operational creditor, cannot be a reason for rejection of an insolvency application by operational creditor, if operational creditor otherwise satisfies that there is a debt and default on the part of the corporate debtor; and
  4. Onus to prove that there is no debt and default or that there is a dispute pending, shifts on to the corporate debtor.

Background:

In the aforesaid case before the Appellate Tribunal, the appeal had arisen out of an order of the Tribunal (Mumbai bench) rejecting the insolvency application filed by an operational creditor. In the order, the Mumbai bench had dismissed the insolvency application by merely observing that a notice of dispute had been issued by the corporate debtor disputing the claim of the operational creditor, without adjudicating as to whether the dispute actually existed. The operational creditor challenged the Tribunal's order in appeal on the ground that merely disputing a claim of default of debt cannot be a reason to reject the insolvency application under the Code till the corporate debtor refers any pending dispute. Thus, the only question which arose before the Appellate Tribunal in the appeal was – what does "dispute" and "existence of a dispute" mean for the purpose of determination of a petition under Section 9 of the Code?

The Judicial Interpretation & Observations:

The Appellate Tribunal interpreted the provisions of the Code and decided the question as under:

  1. The Code is to be read as a whole in order to give the term "dispute" its natural and ordinary meaning, which will then cover all disputes on debt, default, etc. without limiting it to a pending suit or arbitration proceeding. The definition of the term "dispute" under the Code is inclusive and illustrative and not exhaustive, as evident from Section 5(6) which uses the term "include" and Section 8(2) which uses the term "if any". Therefore, disputes pending before every judicial authority including mediation, conciliation, etc. as well as disputes raised in notices from the corporate debtor to the operational creditor, will also be covered;
  2. A dispute should satisfy any of the three requirements under Section 5(6) as mentioned above, and should not be a malafide dispute raised merely to stall the insolvency resolution process. An illusory dispute raised for the first time in reply to the demand notice/invoice under Section 8, cannot be a tool to reject an insolvency application if the operational creditor satisfies the Tribunal regarding the existence of a debt and default;
  3. The onus to prove the absence of a debt/default or the existence of a pending dispute shifts from the operational creditor to the corporate debtor. Thus, the corporate debtor is required to raise a dispute with sufficient particulars and even if a record of pendency of a suit or arbitration proceeding is shown, the same should relate to any of the three requirements under Section 5(6);
  4. Examples of "existence of a dispute" will include notices issued under Section 80 of the Code of Civil Procedure, 1908 and under Section 59 of the Sale of Goods Act, 1930, disputes regarding quality of foods raised before the corporate debtor for taking appropriate steps, decrees pending execution and pending writ petitions against public sector undertakings before High Courts, winding up proceedings under Section 433 of the Companies Act, 1956, petitions under Section 34 of the Arbitration & Conciliation Act, 1996, disputes regarding existence of debt amounts before Labour Courts and proceedings before consumer courts, tribunals, labour courts, mediation, conciliation, etc.

While giving the above detailed judicial interpretation of the provisions of the Code, the Appellate Tribunal examined the case before it on merits and found that the notice of dispute therein was insufficient in view of the said interpretation and was in fact "vague, got up and motivated to evade the liability". From the extract of the notice of dispute in the Appellate Tribunal's order, it appears that though the corporate debtor only made a statement of denial of the amounts alleged to be paid by it without offering any counter argument or explanation for the same, it had also alleged breach by the operational creditor of the terms and conditions of the NDA between the parties. However, the Appellate Tribunal observed that the corporate debtor could not adequately raise a dispute within the meaning of Sections 5(6) and 8(2) of the Code and held that merely disputing the amount on some account or the other could not be termed as a dispute for the purpose of rejecting an insolvency application under Section 9. With this observation, the Appellate Tribunal allowed the appeal by setting aside the Tribunal's order and remitted the case back to the Tribunal for reconsideration of the insolvency application.

Conclusion:

The Appellate Tribunal has taken a logical stand and brought balance with respect to insolvency cases regarding operational debts by clarifying that despite its liberal interpretation of the Code, companies are required to show sufficient proof of an existing dispute, thereby ensuring that the aforesaid case is not misused as a precedent. The Tribunal's role has also been clearly outlined with respect to such cases by ensuring that it applies its mind on a case to case basis without literally following the words contained in the provisions under the Code. After all, judicial interpretation of legal provisions, where such provisions have not been clearly worded, has time and again proved to be a necessary tool for proper adjudication of any dispute.

The aforesaid case, being the first of its kind, showcases the Appellate Tribunal's current view, which has been reiterated by it subsequently in the appeal challenging the Tribunal's (Mumbai bench) decision in Essar Projects India's case. However, there are several other cases of operational debt (such as Annapurna Infrastructure's case) which are currently pending before the Appellate Tribunal in appeal, to which the aforesaid interpretation is expected to be applied on a case to case basis. Therefore, it remains to be seen whether subsequent decisions of the Appellate Tribunal will provide more clarity with respect to the level of proof required to be shown by operational creditors and corporate debtors on a case to case basis.

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.

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Alishan Naqvee
Rupal Bhatia
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