India: NCLAT: Wider Definition Of "Dispute" To Resist An Action For Insolvency Under The Bankruptcy Code

  • The National Company Law Appellate Tribunal ("NCLAT") interprets the definition of "dispute" under Section 8 and 9 of the Insolvency and Bankruptcy Code ("Code") to include, apart from existing suits and arbitrations, any other actions, proceedings, conciliation, mediation pending before any Court or Tribunals under any existing act or law in relation to an operational debt.
  • Holds that an application initiating the insolvency resolution process would be rejected if the Corporate Debtor has raised the existence of a pending "dispute" with the applicant Operational Creditor.
  • Onus to prove existing dispute pending before competent court of law or authority on Corporate Debtor
  • National Company Law Tribunal ("NCLT") to form a prima facie view on the existence of dispute pertaining to debt and default and not go into adequacy of the same.

Introduction

The NCLAT in a recent judgment, Kirusa Software Pvt. Ltd. ("Kirusa") v. Mobilox Innovations Pvt. Ltd. ("Mobilox") has broadly interpreted the term "dispute" to be of wide ambit and scope, stating that the term cannot be confined to pending proceedings or 'lis' within the limited ambit of a "suit or arbitration proceeding". Accordingly, an application for corporate insolvency resolution process ("CIRP") would be rejected if the Corporate Debtor has communicated the existence of a "dispute" which emanated prior to the initiation of the CIRP by an Operational Creditor. However, the NCLAT has also stated that a mere illusory dispute, raised for the first time by the Corporate Debtor while communicating the existence of a dispute, cannot be used as a tool to get an application for CIRP rejected by the Adjudicating Authority.

Brief Facts

Kirusa issued a demand notice to Mobilox as an Operational Creditor, demanding payment of certain dues. Mobilox issued a reply to the demand notice ("Mobilox Reply") inter alia stating that there exists certain serious and bona fide disputes between the parties and alleging a breach committed by Kirusa of the terms of a Non-Disclosure Agreement between the parties.

Kirusa filed an application before the NCLT, Mumbai for initiation of CIRP against Mobilox which was dismissed by the NCLT, Mumbai because a notice of dispute had been issued by Mobilox. Kirusa filed an appeal before the NCLAT, claiming that the Mobilox Reply does not constitute a notice of dispute as contemplated under the provisions of the Code.

Issue

What is the scope and ambit of the terms "dispute" and "existence of dispute" for determining the maintainability of an application filed by an Operational Creditor under Section 9 read with section 5 and 8 of the I&B Code?

Judgment

The Appellate Tribunal, while relying on Section 9 (5) (ii) (d) of the Code, had to determine whether an application filed by an Operational Creditor should be rejected if the Corporate Debtor in response to a demand notice for payment of debt, raises the existence of a "dispute" with the Operational Creditor. (All relevant sections have been reproduced for reference as endnotes)

Therefore, the key question in the appeal hinged on the interpretation of the scope and ambit of the term "dispute" in context of Section 9 read with section 8 and 5(6) of the Code. The Appellate Tribunal stated that as per Section 9 the NCLT can admit an application filed by an Operational Creditor only if no notice raising a valid "dispute" is received by the Operational Creditor. Therefore, as per the NCLT the existence of a "dispute" in respect of the operational debt claimed by the Operational Creditor would preclude the NCLT from admitting an application for initiation of CIRP.

The Appellate Tribunal observed that Section 5(6) of the Code which defines "dispute" mentions only a pending "suit or arbitration proceedings". The Appellate Tribunal relied on the Supreme Court judgment of Mithlesh Singh v. Union of India 1 to observe that, while interpreting statutes Courts have always presumed the legislature to have used every word for a purpose and therefore every part of a statute should be given effect. Therefore, the inclusion of any term within a statute reflects deliberate legislative intent. Considering this, the Appellate Tribunal relied on the Supreme Court judgment of P. Kasilingam v. PSB College of Technology 2 to interpret the scope of a definition when it uses the expression "means" or "includes" individually or collectively. It identified that the term "means" refers to the restricted definition as provided for in the statute and does not leave any scope for expansion of the definition. Whereas the term "includes" enlarges the meaning of the defined expression so as to include the natural meaning of the defined term, along with the definition provided for in the statute. Therefore, the Appellate Tribunal, proceeded to examine the term "dispute" in its natural and ordinary meaning, and upon reading the Code as a whole observed that the scope of "dispute" should cover all disputes and not be limited to only two ways of disputing a demand made by the Operational Creditor.

The Appellate Tribunal went on to inspect the term considering the intent of the legislature and held that, if the legislature had intended the definition of 'dispute' to be exhaustive and limited to only a suit or arbitration proceeding, the sub-section would have simply read as "dispute means a dispute pending in arbitration or a suit" without making the requirement inclusive.

Considering the aforementioned observations, the Appellate Tribunal harmoniously constructed the definition of "dispute" appearing in section 5(6) read with the Section 8(2) of the Code to mean that the term "disputes" would apply to all kinds of disputes, in relation to a debt and default.

The Appellate Tribunal went on to conclude that definition of "dispute" under Section 8 and 9 of the Code, when interpreted with the object and purpose of the Code, would mean any proceeding initiated or pending before any consumer courts, tribunal, labour court, mediation or conciliation, as well as any action taken by a Corporate Debtor under any act or law such as replying to a notice under section 80 of the Code of Civil Procedure, 1908, or an action under section 59 of the Sale of Goods Act, 1930 or an action regarding the quality of goods provided by an Operational Creditor. It essentially, includes any dispute raised in relation to clause (a) or (b) or (c) of section 5(6).

However, the Appellate Tribunal importantly stated that a dispute would have to be "raised in a court of law or authority and proposed to be moved before the court of law or authority and not any got up or mala fide dispute just to stall the insolvency resolution process", for it to fall within the scope and ambit of section 8 and 9 of the Code. Therefore, the Corporate Debtor has the onus to prove that there exists a pending dispute raised before a competent court of law or authority prior to initiation of the CRIP.

Further, the Appellate Tribunal has also drawn a parallel between Section 8 and 9 of the Code with Section 8 of the recently amended Arbitration and Conciliation Act, 1996. It has stated that the NCLT, when presented with a notice of dispute, has to only prima facie decide whether there exists a dispute pertaining to the "debt" and "default" as referred to by the Operational Creditor. The Tribunal does not have the mandate to use its discretion to verify the adequacy of the dispute.

The Appellate Tribunal also highlighted the following differences between the initiation of a CIRP by a Financial and Operational Creditor

Requirement

Financial Creditor

Operational Creditor

Filling of Application

No condition precedent

Needs to issue a notice a demand of unpaid debt/invoice demanding payment prior to filing

Right to file Application

Can file on default

Accrues after expiry of ten days from the date of delivery of the demand notice

Notice of dispute

No provision

Corporate Debtor can respond to the demand notice within ten days by issuing a notice of dispute

Admission/rejection of Application

Application admitted if existence of debt and occurrence of default ascertained

Application admitted in case there is no notice of dispute

Application rejected if there is a notice raising a valid dispute under the provisions of the Code

Analysis

The I&B Code was enacted as a means to consolidate the already existing, but segregated laws in the country with regard to insolvency and bankruptcy. The Code is a positive step forward in creating a single platform for resolution of disputes and insolvency. However, the Code like any other nascent legislation is not free from ambiguity, one of the key interpretational issues that has arisen with respect to initiation of CIRP by an Operational Creditor is the scope of the definition of "dispute" as appearing in Section 8 and 9 of the Code.

Prior to the present judgment of the NCLAT, there were various conflicting decisions interpreting the meaning of the term "dispute". In Essar Projects India Ltd vs MCL Global Steel, 3 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 the receipt of the Demand Notice issued under Section 8 of the Code. It also stated 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 the receipt of the demand notice. The same view was taken by the NCLT in the case of Deutsche Forfait vs Uttam Galva Steel. 4 It said that the NCLT had made it clear that such a dispute must be validated by raising the issues in dispute before a court or arbitral tribunal prior to the date of receipt of a demand notice. Merely contesting the amount in question did not constitute a 'dispute' within the meaning of the Code. However, the Delhi NCLT had taken the exact opposite view while stating that a dispute raised post issuance of a demand notice could also be considered as a valid dispute under the scope of section 9 of the Code.

As is evident, the previously ambiguous position on the scope of the definition of "dispute" has been finally resolved by the NCLAT, by stating the following:

  • The term "dispute" must be interpreted in a wide an inclusive manner to mean any proceeding which had been initiated by the Corporate Debtor before any competent court of law or authority;
  • The dispute should be in respect of (a) existence of the amount of debt (b) quality of goods and services or (c) breach of representation and warranty;
  • The dispute should be raised prior to the issuance of a demand notice by the Operational Creditor;
  • The Corporate Debtor would have to particularize and prove the dispute in respect of the existence of the "debt" and the "default"
  • The dispute cannot be a mala fide, moonshine defense raised to defeat the insolvency proceedings.
  • The NCLT would have to prima facie verify the existence of the pending dispute and not judge the adequacy of the same

The previous law on insolvency of corporate entities had a similar position, whereby if the creditors' debt was bona fide disputed on substantial grounds, the Court would ideally dismiss the winding up petition and leave the creditor to establish his claim in a separate action. A dispute would be considered substantial and genuine if it was bona fide and not spurious, speculative, illusory or misconceived. 5

The initiation of CIRP by an Operational Creditor is a novel phenomenon in the Indian legal and corporate scenario and can prove to be a powerful tool in realizing operational debts even when the Corporate Debtor is not insolvent. Therefore, in light of the clarifications issued by the NCLAT and the requirements of the Code itself it has become vitally important and prudent for a Corporate Debtor to proactively take steps to raise a dispute in respect of unpaid invoices/dues of an Operational Creditor and put on record the existence of deficiency in service or goods or any breach of representation/warranty or any counter claim that the Debtor might have against the Operational Creditor so as to pre-empt any insolvency proceedings under Section 9 of the Code.

For Relevant section, please click here.

Footnotes

1 (2003) 3 SCC 309

21995 Supp. (2) SCC 348

3CP No. 20/1 & BP/NCLT/MAH/2017

4C.P. no. 45/I&BP/NCLT/MAH/2017

5IBA Health(India) Private Ltd. Vs Info-Drive Systems Sdn.Bhd. (2010(10) SCC 553); Mediqup Systems Pvt. Ltd. vs Proxima Medical System G.M.B.H (AIR 2005 SC 4175)

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.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions