India: The Disputed "Dispute" Under The Insolvency And Bankruptcy Code, 2016

Last Updated: 18 July 2017
Article by Aayush Mitruka

Most Read Contributor in India, July 2017

The Mumbai and Delhi Benches of the Adjudicating Authority31 were seen to be at loggerheads when it came to the interpretation of the term "dispute" under the recently notified, The Insolvency and Bankruptcy Code, 2016 ("The Code").

The Code provides that an operational creditor may serve a demand notice on occurrence of a default on operational credit. Subsequently, if the corporate debtor fails to make the payment within 10 days or fails to notify the creditor 'the existence of a dispute' in relation to the requested payment, the operational creditor can make an application for initiation of corporate insolvency resolution process to the Adjudicating Authority under the Code in the prescribed format therein.

Under sub section 6 of section 532 of the Code, 'dispute' has been defined as follows:

"dispute includes a suit or arbitration proceedings relating to-

(a) the existence of the amount of debt;

b) the quality of goods or service; or

(c) the breach of a representation or warranty;"

The Adjudicating Authority (Mumbai Bench) was called to interpret the expression "dispute" under the Code in the case of Essar Projects India Ltd.("Essar") v. MCL Global Steel Private Limited33 . The controversy arose in the background of a contract wherein Essar was appointed to execute certain civil work and other related works. After completion of the work, Essar raised certain invoices and the same remained unpaid despite repeated reminders. Having left with no choice, the

creditor issued a demand notice under section 834 of the Code. The debtor disputed the contents and the amount stated in the said notice due to disagreement regarding the quality of construction, timeline, etc. and enforceability of contract. A revised notice was thereafter sent by the creditor and consequently an insolvency petition was filed under section 9 of the Code. The debtor argued before the Adjudicating Authority that there was a 'dispute' in existence and therefore a petition under section 935 of the Code cannot be maintained.

The creditor was quick to point out there were no proceedings pending before any authority and it was for the first time that the debtor raised a dispute in reply to the notice sent by the Creditor under section 8 of the Code. Rejecting the defense, the Hon'ble Bench categorically held that the term dispute in existence means and include "raising dispute in a court of law or arbitral tribunal before receipt of notice under section 8." Accordingly the Hon'ble Bench admitted the petition. This was a welcome decision since it clarified that a dispute cannot be raised post section 8 notice as an afterthought.

The confusion ensued when in insolvency application filed by the operational creditor M/s Annapurna Infrastructure Pvt. Ltd. ("Annapurna") against the debtor SORIL Infra Resources Ltd.("SORIL") before the Principal Bench36. The dispute related to payment of rent coupled with damages/ interest between the parties was subjected to arbitral proceedings. The Sole Arbitrator passed an award in favor of the Applicant, Annapurna. SORIL challenged the award under sections 3437 of the Arbitration and Conciliation Act, 1996 ("The Act") and the challenge was rejected by the Court. Annapurna issued a demand notice under

section 8 of the Code to the debtors on 13.01.2017. In its reply dated 27.01.2017, SORIL contended that the existence of debt is disputed and an appeal has also been preferred under Section 3738 of The Act against the order passed by the Court while dismissing the challenge under Section 34 of The Act. Pertinently, execution proceedings to recover the award amount were also pending. It will be beneficial to note that on the date of service of the demand notice (i.e., on 13.01.2017) no appeal under Section 37 of T h e Act was filed or pending.

The debtor disputed the debt before the Adjudicating Authority on the pretext of a pending appeal and contended that the arbitral award did not attain finality in view of the pending appeal. The Authority upheld the Respondent's argument and refused to entertain the petition even in the absence of any pending appeal on the date of Section 8 notice. The Authority reasoned that the Respondent had time to prefer an appeal and chose to depart from a literal interpretation because "extreme technicality would result in nullifying the remedy of appeal within 30 days by section 37 of the Arbitration and Conciliation Act, 1996."

The Authority further opined that a party cannot be allowed to invoke more than one proceeding simultaneously. The issue of whether rent related debts would fall within the definition of 'operational debt' under the Code was also raised. However, since this piece does not aim to address that question; I will refrain from delving into that issue.

In other words, the Bench rejected the application despite no pending dispute 'before' the receipt of a demand notice under section 8 of the Code. The ruling further assumes significance as it noted that if a party has already invoked an effective remedy, it should not be allowed to indulge in the practice of forum shopping. While the Mumbai Bench in Essar dispute adopted a text oriented approach, the Principal Bench in the Annapurna ruling chose to depart from the text and emphasized the spirit of law.

Quite recently, the National Company Law Appellate Tribunal (NCLAT) in Kirusa Software Private Limited v. Mobilox Innovations Private Limited39 discussed this important issue of "dispute" and "existence of dispute" under the Code. The NCLAT discussed the issue at length and remitted the case back to the Tribunal. In the instance case, the creditor raised certain invoices related to software services it provided to the debtor and subsequently on non-payment a demand notice under section 8 of the Code was sent. The debtor disputed the debt in its reply.

The Hon'ble Appellate Tribunal, in light of the Legislative intent, upon reading of the code, opined that the term "dispute" ought to be given its natural and ordinary meaning. The width of the expression "dispute" should cover all disputes on debt, default etc. and not be limited to only two ways of disputing a demand made by the operational creditor, i.e. either by showing a record of pending suit or by showing a record of a pending arbitration. The Hon'ble Appellate Tribunal further reasoned that once parties are already before any judicial forum/authority for adjudication of disputes, notice becomes irrelevant and such an interpretation renders the expression 'existence of a dispute, if any, in sub-section (2) of Section 8, otiose. It was held that the definition of dispute is not exhaustive but illustrative and the same ought to be given a wide and broad interpretation. The Hon'ble Appellate Tribunal noted:

"In view of the aforesaid discussions, we hold that the dispute as defined in sub-section (6) of Section 5 cannot be limited to a pending proceedings or lis, within the limited ambit of suit or arbitration proceedings, the word 'includes' ought to be read as "means and includes" including the proceedings initiated or pending before consumer court, tribunal, labour court or mediation, conciliation etc. If any action is taken by corporate debtor under any act or law including while replying to a notice under section 80 of CPC, 1908 or to a notice issued under Section 433 of the Companies Act or Section 59 of the Sales and Goods Act or regarding quality of goods or services provided by 'operational creditor' will come within the ambit of dispute, raised and pending within the meaning of sub-section (6) of Section 5 read with subsection (2) of Section 8 of I&B code, 2016."

Significantly, the Hon'ble Appellate Authority also ruled that the Adjudicating Authority, before admitting an application, ought to examine whether the notice of dispute actually raises a dispute qua the terms 'debt' and 'dispute' as used under the Code. This observation has raised some concerns in view of the fact that the expression 'prima facie' or any related expression does not find a mention in Sections 8 or 9 of the Code. To appreciate this in a better manner it will be helpful to reproduce the relevant provision of the Code.

Sub clause 5 of section 9 of the Code states: "(9) Application for initiation of corporate insolvency resolution process by operational creditor.

.........

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

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

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.

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

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;

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

(e) any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application under subclause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the Adjudicating Authority."

The importance of this authoritative pronouncement from the Hon'ble Appellate Tribunal can hardly be under stated since it enlarged the scope of the expression "dispute." It has largely clarified the dispute conundrum and should ideally put the issue to rest for some time. This could also be seen as an attempt to protect the genuine debtors from the savage provisions of the Code having far reaching consequences. At the same time this decision could be misused by raising illusory and colorable 'disputes'.

The Code provides that an appeal against the order of the Hon'ble Appellate Tribunal can be preferred before the Hon'ble Supreme Court of India40. It will be very interesting to see how the Hon'ble Apex Court deals with this question when faced with a similar issue.

Footnotes

31 Adjudicating authorities in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal. (See Section 60 of the Code)

32 Section 5 provides for Definitions.

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

34 Insolvency resolution by operational creditor

35 Application for initiation of corporate insolvency resolution process by operational creditor.

36 CP No. (IB) 22(PB)/2017.

37 The provision relates to application for setting aside an arbitral award.

38 The provision relates to Appealable orders.

39 Company Appeal (AT) (Insolvency) 6 of 2017.

40 Section 62 of the Code

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