India: NCLAT Interprets Disputed Debts Under The Insolvency Bankruptcy Code, 2016

Last Updated: 30 August 2017
Article by S.S. Rana & Co. Advocates

Introduction:

A need to codify and consolidate the laws related to bankruptcy or insolvency was felt since a long time. The Insolvency and Bankruptcy Code, 2016 ("Code") brought about many changes to the laws related to corporate insolvency resolution making the process definite, ascertainable and easier. The new code makes the National Company Law Tribunal ("NCLT") and the National Company Law Appellate Tribunal ("NCLAT"), the adjudicating authority, inter alia in case an application is filed for resolution of matters pertaining to insolvency. Upon a collective reading of various provisions of the code it is observed that if the notice of a disputed debt is sent to the operational creditor by the corporate debtor, then the NCLT is required to send back/ reject the application for corporate insolvency resolution process. ("CIRP").

The Law:

Notice of demand for default:

According to Section 8 of the Code, an operational creditor may, on the occurrence of a default, deliver a demand notice and/ or 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.

Application for CIRP:

Under Section 9 of the Code, the operational creditor becomes entitled to file an application after expiry of 10 days from the date of delivery of the demand notice or copy of invoice, as the case may be, demanding payment. The 'operational creditor' would receive either the payment or a 'notice of dispute' in terms of sub-section (2) of Section 8 of the Code. The notice of dispute is a notice given by the debtor claiming that he disputes the amount relating to goods or services, to be paid or owed to the creditor, which is the cause for non-payment. If the operational creditor receives neither, he may file an insolvency proceeding against the debtor.

Acceptance of rejection of Application:

According to Section 9(5)(ii)(d) of the Code, the Adjudicating authority is required to reject the application of CIRP if there is a notice of dispute. In other words, the notice of dispute can be a ground for rejecting an application by Operation Creditor. The pre-requisite for qualification of a notice of dispute to be an eligible ground is the existence of a valid dispute.

The Case:

Kirusa Software Pvt. Ltd. ("Kirusa") v. Mobilox Innovations Pvt. Ltd. ("Mobilox")

Kirusa issued a notice of demand regarding a certain debt to Mobilox, to which Mobilox replied by raising a dispute between the parties with regards the debt. The NCLT, Mumbai, considering this notice of dispute and Section 9, rejected the application made by Kirusa, for CIRP, leading to the instant appeal.

Kirusa appealed to the NCLAT, stating that in the impugned order the validity of the "disputed debt" was not examined by NCLT. If the disputed debt had been analyzed, Kirusa contended, the NCLT would have inferred that the dispute raised neither fulfills the requirements of a dispute as enumerated under Section 5(6), nor is a bonafide dispute within the meaning of the Code. Kirusa therefore prayed that as the dispute was invalid within the meaning of the Code, the NCLT erred in rejecting its application for Corporate Insolvency Resolution Process filed by Kirusa.

The appellants stated that the in order to qualify as a 'dispute' under Section 5(6), the dispute must relate to (i) existence of the debt or (ii) quality of the goods or services or (iii) the breach of the representation or warranty with regard to such goods or services.

The appellants further stated that the NCLT failed to exercise its jurisdiction as an adjudicatory body as it did not speculate the requirements for qualification of a dispute as a 'dispute' as defined under Section 5(6). It also failed to examine whether the notice of dispute given by the corporate debtor fulfils the condition stipulated in Section 8(2)(a); and ensure whether the dispute was raised in good faith.

The Verdict:

The main question of interpretation which the NCLAT speculated and pronounced upon was the ambit of the phrase 'disputed debt'. It observed, "Sub Section (6) of Section 5 defines "dispute", to include, unless the context otherwise requires, a dispute pending in any suit or arbitration proceedings relating to: (a) existence of amount of the debt; (b) quality of good or service; (c) breach of a representation or warranty. The definition of "dispute" is "inclusive" and not "exhaustive". The same has to be given wide meaning provided it is relatable to the existence of the amount of the debt, quality of good or service or breach of a representation or warranty."

NCLAT, applying the doctrine of harmonious interpretation stated that: "Admittedly in subsection (6) of Section 5 of the 'I & B Code', the Legislature used the words 'dispute includes a suit or arbitration proceedings... If this is harmoniously read with Section (2) of Section 8 of the 'I & B Code', where words used are 'existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings, 'the result is disputes, if any, applies to all 14 kinds of disputes, in relation to debt and default. The expression used in subsection (2) of Section 8 of the 'I & B Code' 'existence of a dispute, if any,' is disjunctive from the expression 'record of the pendency of the suit or arbitration proceedings'. Otherwise, the words 'dispute, if any'. in sub-section (2) of Section 8 would become surplus usage."

Referring to the Hon'ble Supreme Court's observation in Mithlesh Singh Vs. Union of India (2003) 3 SCC 309, NCLAT stated that "the Legislature is deemed not to waste its words or to say anything in vain." Therefore, if the legislature intended to limit the ambit of the word 'dispute' it would have mentioned the requirement of notice of a dispute to only refer to a record of pendency of the suit or arbitration proceedings and not to 'existence of a dispute, if any'.

With regards to the present case, the NCLAT set aside the order of the NCLT as it was made mechanically and was based on a very vague, got up and motivated dispute made merely with the view of evading the liability.

Conclusion:

The word dispute cannot be interpreted in a limited and restrictive sense. The tribunal observed that the definition of the word 'dispute' is inclusive and not exhaustive, and therefore it need not be interpreted in a restrictive light. It stated that the term dispute applies to any dispute that has arisen or is pending before the application for CIRP was made. The NCLAT included within this definition, the disputes which are pending with different adjudicating authorities such as, Consumer Courts, Adjudicating Tribunals, arbitration proceedings, mediation or conciliation proceedings 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. etc. Dispute also includes any dispute raised by the operational debtor with respect to the quality of goods and services delivered or breach of representation of warranty by the operational creditor. On the other hand, the CALT also stated that this interpretation should not be used as a tool by the corporate debtors to avoid or evade insolvency proceedings by mentioning any unsubstantiated or frivolous dispute.

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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