India: Decrypting "Dispute" Under The Corporate Insolvency Resolution Process

Overview

The word "Dispute" is significant for the maintainability of every application filed under Section 9 of the IB Code. It will be not wrong to say that the first acid test for admission of an application under Section 9 is prima facie "whether there is any dispute or otherwise."

It is apposite to refer to Section 9(5) of IB Code which reads as below:

Section 9 (5) "The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

In other words, if there is an existence of a dispute between the Operational Creditor and the Corporate Debtor then the adjudicating authority may reject the application under IB Code.

Further, the term "Dispute" is defined under Section 5 (6) of the IB Code as;

"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;

It must be also noted that the term "includes" is a very wide term and it covers various aspects but is not limited to certain issues only.

The concept of dispute and the recurring doubt as to what constitutes dispute resulted in many situations wherein Courts and tribunals had to determine and clarify as to what will be construed as a prima facie dispute.

Different benches of the Ld' NCLT provided conflicting elucidations to the terms 'dispute' and 'existence of dispute'. The Mumbai Bench gave a strict interpretation of the terms,¹ and observed that the word 'includes' should be read as 'means', and consequently, a dispute would mean disputes raised in a court of law or Arbitral Tribunal before receipt of notice under section 8 of the Code. On the other hand, the Principal Bench provided a very liberal interpretation to the terms in question in a catena of cases,² and held that the definition of the dispute is illuminating in nature and any dispute raised post-issuance of demand notice, whether before a court of law/ competent authority or otherwise, could also be considered as a valid dispute.

The Hon'ble NCLAT took a similar view as the Principal Bench of the Ld' NCLT in Kirusa Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd.³ and provided a liberal interpretation of the phrases 'dispute' and 'existence of dispute'. The Hon'ble NCLAT held that the definition of "dispute" is "inclusive" and not "exhaustive" and includes mediation, conciliation, labor court, consumer court or any other proceedings pending or raised before any court of law or authority. The Hon'ble NCLAT also held that the dispute need not be pending between the parties prior to the notice of demand but could be raised thereafter. Significantly, it also elucidated that the Adjudicating Authority need not verify the adequacy of dispute. It only needs to be satisfied that a genuine dispute exists.

This matter was finally established by the Hon'ble Apex Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.⁴ The Hon'ble Supreme Court held that the definition of dispute is an inclusive one and also held that it would not be necessary for the dispute to be pending before the filing of the application since "a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court". To decide if the dispute exists, the Apex court held that "all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence...The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the Adjudicating Authority has to reject the application."⁵ By virtue of the Second Amendment to the Code,⁶ the decision in Mobilox was given statutory recognition.

This decision has thereafter been applied in the context of arbitration proceedings by the Hon'ble Supreme Court itself. In K. Kishan v. Vijay Nirman Company Pvt. Ltd.,⁷ the Hon'ble Apex Court held that "operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. Such a case would come within 'para 38' of Mobilox Innovations (supra), which is a case of a pre-existing ongoing dispute between the parties." Further, the Supreme Court stated that "the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist."

Whether the defense w.r.t existence of Dispute is applicable in case application filed under Section 7 of the Code i.e. by financial Creditor(s).

While time and again the judicial forums have clarified that if there is a proof of the existence of dispute in case of Operational Debt prior to serving of demand notice under Section 8 of the code by Operational Creditor to Corporate Debtor then the said Application filed under Section 9 will be eligible to be dismissed. Further, the Ld' Adjudicating Authority is not required to go into the merits of the dispute or adjudicate the same. However, w.r.t Financial Creditor, there has been a lack of clarity as to the position of financial creditors where there is a dispute as to the existence of a claim. The Code does not specifically have any provision that deals with the existence of a dispute in respect of financial debt since there is an expectation that information utilities would be able to provide undisputed information regarding the existence of debtor default.⁸

The Hon'ble Apex Court in Innoventive Industries v. ICICI Bank,⁹ held that "at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or fact." Accordingly, a Corporate Debtor could also dispute the existence of financial debt. This was also relied on by the Supreme Court in Mobilox,¹⁰ where the court held that while the scheme for disputing financial debts and operational debts was different, a dispute could be raised in respect of financial debt as well.

A corporate debtor could show that the debt was a disputed claim, the debt was not due or there was no default. It is relevant to note, however, that this takes place when the Ld' Adjudicating Authority is making an order admitting the application. This is distinct from the scheme of raising a dispute for operational debts which has been designed keeping in mind that "operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts."¹¹

Though Hon'ble Apex Court has held that Corporate Debtors can dispute the initiation of insolvency proceedings against them both in respect of operational debts and financial debts however still w.r.t financial debts there is still no clarity and there are hardly any Section 7 application(s) which have been rejected by Adjudicating Authority or Appellate Tribunal on the grounds of dispute those which are been rejected are rejected on the ground that Applicant does not qualify to be a Financial Creditor. In respect of operational debts, the Code specifically defines the term "dispute" and gives Corporate Debtors a chance to highlight such dispute. These disputes need not be restricted to a dispute raised in suits or arbitration proceedings. In addition, these disputes need not be raised prior to the filing of the application but may be raised thereafter as well. The Adjudicating Authority, while assessing if there is a dispute must only analyze if the dispute exists in fact and is not illusory.

Footnotes

1. Essar Projects India Ltd. v. MCL Global Steel Pvt. Ltd., 2017 (4) TMI 1156. Decision date- 06.03.2017, DF Deutsche Forfait AG and Ors v. Uttam Galva Steel Ltd., C.P. No. 45/I&BP/NCLT/MAH/2017. Decision date- 10.04.2017

2. One Coat Plaster and Shivam Construction Company v. Ambience Private Ltd. C.P. No. (I.B.) 07/PB/2017.Decision date- 01.03.2017; Annapurna Infrastructure Pvt. Ltd. & Ors. v. Soril Infra Resources Ltd., CP. No. (IB)-22(PB)/2017. Decision date- 24.03.2017; Goodwill Hospital and Research Centre Ltd v. Philips India LimitedCP No. (IB)-03(PB)/2017. Decision date- 02.03.2017; K. K. V. Naga Prasad v. Lanco Infratech Ltd., CP No. (IB) No. 9/9HDB/2017. Decision date- 13.07.2017

3. Kirusa Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd., Company Appeal (AT) (Insolvency) 6 of 2017. Decision date- 24.05.2017

4. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., Civil Appeal No. 9405 of 2017. Decision date- 21.09.2017

5. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., Civil Appeal No. 9405 of 2017. Decision date- 21.09.2017

6. Insolvency, and Bankruptcy Code (Second Amendment) Act, 2018

7. K. Kishan v. Vijay Nirman Company Pvt. Ltd., Civil Appeal Nos. 21824 and 21825 of 2017. Decision date - 14.08.2018

8. Bankruptcy Law Reform Committee, Report of the Bankruptcy Law Reform Committee, Para 5.2.1 Vol. I (2015)

9. M/s Innoventive Industries Ltd. v. ICICI Bank, Civil Appeal Nos. 8337-8338 of 2017. Decision date- 31.08.2017

10. Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., Civil Appeal No. 9405 of 2017. Decision date- 21.09.2017

11. Swiss Ribbons Pvt. Ltd. &Anr. v. Union of India, Writ Petition (Civil) No. 99 of 2018. Decision date- 25.01.2019

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