Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016

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Ascertaining The Meaning Of “Dispute” And “Existence of Dispute” Under The Insolvency And Bankruptcy Code, 2016.

[Ashish Jain]

The author is a third-year student of National Law Institute University, Bhopal.

Introduction

The Insolvency and Bankruptcy Code, 2016 (“Code“) has been enacted with the objective of bringing efficiency in the insolvency and liquidation process in the country. However, there have arisen disagreements relating to the true meaning and purpose of the various provisions of the Code. One such concern has been raised with respect to interpretation of the terms “dispute” and “dispute in existence” used in the Code. Both the Mumbai and the Delhi benches of the National Company Law Tribunal (“NCLT”) in their various recent judgments have provided different interpretations to the said terms.

Relevant Provisions of the Code

Section 5(6) of the Code, which provides the meaning of “dispute,” says that the term includes a suit or arbitration proceeding 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.[i]

Section 8 then provides that the corporate debtor is required to bring notice, within ten days of receipt of demand notice from an operational creditor, of any “existence of dispute” in relation to such debt.[ii] Further, section 9 provides for initiation of corporate insolvency resolution process and states that the adjudicating authority may reject the application for initiation of such process if, before the expiry of the notice period of ten days, the operational creditor has received a notice of dispute from the corporate debtor.[iii] Thus, interpretation of the expression “dispute in existence” becomes significant as it remains the only defence available with the corporate debtor to avoid the insolvency proceedings.[iv]

In cases where the debt is not disputed by the corporate debtor (and therefore the tribunal can initiate the insolvency proceedings) or where a suit or arbitration proceeding is already pending (and therefore the tribunal may reject the application), it is easier for the adjudicating authority to take a call. However, problem arises when a dispute regarding such debt has been raised by the corporate debtor within the ten days of delivery of demand notice and no suit or arbitration proceedings are pending in relation to such debt.[v] The question arises whether this would amount to an existing dispute within the meaning of the Code.

Conflicting Judicial Interpretations

On the one hand, the NCLT Mumbai bench has taken recourse to strict interpretation and held that a debt would be considered disputed only if a suit or an arbitration proceeding exists before the delivery of notice by the operation creditor regarding the debt. It can be argued that this may lead to injustice in matters where there is a genuine dispute in respect of the debt but no suit has been filed.

The NCLT Mumbai bench in Essar Projects India Limited v. MCL Global Street Private Limited,[vi] while deciding over an application filed by an operational creditor, held that since the dispute raised by the corporate debtor in its reply to the demand notice was not raised before any court of law or arbitration tribunal, it cannot be said to come within the purview of existing dispute under the Code. Therefore, the Tribunal while allowing the application for initiation of insolvency resolution proceedings held that a simple denial of claims by the corporate debtor without any pending suit or arbitration proceeding would not amount to “existence of dispute” under section 8(2) of the Code.

The Tribunal in DF Deutsche Forfait AG & Anr v. Uttam Galva Steel Limited[vii] while further affirming its interpretation observed that the term “dispute” cannot be held to mean mere assertion or denial as it would frustrate the objective of the Code and deny the remedy available to the operational debtor. Further, the Tribunal while deliberating over the meaning of the word “includes” in the definition of dispute under section 5(6), considering the context of the surrounding provisions, observed that the word “includes” must be read as “means”. Therefore, pendency of suit or arbitration proceeding before delivery of demand notice is necessary to take defence of section 9(5)(ii)(d).

On the other hand, applying the golden rule of interpretation, the Delhi Principal Bench of NCLT has held that, in order to claim “existence of dispute,” it is enough that the corporate debtor has questioned the default of debt in the reply to notice within the ten-day period. Therefore, an application filed by an operational creditor is liable to be rejected by the tribunal if the corporate debtor claims that a dispute exists regarding such debt and there is no mandatory requirement that a suit or arbitration must be pending. The application in such case will only be allowed if such claim of dispute can be refuted on the basis of evidence provided in the application. The problem with such wide interpretation will be that the corporate debtor may raise a dispute even though no genuine dispute is present and this may lead to rejection of the application filed by the operational creditor.

The NCLT Delhi bench while deciding over the application filed for initiation of insolvency resolution process under section 9 in One Coast Plaster v. Ambience Private Limited[viii] and in Philips India Limited v. Goodwill Hospital and Research Centre Limited[ix] interpreted the term “dispute.” In both the cases, the Tribunal observed that since the corporate debtor had disputed the debt in its reply to demand notice, the applications were liable to be rejected. The Tribunal further held that since the word “includes” comes before the word “dispute” in section 5(6), the definition of dispute is inclusive and not exhaustive and, therefore, it must be given a wider interpretation and should not be restricted to mean pending suit or arbitration proceeding alone. The Tribunal also observed that there is “adequate room for the NCLT to ascertain the existence of a dispute” under section 8 of the Code.

The NCLAT Decision

Recently, the National Company Law Appellate Tribunal (“NCLAT”) had the occasion to deliberate over the true interpretation of the words “dispute” and “dispute in existence” in the case of Kirusa Software Private Limited v. Mobilox Innovations Private Limited.[x] The NCLAT observed that the term dispute should be given its natural and ordinary meaning and should be interpreted to be wide enough to cover all disputes relating to debt and should not be limited to suit or arbitration proceeding only. While holding that the definition of dispute under section 5(6) is illustrative and not exhaustive, the Appellate Tribunal observed that:

“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 proceeding 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 the 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 Sale of Goods Act or regarding quality of the goods or services provided by the ‘operational creditor’, [that] will come within the ambit of dispute raised and pending within the meaning of sub-section (6) of section 5 read with sub-section (2) of section 8 of I&B code, 2016.”[xi]

The decision of the Appellate Tribunal can be summed up as follows:

  • the disputes pending before any court of law as well as the disputes raised for the first time in reply to the demand notice are both included within the ambit of “dispute” under section 5(6).
  • the dispute raised must not be mala fideand must not be one for the purpose of stalling the insolvency process. An application for insolvency resolution cannot be rejected merely on the basis of an illusory dispute raised for the first time in reply to demand notice if the operational creditor can prove that the debt exists.
  • the burden to prove that a dispute exists relating to the debt or of absence of debt is on the corporate debtor and he has to raise a dispute with sufficient particulars.

In view of the aforesaid interpretation, the Appellate Tribunal deciding over the application on merits held that the notice of dispute by the corporate debtor was insufficient and vague.

Comment

It seems that the interpretation of the term “dispute” by the NCLAT has put the debate to rest, at least for some time. The Appellate Tribunal has taken a logical view to come to a middle path by bringing together both the inclusive view taken by the Delhi Bench, and the restricted view taken by the Mumbai Bench. The Tribunal has taken an appropriate view by holding that pendency of suit or arbitration proceeding is not a mandatory requirement and (on the other hand) any dispute raised in reply to a demand notice will not be covered under “existence of dispute” without sufficient proof. It seems right to hold that each case must be decided on its particular facts and that the tribunal should apply its judicial mind to each case. This will save genuine debtors from the claws of the provisions and will also ensure that the provisions are not misused by opportunistic debtors by raising an illusory dispute.

However, taking a different viewpoint, it can be said that the NCLAT has failed to lay down guidelines to be followed by the NCLT while dealing with the issue, and has given subjective criteria to decide whether a dispute exists in a particular case. This may open a Pandora’s box, and it remains to be seen whether the ambiguity regarding the interpretation of “dispute” will come to an end in the near future.

[i] The Insolvency and Bankruptcy Code, 2016, section 5.

[ii]Ibid, section 8.

[iii]Ibid, section 9.

[iv]Alishan Naqvee, Rupal Bhatia and Monica Benjamin, Insolvency And Bankruptcy Code- Meaning Of “Dispute In Existence” (Mondaq, May 03, 2017), http://www.mondaq.com/india/x/590894/Insolvency+Bankruptcy/Insolvency+And+Bankruptcy+Code+Meaning+Of+Dispute+In+Existence.

[v]Ibid.

[vi]Company Application No. 20/I & BP/ NCLT/MAH/2017.

[vii]Company Application No. 45/I & BP/ NCLT/MAH/2017.

[viii]Company Application No. (I.B.) 07/PB/2017 and Company Application No. (I.B.) 08/PB/2017.

[ix]Company Application No. (I.B.) 03/PB/2017.

[x]Company Appeal (AT) (Insolvency) 6 of 2017.

[xi]Para 35, Company Appeal (AT) (Insolvency) 6 of 2017.

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