Interpretation of ‘Dispute’- NCLAT/ NCLT INSOLVENCY CODE



Interpretation Of ‘Dispute’- NCLAT/ NCLT INSOLVENCY CODE

SHORT SUMMARY
In this Flash editorial, the author begins by referring the provisiosn of Operational Creditor under Insolvency & Bankruptcy Code, 2016. Since the code come into effect from December 2016 all the applicants/ creditors have begun to file applications under the Code. The main thrust of the article, however, is upon the “Definition of Dispute under Insolvency and Bankruptcy Code.

In this editorial author discuss the decisions of Hon’ble NCLT in case of Essar Projects India Ltd. v. MCL Global Steel Private Limited (CP No. 20/1 & BP/NCLT/MAH/2017) and NCLAT in case of Kirusa Software Private Limited v. Mobilox Innovations Private Limited. This article discusses some key observations made by NCLAT / NCLT on interpretation of ‘dispute’

This is article no. 232 of the series of editorials written by the author on corporate laws {Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}
.
INTRODUCTION:

An operational creditor can initiate a corporate insolvency resolution process (“CIRP”) of the corporate debtor by filing an application before the relevant National Company Law Tribunal (“NCLT/ Adjudicating Authority”) upon occurrence of a default in payment of its operational debt.

However, the operational creditor must first send a demand notice or invoice to the corporate debtor, demanding the payment of the defaulted debt. In case the corporate debtor issues a ‘notice of dispute’ to the operational creditor, the Adjudicating Authority is required to reject the application of the operational creditor.

Question: The question that has arisen before various NCLTs / NCLATs is whether a corporate debtor can raise all kinds of disputes in the notice of dispute or can the notice of dispute only refer to pendency of a suit or arbitration before receipt of the demand notice.

Facts of the CASE
Essar Projects India Ltd. (Operational Creditor) v. MCL Global Steel Private Limited (Corporate Debtor)
(CP No. 20/1 & BP/NCLT/MAH/2017)”
I.          The Operational Creditor was appointed to assist with the construction of a steel melt shop complex by the Corporate Debtor. However, despite raising invoices and sending reminder letters to the Corporate Debtor, the Operational Creditor's dues remained unpaid. 

II.          The Debtor denied the contents of the notice and stated that the remedies under Sections 8 and 9 of the IBC were not available to Essar since the Debtor disputes the amount due to a disagreement regarding the quality of construction, timelines etc. and enforceability of the contract pursuant to which Essar was appointed by the Debtor.

III.          The Petition noted that the Debtor had never raised any dispute prior to the issuance of the statutory notice by Essar. Further, OC also noted that the Debtor had not initiated any civil suit or other proceedings against Essar which is a pre-requisite under Section 8 of the IBC.

The Bench examined the case read with relevant provisions of the IBC, the provisions of which have been reproduced below:

Provisions relating to Dispute under the IBC, 2016

8. (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor 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.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) Existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

The term ‘Dispute’ has been defined in Section 5 (6) of the Code as “dispute includes a suit or arbitration proceedings relating to:
(a) the existence of the amount of debt;
(b) quality of goods or service; or
(c) the breach of a representation or warranty

As is clear from the text of Section 8, the Bench made the following observations:

§  The reply by the Corporate Debtor highlighting disputes in relation to the amount in default was issued after the demand notice was served, whereas Section 8  of the Code requires a pre-existing dispute (i.e. existing before the receipt of the demand notice) to be able to challenge a petition by an Operational Creditor.

§  No civil suit or other proceedings were initiated against the Operational Creditor, therefore, a' dispute in existence', i.e. the raising of a dispute in a court of law or an arbitral tribunal before the receipt of the demand notice - as is required under the Code) could not be established in the facts and scenario of this case.

Accordingly, the Bench held that the disputes raised by the Debtor were not sustainable and admitted the Petition.

facts of the CASE - 2

Kirusa Software Private Limited issued a demand notice on Mobilox Innovations Private Limited (as an operational creditor, demanding payment of certain dues. Mobilox issued a reply to the demand notice inter alia stating that there exists serious and bona fide dispute between the parties. Kirusa filed an application before the NCLT, Mumbai for initiation of CIRP of Mobilox which was dismissed by the NCLT, Mumbai on the grounds that a notice of dispute has been issued by Mobilox. Kirusa filed an appeal before the Hon’ble NCLAT, claiming that Mobilox Reply does not constitute a notice of dispute in accordance with the Code. 

An important question before the National Company Law Appellate Tribunal (“NCLAT”) in was, inter alia, the true meaning and interpretation of the expression ‘dispute’ for the purposes of section 9 of the IBC.

While interpreting the definition of ‘dispute’ in favour of corporate debtors, the NCLAT held the following:
§  the definition of ‘dispute’ under the IBC is an inclusive definition and not exhaustive; the expression ‘includes’ used in the definition of ‘dispute’ should be read as ‘means and includes’; 
§  ‘Dispute’ must be raised (by the corporate debtor) prior to the notice for insolvency resolution by an operational creditor under section 8 of the IBC 
§  Dispute as defined in Section 5 (6) cannot be limited to a pending proceeding or ‘lis’ within the limited ambit of suit or arbitration proceedings but includes proceedings initiated or pending before consumer court, tribunal, 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 433 of the Companies Act or Section 59 of the Sale of Goods Act or regarding quality of goods or services provided by the operational creditor, the same will come within the ambit of dispute, raised and pending within the meaning of Section 5 (6) read with Section 8 (2) of the Code. 
§  Such actions, suits, arbitrations, proceedings before any court, tribunal, or mediations etc. must be in the context of a debt, or quality of goods or services or breach of representation or warranty;
On facts of the case, it was held that the Corporate Debtor Reply does not raise any dispute within the meaning of Section 5 (6) or Section 8 (2), that Corporate Debtor has disputed the payment merely on “some or other account” and that Corporate Debtor defence was “vague, got up and motivated to evade the liability”. The NCLAT therefore set aside the order of NCLT, Mumbai and remitted the case to it for consideration of Operational Creditor application for admission, if the application is otherwise complete.

Conclusion:
Thus from the above two judgments’ one can opine that Corporate Debtor have to highlight the dispute existing before the receipt of the demand notice. Such actions, suits, arbitrations, proceedings before any court, tribunal, or mediations etc. must be in the context of a debt, or quality of goods or services or breach of representation or warranty.
The ability of a corporate debtor to insulate itself from an application for insolvency resolution by an operational creditor hinges on the pre-existence of a 'dispute' in relation to the debt. Mere illusory dispute, raised while replying to a demand notice cannot be a tool to reject the application under Section 9.

Importantly, the onus to initiate action on disputed invoices has now shifted from the creditor to the debtor. Typically, it is the creditor who initiates legal actions to recover its dues. However, after the NCLAT Order, the corporate debtor may need to proactively take steps to dispute the invoices/dues of the operational creditor (that too before the operational creditor issues a formal demand notice under the Code).


(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. 

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