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'Existence of a Dispute' under Insolvency & Bankruptcy Code

Published: Oct 10, 2017

By Yudhvir Dalal, Adv.

THE corporate debtors are perplexed and worried by the time bound insolvency resolution under the Insolvency and Bankruptcy Code, 2016 (hereinafter 'I&B Code'). Moreover, the insolvency proceedings commence from the date of admission of insolvency application. The 'financial creditors' and 'operational creditors' are taking recourse to I&B Code as compared to earlier time consuming debt recovery mechanisms under the SARFAESI Act, 2002 or RDDB Act, 1993 or liquidation mechanism under the Companies Act, 2013. From the perspective of a corporate debtor, I&B Code is very stringent and harsh statute. If the debtor has to save his business then it is sine qua non for him to whole heartedly challenge the insolvency application in the first instance itself i.e. at the stage of admission of insolvency application. Otherwise, liquidation of his company within 180 days or maximum 270 days looms over his head.

Judicial Interpretation of Phrase 'Existence of Dispute'

One of the rescuer of a corporate debtor is section 9(5)(ii)(d) of I&B Code. In terms of section 9(5)(ii)(d), if the operational creditor has received the notice of dispute or there is a record of dispute in the information utility then it is a valid ground for rejection of insolvency application in preliminary stage itself. And, section 8(2)(a) stipulates that the corporate debtor shall, within 10 days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor about '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'.

On perusal of above mentioned two provisions viz. section 9(5)(ii)(d) and section 8(2)(a) it can be observed that in section 9(5)(ii)(d) the word "or" has been used while in section 8(2)(a) the term "and" has been used. So, as per literal interpretation of section 9(5)(ii)(d), either of the notice of dispute or record of dispute in information utility is sufficient ground for rejecting insolvency application. But the literal interpretation of section 8(2)(a) mandates for both viz. 'existence of dispute' as well as record of pendency of any suit or arbitral proceedings. This statutory anomaly between the provisions led to legal disputes.

While resolving the statutory anomaly, the Hon'ble Supreme Court in Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd. , Civil Appeal No. 9405 of 2017; - 2017-TIOLCORP-05-SC-IBC after referring and discussing catena of Indian and foreign decisions held that the word "and" occurring in Section 8(2)(a) must be read as "or". The Court held that keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as "or", the word "and" needs to be read as "or". The Court further cautioned that if read as "and", disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that 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. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them. It is enough that a dispute exists between the parties. So, the existence of a dispute is enough ground for rejection of insolvency application even if no record of pending suit or arbitral proceedings is found.

'Dispute' Shouldn't be 'Sham' or 'Frivolous'

After pronouncement of Mobilox Innovations (P.) Ltd. Case (supra) the existence of a dispute is enough ground for rejecting an insolvency application. But the dispute or record of proceedings, as also held by Hon'ble Apex Court in Innoventive Industries Ltd. v. ICICI Bank & Anr. , Civil Appeal Nos. 8337-8338 of 2017 - 2017-TIOLCORP-09-SC-MISC, should be pre-existing – i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational debtor gets out of the clutches of the Code. The 'dispute' should be genuine and not sham or frivolous. As per section 5(6) the term "dispute" includes a suit or arbitration proceedings in relation to: existence of the amount of debt; quality of goods or services; or breach of a representation or warranty.

In M/s. One Coast Plaster v. M/s. Ambience Private Limited & Ors., C.A. Nos. (I.B.) 7&8/PB/2017, NCLT held that the definition of "dispute" under section 5(6) is not exhaustive but illustrative in nature. A suit or arbitration proceeding challenging the amount claimed by the operational creditor is only one of the ways in which the corporate debtor may dispute the debt. However, another Bench of NCLT in M/s. DF Deutsche Forfait AG & Anr. v. M/s. Uttam Galva Steel Ltd., held that in order to give constructive meaning to term "dispute", the term 'includes' in the definition needs to be construed strictly and in the context it is applied.

But, later in the case of Kirusu Software Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd., CA (AT) Insolvency 6 of 2017, the Ld. NCLAT while settling the issue held that 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. Once the term "dispute" is given its natural and ordinary meaning, upon reading of the Code as a whole, the width of "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 intent of the Legislature, as evident from the definition of the term "dispute", is that it wanted the same to be illustrative (and not exhaustive). If the intent of the Legislature was that a demand by an operational creditor can be disputed only by showing a record of a suit or arbitration proceeding, the definition of dispute would have simply said dispute means a dispute pending in arbitration or a suit. Later the same view was upheld by the Hon'ble Apex Court in Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd., - 2017-TIOLCORP-05-SC-IBC.

Conclusion

After the landmark pronouncement of Supreme Court in Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd. (supra) now it is well settled that mere 'existence of a dispute' is enough for rejecting an insolvency application under section 9(5)(ii)(d) of I&B Code. This pronouncement has acted panacea for the businesses which were put on peril of insolvency merely on the pretext of non-payment of due debt, which the debtor itself is refuting.The Court has taken care of statutory prescribed limitation period for filing any suit or arbitration petition.

It is quintessential that if the corporate debtor is disputing or questioning the existence of debt amount, quality of goods or services provided to it or breach of any representation or warranty by the creditor then he should be given opportunity to adjudicate that dispute before initiating insolvency proceedings against him.

Furthermore, at the same time, the pronouncement has made it quite explicit that the 'dispute' should be genuine and not mere sham or frivolous pretext to delay the insolvency proceedings. Also, in Innoventive Industries Ltd. v. ICICI Bank & Anr. (supra) it has been categorically held that the dispute should be pre-existing – i.e. before demand notice or invoice was received by the corporate debtor under section 8 (1) of the Code.

So, the Hon'ble Apex Court has aptly settled the anomaly between section 9(5)(ii)(d) and section 8(2)(a) of I&B Code by reading term "and" in section 8(2)(a) as "or". Hence, the existence of a dispute is enough ground for rejecting an insolvency application even if no record of pending suit or arbitral proceedings is found.

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