“Dispute” is heavily disputed under Insolvency and Bankruptcy Code

 Interpretation of ‘Dispute’ in case of application by Operation Creditor

Introduction

Under the Insolvency and Bankruptcy Code, 2016 (“Code”), an operational creditor can initiate a corporate insolvency resolution process (“CIRP”) by filing an application before the jurisdictional National Company Law Tribunal (“NCLT”) upon occurrence of a default in payment of its operational debt under section 8 and 9 of the Code.

Before making an application, the operational creditor shall issue a demand notice or issue a copy of invoice to corporate debtor. Such corporate debtor, within a period of 10 days from the date of receipt of notice, shall either repay the outstanding debt or bring to the notice of operational creditor regarding the existence of any Dispute before any authority.

The term ‘Dispute’ is defined under sub-section 6 of section 5 of the Code. Dispute includes a suit or arbitration proceedings 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;

In case if the operational creditor doesn’t receive either the outstanding payment or notice of existence of dispute, then he can make an application to NCLT to initiate the CIRP.

The ambit of the definition of Dispute is discussed in case of 24thMay17_in_the_matter_of_Kirusa_Software_Private_Ltd_vs_Mobilox_Innovations_Private_Ltd (Company Appeal (AT) (Insolvency) 6 of 2017 dated 24 May 2017 and decided the definition of Dispute under section 5 of the Code.

Facts of the Case

The Appellant had issued a demand notice on Respondent as an operational creditor, demanding payment of certain dues. Respondent issued a reply to the demand notice (“Mobilox Reply”) inter alia stating that there exists serious and bona fide dispute between the parties and Appellant had breached the terms of an NDA between the parties.

Later, the Appellant had filed application with NCLT, Mumbai Bench for CIRP. However, the NCLT rejected application on the grounds that the Respondent has issued a notice to Appellant on the existence of the Dispute. The Respondent in his notice had quoted that the claim of the Appellant is not due and payable as there exist serious and bonafide dispute in case of breach of the terms and conditions of the Non-Disclosure Agreement (the NDA) and divulged the client’s confidential information and the debt has been disputed by the Respondent. Basis this, the NCLT, Mumbai Bench rejected the Application vide its order dated 27 January 2017.

The Appellant challenging the order of NCLT, filed petition with National Company Law Appellate Tribunal (NCLAT) claiming that mere disputing a claim of default of debt cannot be a ground for rejection under section 9 of the Code. The NCLAT observed the definition of Dispute under the Code and it was noted 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 debt, quality of goods or service, breach of representation and warranty. Such dispute cannot be confined to suit or proceedings only.

The question that has arisen before NCLAT is whether a corporate debtor can raise all kinds of disputes or can the notice of dispute only refer to pendency of a suit or arbitration before receipt of the demand notice. The NCLAT also observed the same in case of Mithlesh Singh v/s Union of India (2003) 3 SCC 309 that the intent of legislature is not to limit the dispute to only a pending suit or arbitration proceedings and record of pendency becomes irrelevant if the corporate debtor proves the existence of dispute and there is no default, before the receipt of demand notice under section 8(1) of the Code. The statutory requirement under section 8(2) of the Code is that the corporate debtor must raise dispute with sufficient particulars and such dispute shall be relatable to the existence of debt, quality of goods or service, breach of representation and warranty. It was also noted that mere raising a dispute for the sake of showing existence of dispute, shall not be entertained.

Judgement

Referring to the notice in Form D received from corporate debtor it was held that the Respondent’s notice does not raise any dispute within the meaning of Section 5 (6) or Section 8 (2) of the Code, that Respondent has disputed the payment merely on “some or other account” and that its defence was “vague, got up and motivated to evade the liability”. The NCLAT has set aside the order of NCLT, Mumbai and remitted the case to it for consideration.

Ashwin Bhat, is a Senior Associate with NovoJuris Legal

 

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