To Be Or Not To Be A Dispute The Insolvency And Bankruptcy Code

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To Be Or Not To Be A Dispute
The Insolvency And Bankruptcy Code

The recently implemented Insolvency and Bankruptcy Code, 2016 (IBC) contains certain special requirements with respect to operational creditors, i.e., creditors owed debts in relation to the provision of goods or services including employment or a debt in respect of the repayment of dues. An operational creditor is only permitted to file an IBC application for insolvency resolution against a corporate debtor after issuing a demand notice to the debtor.

A debtor can respond to such a notice with a “notice of dispute”. If an operational creditor receives such a notice of dispute, it is no longer permitted to initiate the insolvency resolution process. (Note that this provision does not apply to financial debts owed to financial creditors, such as loans, credit facilities etc.)

Therefore, for all operational creditors considering, and debtors potentially facing, insolvency resolution proceedings, the question of what exactly amounts to a dispute under the IBC is significant.

The National Company Law Appellate Tribunal (NCLAT) recently answered this question in the case of Kirusa Software Private Limited v. Mobilox Innovations Private Limited.

The conflicting and confusing NCLT decisions

Both the Mumbai and Delhi benches of the National Company Law Tribunal (NCLT) have already answered the question of what amounts to a dispute under the IBC multiple times.

Mere assertion of existence of dispute post demand notice

However, the benches have given contradictory views. In One Coat Plaster, Shivam Construction Company v. Ambience Private Limited, the Delhi bench of the NCLT held on 01 March 2017 that the term “dispute” under the IBC has a broad, inclusive definition. For a debt to be considered disputed under the IBC, the debtor need not have filed a suit or arbitration proceedings prior to receipt of the notice from the operational creditor. The debtor must simply have responded to the notice issued by the operational creditor under the IBC asserting the existence of a dispute. This view seemed to be echoed by the Mumbai bench of the NCLT in its order passed in the Kirusa matter on 27 January 2017.

Suit or arbitration proceeding filed pre demand notice

The Mumbai bench of the NCLT however changed its view on the meaning of the term dispute under the IBC in two subsequent orders passed in March and April 2017. In Essar Projects India Limited v. MCL Global Steel Private Limited and DF Deutsche Forfait AG and Another v. Uttam Galva Steel Limited, the Mumbai bench of the NCLT held that the “existence of a dispute” in the IBC means that a suit or arbitration proceeding must be pending before an operational creditor serves a demand notice on the debtor. Merely raising an allegation in a reply to the demand notice will not amount to notice of an existing dispute, and nor will filing a suit or arbitration subsequent to receipt of the demand notice.

The compromise NCLAT decision

The recent NCLAT decision seems to be a compromise of the two different positions taken in the NCLT cases.

Broad definition of dispute

The NCLAT held that the definition of dispute in the IBC is inclusive, and not exhaustive. A dispute under the IBC will not be limited to a pending suit or arbitration proceedings; the term will include proceedings initiated or pending before consumer courts, tribunals, labour courts or mediation, conciliation etc. The term dispute will also include any action taken by a corporate debtor under any act or law including while replying to statutory or other notices.

Specific subject matter of dispute

However, the dispute must relate to either (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty, as specified in the IBC.

Genuine, pending dispute

The NCLAT held that the dispute must also be a genuine, pending dispute and the corporate debtor must give sufficient particulars to prove the existence of the dispute. The NCLT will not refuse to initiate IBC proceedings because of an illusory dispute, raised for the first time while replying to the operational creditor’s demand notice. Further, the dispute must be raised in a court of law or authority or be proposed to be moved before a court of law or authority, prior to receipt of the demand notice.

Although the NCLT cannot decide the substance of any dispute between the parties, it can prima facie decide whether there exists a genuine dispute.

What this means practically

The NCLAT judgment has implications for both debtors and operational creditors.

Takeaways for debtors

The NCLAT judgment means that any person who allegedly owes another a debt needs to be vigilant in raising any and all disputes with respect to the debt. A debtor company can no longer simply refuse to pay the amount of a debt. The NCLAT judgment places the burden on the debtor to raise its objections to a debt claimed in a timely manner, before receiving a demand notice under the IBC.

The dispute need not be raised by filing a suit or arbitration proceedings, but it must be raised in a manner that indicates it is a genuine dispute, proposed to be moved before a court of law or authority.

Takeaways for operational creditors

Creditors owed debts in relation to the provision of goods or services can rest easier knowing that corporate debtors cannot escape the IBC simply by refusing to pay or denying their obligation to pay. Corporate debtors also cannot escape by raising sham disputes after receiving IBC demand notices from the creditors.

In case a corporate debtor simply fails or refuses to pay an operational creditor, and does not raise any dispute with respect to the debt it allegedly owes, an operational creditor will be allowed to initiate IBC proceedings against the debtor. Subsequent disputes raised by the debtor will be to no avail.

Creditors and debtors in disagreement over any payment alleged to be due, or considering IBC proceedings, may need to seek legal advice on whether specific actions might amount to the raising of a “dispute” as defined in the IBC.

- By Krishna Hariani