Introduction
Recently, two benches of the National Company Law Tribunal (“NCLT”), namely the Principal Bench at New Delhi and the Mumbai Bench gave divergent orders on the following issue:- Whether the NCLT had jurisdiction to entertain insolvency petitions filed by “operational creditors” under the Insolvency and Bankruptcy Code, 2016 (“Code”) against the corporate debtor wherein the payment of the debt is challenged by the corporate debtor by merely denying a claim of the operational creditor in response to the demand notice of the operational creditor issued under section 8 of the Code.
The issue came into question in the case of (i) One Coat Plaster and Shivam Construction Company v. Ambience Private Limited (“One Coat Plaster Case”) which came before the Principal Bench of NCLT and (ii) Essar Projects India Ltd v MCL Global Steel Pvt. Ltd (“Essar Project Case”) which came before the Mumbai Bench.
While the Mumbai Bench held that merely denying a claim in reply to a demand notice, could not be treated as ‘dispute in existence’ for the purposes of rejecting an application under Section 9 of the Code, and accordingly, the application for insolvency had to be allowed. The Principal Bench however held that the word “dispute” was an inclusive definition under the Code and taking into consideration that the debt sought to be fastened on the corporate debtor was vehemently disputed, the application for insolvency could not be allowed.
Legal Background
The term “dispute” has been defined under Section 5(6) of the Code by way of inclusive definition to ‘include a suit or arbitration proceedings relating to – (a) the existence of the amount of the debt; (b) the quality of the goods or service; or (c) the breach of a representation or warranty’.
As per Section 8 of the Code, upon occurrence of a default (i.e., non-payment of debt, when it has become due and payable) an operational creditor can issue a demand notice in the manner prescribed therein, to a corporate debtor, which can be followed by filing an application before NCLT in terms of Section 9 of the Code.
As per section 8 (2) of the Code, the corporate debtor, within a period of 10 days of the receipt of the demand notice, is required to bring to the notice of the operational creditor, existence of the dispute if any, and record of the pendency of the suit of arbitration proceedings filed. NCLT, within 14 days of the receipt of the insolvency application is required to admit the application on satisfaction of certain conditions which inter alia include that there should not be any notice of dispute received by the operational creditor or there is no record of dispute in the information utility. Else, the application has to be rejected.
Facts of the Cases & Issue
In both the aforesaid two cases, the operational creditors were appointed to carry out certain civil works. After completion of the work by the operational creditors, substantial portion of the invoices raised by the operational creditors remained outstanding to be paid by the corporate debtors.
The corporate debtors, in each of the cases, disputed the amount on the grounds of poor quality of work, loss due to delay in construction etc.
It was contended on behalf of the corporate debtors that as the debt itself was disputed, the NCLT could not allow the insolvency application.
In view of the aforesaid legal provisions, it had to be decided by the NCLT as to whether mere denial of the claim (debt) could be treated as a ‘dispute in existence’ for the purposes of Code and consequentially entail rejection of the application under Section 9 of the Code.
Orders of NCLT Benches Mumbai Bench
As the debt was not disputed before any Court of law before the receipt of notice issued under section 8 of the Code, the disputed raised by the corporate debtor in the reply to the notice under section 8 of the Code cannot be treated as “dispute in existence” at the time of receipt of the said notice, for 2 reasons, one – due to admission of raising invoices and two due to raising it as a dispute in the reply only after notice under section 8 has been issued.
Accordingly, the Mumbai bench allowed the application of the operational creditor. Principal Bench
The word “dispute” was an inclusive definition under the Code and not an exhaustive one.
Taking into consideration the fact that the debt sought to be fastened on the corporate debtor was vehemently disputed in response to the demand notice sent by the operational creditor, the application insolvency could not be allowed.
Our Analysis & Comments
As per the Parliament’s notes on clause (section) 8 of the Code, it is mentioned that the object of giving the corporate debtor a time of 10 days from the receipt of the demand notice, to inform the operational creditor of the existence of a dispute regarding the debt claim,- is to ensure that the operational creditors whose debt claims are usually smaller, are not able to put the corporate debtor into the insolvency resolution process prematurely, or initiate the process for the extraneous considerations. It may also facilitate informal negotiations between creditor and the corporate debtor, which may result in the restructuring of the debt outside the formal proceedings.
A dispute may ‘exist’ even in the absence of a pending suit or arbitral proceeding; the latter two are only forums created to formally take cognizance of an already existing dispute. In view of the aforesaid, we believe that while the provisions of the Code cannot be used for pressing contentious claims, at the same time, the same can also not be misused to give errant corporate debtor(s) an opportunity to defeat the object of the Code. But, in absence of any legislative or any other authoritative jurisprudence on this subject, and also considering that no powers have been granted to NCLT to determine whether or not the dispute is bonafide, it remains to be seen as to on what basis and what tests are applied to achieve a balance between these two factors.
The Principal Bench’s decision (and even the Mumbai Bench’s decision to a certain extent) leaves open the possibility that a debtor could simply avoid commencement of the insolvency resolution process by disputing a debt after a demand notice has been served.
It will also be interesting to see as to how the judiciary interprets the term “dispute” based on various principles of interpretation of statutes and particularly whether the said term can be given a restrictive meaning even when it is a inclusive definition.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.