INTRODUCTION
The National Company Law Appellate Tribunal (“NCLAT”), in a recent judgment, given in the case of Kirusa Software Pvt. Ltd. (“Kirusa”) v. Mobilox Innovations Pvt. Ltd. (“Mobilox”) has provided much needed clarity on the scope and ambit of the terms “dispute” and “existence of dispute” for determining the maintainability of an application filed by an Operational Creditor under Section 9 read with section 5 and 8 of the Insolvency and Bankruptcy Code, 2016 (“Code”).
In the aforesaid case, the NCLAT had to deal with the issue, – whether National Company Law Tribunal (“NCLT”) had jurisdiction to entertain insolvency petition filed by an operational creditor under the Code wherein the corporate debtor merely denies / disputes a claim of the debt in response to the demand notice issued by the operational creditor under section 8 of the Code.
Before NCLAT, the same issue was dealt by the NCLT Bench in 4 (four) cases. However, the NCLT had been inconsistent in the judicial interpretation of the term ‘dispute’ as divergent views were given in four by different benches of NCLT.
NCLAT held that as the term “dispute” was an inclusive definition, it coverage cannot be limited to a pending suitor arbitration proceedings but includes proceedings initiated or pending before consumer court, tribunal, court or mediation, conciliation, etc. However, a dispute to fall within the scope and ambit of section 8 and 9 of the Code, it would have to be raised in a court of law or authority and proposed to be moved before the court of law or authority and not any got up or mala fide dispute just to stall the insolvency resolution process. NCLAT held that merely raising a dispute for the sake of dispute, if not raised prior to application and not pending before any competent court of law or authority cannot be relied upon to hold that there is a ‘dispute’ raised by the corporate debtor.
BACKGROUND (IN BRIEF)
The recently implemented Code inter alia contains certain special requirements with respect to operational creditors, (i.e., creditors owed debts in relation to the provision of goods or services) wherein operational creditors are permitted to initiate insolvency resolution proceedings against a corporate debtor, subject to certain conditions precedent as elucidated hereunder:
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, to a corporate debtor, which can be followed by filing an application before the National Company Law Tribunal (“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 a dispute” if any.
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.
The term ‘dispute’ is defined under Section 5(6) of the Code which is reproduced as under:
“In this Part, unless the context otherwise requires, – ‘dispute’ 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.”
In background of the aforesaid provisions of the Code, the following important question of law came into light:-
“Whether the NCLT had jurisdiction to entertain insolvency petition filed by an operational creditor under the Code wherein the corporate debtor merely denies / disputes a claim of the debt in response tothe demand notice issued by the operational creditor under section 8 of the Code? In other words, whether the said denial established an “existence of a dispute” for the purposes of rejecting the insolvency application under Section 9 of the Code, even when the said dispute was not raised / pending in a court / tribunal / judicial authority by the corporate debtor?”
Before NCLAT dealt with the said issue in the Kirusa Software Case, the same issue was dealt by the NCLT Bench in four cases. However, there have been inconsistencies in the judicial interpretation of the term ‘dispute’.
One Coat Plaster and Shivam Construction Company v. Ambience Private Limited which was decided by the Principal Bench of NCLT, Delhi
The Principal Bench held that,- the word “dispute” was an inclusive definition under the Code and hence, if the debt sought to be fastened on the corporate debtor was vehemently disputed by the operational debtor, the application for insolvency could not be allowed.
Essar Projects India Ltd v MCL Global Steel Pvt. Ltdwhich was decided by the Mumbai Bench of NCLT
The Mumbai Bench expressed conflicting views to the views expressed by the Principal NCLT Bench of Delhi and 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.
DF Deutsche Forfait AG and Anr.v/sUttam Galva Steel Ltd which was decided by the Mumbai Bench of NCLT
The Mumbai Bench held that,- – merely because the Corporate Debtor disputed the claim of the Operational Creditor in response to the latter’s demand notice issued under the Code, it did not mean that there was an existence of a “dispute” under the Code, unless there was a suit or arbitration proceedings pending at the time of issue of such demand notice. The Bench accordingly admitted the petition of the operational creditor under section 9 of the Code filed in that case.
In the aforesaid decision given in the Uttam Galva Steel Case, Mumbai Bench contravened its own judgment which was given in the case of Kirusa Software Private Limited v. Mobilox Innovations Pvt. Ltd, decided previously on27th January, 2017.
FACTS OF THE CASE
Kirusa, the Operational Creditor issued a demand notice to Mobilox for payment of certain dues. In its reply to the said demand notice, Mobilox stated that there existed certain serious and bona fide disputes between the parties.
Kirusa filed an application before the NCLT, Mumbai for initiation of insolvency proceedings against Mobilox, which was dismissed by the NCLT, Mumbai because a notice of dispute had been issued by Mobilox. The NCLT Bench, Mumbai rejected the application filed by Kirusa Software (Operational Creditor)under Section 9 of the Code against Mobilox Innovations (Corporate Debtor) by treating the ‘reply’ to Section 8 (2) Notice by the Corporate Debtor, as ‘notice of dispute’ for the purposes of the Code.
Kirusa filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) against the order of NCLT.
ISSUE WHICH CAME UP BEFORE THE NCLAT FOR ADJUDICATION
What is the scope and ambit of the terms “dispute” and “existence of dispute” for determining the maintainability of an application filed by an Operational Creditor under Section 9 read with section 5 and 8 of the Code?
KEY TAKE-AWAYS FROM THE DECISION GIVEN BY THE NCLAT IN THE CASE OF KIRUSA SOFTWARE V. MOBILOX SOLUTIONS
The definition of ‘dispute’ is illustrative, thus ‘inclusive’, and not ‘exhaustive’.
Dispute as defined in Section 5(6) of the Code cannot be limited to a pending suitor arbitration proceedings but includes proceedings initiated or pending before consumer court, tribunal, court or mediation, conciliation, etc.
A dispute would have to be raised in a court of law or authority and proposed to be moved before the court of law or authority and not any got up or mala fide dispute just to stall the insolvency resolution process, for it to fall within the scope and ambit of section 8 and 9 of the Code. Therefore, the Corporate Debtor has the onus to prove that there exists a pending dispute raised before a competent court of law or authority prior to initiation of the Corporate Resolution Insolvency Process.
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 refuse to initiate proceedings under the Code because of an illusory dispute, raised for the first time while replying to the operational creditor’s demand notice.
Mere raising a dispute for the sake of dispute, unrelated or related to clause (a) or (b) or (c) of Subsection (6) of Section 5, if not raised prior to application and not pending before any competent court of law or authority cannot be relied upon to hold that there is a ‘dispute’ raised by the corporate debtor.
The NCLT, when presented with a notice of dispute, has to only prima facie decide whether there exists a dispute pertaining to the “debt” and “default” as referred to by the Operational Creditor. The Tribunal does not have the mandate to use its discretion to verify the adequacy of the dispute.
Accordingly, the NCLAT set aside the Mumbai Bench Order and remitted the application to the Mumbai Bench so as to consider the same for admission.
BRIEF ANALYSIS AND COMMENTS
While elucidating the meaning and scope of the term “dispute” under the Code, NCLAT has given a very important clarification (albeit not in detail). The said clarification is that, – in order to establish existence of a “dispute”, it is necessary that the dispute has to be “raised in a court of law or authority and proposed to be moved before the court of law or authority and not any got up or mala fide dispute just to stall the insolvency resolution process” and also the remarks that “mere raising a dispute for the sake of dispute, unrelated or related to clause (a) or (b) or (c) of Subsection (6) of Section 5, if not raised prior to application and not pending before any competent court of law or authority cannot be relied upon to hold that there is a ‘dispute’ raised by the corporate debtor. ”
The Code is beneficial for an operational creditor for realizing operational debts from the Corporate Debtor, particularly when the threshold to initiate insolvency proceedings against the debtor, is Rupees One Lac only. However, there is a likelihood of the provisions being misused by operational creditors who may take this recourse for extraneous considerations. In the aforesaid background and in light of the aforesaid order given by NCLAT, in case the operational debtor has genuine reasons for not making the payment to Operational Creditor, it is very important for a corporate debtor to put on record the existence of deficiency in service or goods or any breach of representation/warranty by way of raising a dispute in a court / tribunal / any other judicial / quasi judicial authority.
A debtor company can no longer simply refuse to pay the amount of a debt. If the debtor fails to take a timely legal action against the creditor do so prior to the commencement of the insolvency proceedings, or subsequently raises a dispute at the time of issuing demand notice by the operational creditor, the NCLT will consider the dispute as if raised on frivolous grounds and the operational creditor will be allowed to initiate proceedings under the Code against the debtor; and the powers of the Board of Directors of the corporate debtor stand suspended and are to be exercised by the appointed insolvency professional. The judgment given by NCLAT hence places the burden on the corporate debtor to raise its objections to a debt claimed in a timely manner and that too before a judicial forum, before receiving a demand notice under the Code.
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