Brief Background in relation to the Research Update
We refer to our research update circulated earlier which relates to the divergent orders given by two benches of the National Company Law Tribunal (“NCLT”), namely the Principal Bench at New Delhi and the Mumbai Bench on the following issue,-
Issue – Whether the NCLT had jurisdiction to entertain insolvency petitions filed by “operational creditors” under the Insolvency and Bankruptcy Code, 2016 (“Code”) wherein a claim of an operational debt made by the operational creditor is denied by the corporate debtor, in response to the demand notice issued by the operational creditor under section 8 of the Code; and whether the said denial establishes “existence of a dispute” for the purposes of rejecting the insolvency application Section 9 of the Code.
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.
Now further to this difference in views of the said NCLT benches, very recently, (on April 10th 2017), the Mumbai Bench of NCLT passed an order in the case of DF Deutsche Forfait AG and Anr. (Operational Creditor) v/s Uttam Galva Steel Ltd. (Corporate Debtor) wherein the said Bench had to deal with the same issue.
NCLT Mumbai Bench Order – In this case, the 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.
Relevant Legal Provisions (in brief)
Section 5(6) of the Code – The term “dispute” has been defined under Section 5(6) of the Code by way of inclusive definition which reads as follows:- “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.”
Section 8 of the Code – 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 a dispute” if any, and record of the pendency of the suit of arbitration proceedings filed.
Section 9 of the Code – 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.
Reasons given by the NCLT Mumbai Bench in support of its Order (Key Takeaways)
The following is the reasoning given by the Bench to support the aforesaid order:
(i) Relying upon a few judgments given by the Honorable Supreme Court of India, the bench held that,- though the definition of ‘dispute’, is an inclusive one, there are situations to read “includes” as “means” to enable the courts to achieve the purpose of legislation. In the definition of “dispute” given in the Code, at the beginning of section 2 itself of the Code, it is mentioned that definition has to be taken in the way it is defined as long as the context otherwise does not require. Hence, suppose context demands to take it otherwise, this definition will become sub-silentio (i.e. in silence) in the said context. Further, there are many decisions of the Hon’ble Supreme Court holding that this word “includes” has to be understood in the context it is applied.
(ii) If reply is given denying the claim despite the default occurrence is clear, and if it would mean that no application can be filed by any operational creditor even though the operational creditor makes the case of default occurrence, then it will be virtually ousting operational creditor filing any case under section 9. If this scenario emerges, then it will be nothing but putting the law into dustbin.
(iii) If a claim under section 8 is considered as “dispute” by looking at bare denial, sections 8 and 9 of the Code will become exactly like a cobra without fangs in the basket of a snake charmer. It is not the idea of Parliament to make this law to mere show up, had it been so, the Parliament would not have wasted its valuable time in including sections 2(6),8 and 9 in the Code.
(iv) If section 8 mandate is understood by reading dispute as mere assertion and denial, then no Operational Creditor can file a petition once the Corporate Debtor sends a reply notice saying that he is denying the claim raised by the Operational Creditor. The outcome of such situation is the doors of the Code will remain closed forever to any Operational Creditor. It is quite natural that as and when Operational Creditor sends notice, the Corporate Debtor, whether he is in a position to pay or not, unless colluded, will simply send a reply saying that it is disputing the claim raised by the Operational Creditor. This eventuality raises a dispute without any support of pending suit or arbitration proceedings, which will become detrimental for enforcing the mandate of this Code.
Other Key Takeaways from the NCLT Order
The Bench acknowledged that the winding up proceedings take a lot of time and by the time company liquidation happens, very less remains for creditors. The NCLT also acknowledged that corporates, nowadays run on credit facility and creditors have a right to realize their money before the company is fully sunk into. NCLT applies its judicial discretion to find as to whether company is solvent enough to discharge its obligations to its creditors, some admitted, some dismissed, because every situation is fact sensitive. Therefore, adjudication is subject to the facts of the case.
In the course of proceedings, the Corporate Debtor counsel made an argument stating that,- in one of earlier cases, the Mumbai Bench itself dismissed an operational creditor case on the ground that the claim is disputed in the reply; to which the Bench inter alia stated that, a mistake in one case cannot become a ratio to repeat the same mistake again and defeat the object of enactment.
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