Getting a fix on the term ‘dispute’ under the Insolvency and Bankruptcy Code

Getting a fix on the term ‘dispute’ under the Insolvency and Bankruptcy Code

by admin October 26, 2016

Getting a fix on the term ‘dispute’ under the Insolvency and Bankruptcy Code

It’s been more than a year since the all-new corporate insolvency framework of the country (hereinafter referred to as the ‘IBC’) got notified followed by regulations over tranches. IBC is one of the biggest reforms by the government just after the GST, wherein it offers early identification of corporate distress with time-bound resolution being the essence of the Code.

Undoubtedly, it is a well-woven law striving for international standards but IBC is still in its infancy. It is evolving as various bare provisions are being integrated with technicalities and practicalities taken from the perspectives of different stakeholders.

Where does the dispute arise?

As per the provisions under IBC, on occurrence of default on part of the corporate debtor, an operational creditor is required to serve a 10-day’s demand notice under Section 8 of IBC, to the corporate debtor, before initiating application for insolvency resolution against the corporate debtor. Now, the corporate debtor must, either pay the dues or communicate the existence of dispute over the debt within 10 days.

The application for initiating corporate insolvency resolution could sustain in case the dues under consideration are free from any sort of dispute(s). Here, existence of dispute acts as one of the remedies to the corporate debtor; therefore, it is pertinent to analyse the meaning of the term dispute under the IBC.

Section 5 (6) of the IBC defines the term

A “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;”

Contrarily, Section 8 (2) of the IBC provides that the debtor should bring to the notice of the operational creditor “existence of a dispute, if any, and record of suit or arbitration proceeding pending before receipt of the demand notice”.

Questions under the scanner

The term ‘dispute’ has been subject to different interpretations by various benches and it’s been the point of focus for various stakeholders. The questions under the scanner of interpretation are as follows:

What will constitute a dispute under IBC?

What is the relevancy of timings relating to dispute under IBC?

Whether immersion of suit or arbitral proceedings is compulsory in order to qualify as a dispute under IBC?

Whether the definition of dispute under IBC is inclusive or exhaustive?

Interpretation of relevant orders on the subject

Let’s discuss the interpretation of the term ‘dispute’ under IBC in light of various judgements made by different benches of NCLT.

DF Deutsche Forfait AG and Ors. (Operational Creditor) Vs. Uttam Galva Steel Ltd. (Corporate debtor)

The NCLT Mumbai bench in the matter of Uttam Galva Steel, despite acknowledging the inclusivity of the term dispute under the Code, stated that the definition has always to be harmonised with the context in which it is said in the substantive section i.e. Section 8(2).

In this case, the counsel of the corporate debtor stated that the dispute has to be understood as mere denial to the claim as dispute highlighting that the definition of dispute is inclusive definition, which was respectfully disagreed by the Mumbai bench saying that:

“If reply (to the demand notice u/s 8) is given denying the claim despite default occurrence is clear, does it mean that no application can be filed by any operational creditor even though the operational creditor makes the case of default occurrence? If that is so, it will be virtually ousting operational creditor filing any case under section 9.

 If this scenario emerges, then it will be nothing but throwing this law into the dust bin. We all know how much time is taken to wind up proceedings, by the time company liquidation happens, not even bones remain to creditors.”

 In this case, the hon’ble bench gives teeth to provision under Section 8 (2) of the IBC which provides that the debtor should bring to the notice of the operational creditor “existence of a dispute, if any, and record of suit or arbitration proceeding pending before receipt of the demand notice”. The order also stressed upon the definition of the dispute which has to be construed in context of the substantive section, not otherwise.

One Coat Plaster Ors., Shivam Construction Company (Op. Creditors) Vs. Ambience Private Limited (Corporate debtor)

The Delhi bench hearing the petition almost on the same grounds analyzed the questions on existence of dispute, took a view contrary to the one ordered in the above case. The adjudicating authority promulgated that even though the bare perusal of the section shows that the dispute could be proved by showing that a suit has been filed or arbitration are pending, the definition of the term dispute is not exhaustive rather an inclusive one.

Kirusa Software Private Ltd. vs. Mobilox Innovations Private Ltd

Different benches having different views on this kept the stakeholders clueless till the NCLAT in the case of Kirusa Software Private vs. Mobilox Innovations Private on May 24, 2017 sorted the dispute on the term dispute under the Code.

The Appellate Tribunal held 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 the amount of the debt, quality of good or service or breach of a representation or warranty. The dispute as defined in subsection (6) of Section 5 cannot be limited to a pending proceedings or “lis, within the limited ambit of suit or arbitration proceedings, the word ‘includes’ ought to be read as “means and includes”.

Concluding remarks

Basis the above case, the interpretation on existence of dispute could be clearly understood as follows:

    1. Is it mandatory that the suit or arbitration proceedings must be legally on record in order to constitute the existence of dispute?

No, a mere reply by the corporate debtor to the notice issued by corporate debtor may sufficiently demonstrate the existence of dispute under IBC, irrespective of the fact whether the dispute is culminated with formal suit or arbitral proceedings or not.

    1. Is it mandatory that the dispute must be formally existing before serving of Section 8 demand notice?

No, it is not mandatory that the dispute be formally existing prior to serving of the demand notice, provided the dispute is a bonafide dispute, not the one entangled with a view to stall the insolvency proceedings under the Code.

(The writer is Deputy Manager, International Business Advisors, a financial and legal advisory firm)

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