NCLT Ruling under Section 8 of the Insolvency and Bankruptcy Code, 2016

[Guest post
by Shayonee Dasgupta, who is a
project finance lawyer with a leading law firm in India]
As the Insolvency and Bankruptcy Code, 2016 (IBC) is in the process of being
implemented, the provisions relating to the initiation of insolvency resolution
process by an operational creditor were recently examined by the Mumbai bench
of the National Company Law Tribunal (NCLT)
by way of an order
dated March 6, 2017 in the matter of Essar
Projects India Ltd. v. MCL Global Steel Private Limited
(CP No. 20/1 &
BP/NCLT/MAH/2017).
Facts
In 2013, MCL Global Steel Private Limited (Debtor) appointed Essar Projects India
Limited (Essar) to carry out civil
work, structural fabrication and erection of building sheds and other
technological equipment as part of the 0.2 MTPA Steel Melt Shop Complex in
Madhya Pradesh. Essar successfully completed the works by November 30, 2014 and,
as previously agreed, raised invoices. 
Despite several reminders by Essar, the amount
remained unpaid by the Debtor. Thereafter, in December 2016, Essar issued a
demand notice under Section 8 of the IBC, demanding the repayment of INR
9,26,40,255.
The Debtor denied the contents of the notice and
stated that the remedies under Sections 8 and 9 of the IBC were not available
to Essar since the Debtor disputes the amount due to a disagreement regarding
the quality of construction, timelines etc. and enforceability of the contract pursuant
to which Essar was appointed by the Debtor. Subsequently, in January 2017, Essar
sent a revised demand notice to the Debtor demanding a sum of INR 9,10,60,788
(which included the invoice amount of INR 6,7203,097 and the interest at the
rate of 18% pa on the dues up to November 30, 2016 aggregating to INR
2,38,57,691). Finally, a petition for initiation of the corporate insolvency
resolution process (Petition) was
filed by Essar before the NCLT.
Arguments
& Analysis
The Petition noted that the Debtor had never raised
any dispute prior to the issuance of the statutory notice by Essar. The Petition
also noted that the Debtor did not raise any disputes even when the previous
invoices were issued in 2014 and 2015. Further, Essar also noted that the
Debtor had not initiated any civil suit or other proceedings against Essar which
is a pre-requisite under Section 8 of the IBC. Accordingly, Essar argued that the
Debtor had disputed its liability only as an afterthought once the demand
notice was issued.
The Bench examined Section 8 of the IBC, the
provisions of which have been reproduced below:
8. (1) An
operational creditor may, on the occurrence of a default, deliver a demand
notice of unpaid operational debtor copy of an invoice demanding payment of the
amount involved in the default to the corporate debtor in such form and manner
as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of
the receipt of the demand notice or copy of the invoice mentioned in
sub-section (1) bring to the
notice of the operational creditor—
(a) existence of a dispute, if any, and record of the
pendency of the suit or arbitration proceedings filed before the receipt of
such notice or invoice in relation to such dispute
; [
Emphasis supplied]
(b) the repayment of unpaid operational debt—
(i) by sending an attested copy of the record of electronic
transfer of the
unpaid amount from the
bank account of the corporate debtor; or
(ii) by sending an attested copy of record that the operational
creditor has
encashed a cheque issued
by the corporate debtor.
Explanation.—For the purposes of this
section, a “demand notice” means a notice served by an operational
creditor to the corporate debtor demanding repayment of the operational debt in
respect of which the default has occurred.
As is clear from the text
of Section 8, the Bench noted that dispute raised by the Debtor in reply to the
demand notice does not satisfy the requirements under Section 8. The Bench also
noted that the Debtor had admitted the raising of the previous invoices and had
brought up the dispute only once the demand notice was received. Section 8
clearly states that proceedings in relation to the dispute, if any, should be
initiated prior to the receipt of the demand notice from an operational
creditor.
Accordingly, the Bench held
that the disputes raised by the Debtor were not sustainable and admitted the
Petition.
Conclusion
The ruling clarifies that a
debtor cannot raise a dispute as an afterthought to avoid the initiation of the
insolvency resolution process by an operational creditor. The dispute should
have been in existence prior to the issuance of the demand notice in order to
satisfy the requirements under Section 8.
However, concerns have
been raised regarding the effectiveness of Section 8 in protecting the
interests of the operational creditor since no powers have been granted to the
adjudicating authority to determine whether the dispute is bonafide or not.  In a scenario where the debtor initiates the
dispute prior to the receipt of the demand notice in order to stall the
initiation of the insolvency resolution process, the operational creditor may
be left high and dry without any remedies under the IBC.
Shayonee
Dasgupta

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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