NCLAT on the Definition of a “Dispute” Under the Insolvency and Bankruptcy Code

[Post by Shyam Pandya, who is a partner at Desai & Diwanji. Views are
personal.
Disclosure: The author represented the respondent in the matter, i.e.,
Mobilox Innovations Private Limited]
In the context of a corporate
insolvency resolution process initiated by an operational creditor against a
corporate debtor under section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), a corporate debtor can, at a preliminary
stage, resist such initiation (within the prescribed time limit under the IBC)
in one of the two ways:
(a)        it can bring to the notice of the
operational creditor the existence of a
dispute, if any, and record of pendency
of the suit or arbitration proceedings
filed before the receipt of notice
or invoice in relation to the dispute;
or
(b)       it can repay ‘the unpaid operational debt……’.
If the operational
creditor receives neither a ‘notice of
dispute
’ (from the corporate debtor within the time prescribed under the
IBC) nor a payment (from the corporate debtor), the operational creditor is
entitled to make an application before the adjudicating authority for
initiating a corporate insolvency resolution process.
Once such an application
from an operational creditor has been received, the adjudicating authority is
required (within the prescribed time) to either:
(a)        admit the application, if, inter alia, no payment has been made by
the corporate debtor or ‘no notice of
dispute
has been received by the operational creditor ….’ or
(b)       reject the application, if, inter alia, ‘notice of dispute has been received by the
operational creditor ….’.
Under
section 5(6) of the IBC, ‘dispute
has been defined as follows:
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;
An important question
before the National Company Law Appellate Tribunal (“NCLAT”) in
Kirusa Software Private Limited v. Mobilox Innovations Private Limited was, inter alia, the true meaning and interpretation of the expression ‘dispute’ for the purposes of section 9
of the IBC.
While interpreting the
definition of ‘dispute’ in favour of
corporate debtors, the NCLAT held the following:
– the definition of ‘dispute’ under the IBC is an inclusive
definition and not exhaustive; the expression ‘includes’ used in the definition of ‘dispute’ should be read as ‘means
and includes
’;
– the definition of ‘dispute’ under the IBC it cannot be
limited to pending proceedings or ‘lis’ within the limited ambit of suit or
arbitration proceedings;
– ‘dispute’ will embrace not just suits or arbitrations but its ambit
will extend to proceedings initiated or pending before consumer courts,
tribunal, labour court or mediation and conciliation, as well as any action
taken by a corporate debtor under any act or law such as replying to a notice
under section 80 of the Code of Civil Procedure, 1908, or an action under
section 59 of the Sale of Goods Act, 1930 or an action regarding the quality of
goods or services provided by an operational creditor;
– such actions, suits,
arbitrations, proceedings before any court, tribunal, or mediations etc. must
be in the context of a debt, or quality of goods or services or breach of
representation or warranty;
– ‘dispute’ must be raised (by the corporate debtor) prior to the
notice for insolvency resolution by an operational creditor under section 8 of
the IBC;
– raising a pending ‘dispute’ (by the corporate debtor)
cannot be a mala fide effort to stall the insolvency resolution process;
– while the adjudicating
authority is not empowered to verify the adequacy of the ‘dispute’, a ‘dispute
giving the colour of a genuine dispute, or an illusory dispute (raised for the
first time), cannot be a tool to reject the application for initiating the
corporate insolvency resolution process.
The above interpretation
allows the corporate debtor to be cautious when it is supplied with
sub-standard quality of goods or services by its vendors and, as is common
business practice, the corporate debtor withholds payments to its vendors in
this regard. Some key takeaways of the above judgement of the NCLAT which
corporate debtors can bear in mind in such a scenario are below:
– the corporate debtor
should ensure that if it is dissatisfied with the quality of goods or services
supplied by its vendor and, as a result, the corporate debtor withholds payment
to such vendor, it does so by giving reasons;
– the corporate debtor
should factually link the non-payment to its vendor to, inter alia, a breach of quality of goods or services promised by
the vendor (or indicated by the corporate debtor) or breach of representation
or warranty furnished by such a vendor; and
– the corporate debtor
should inform (in writing to) its vendor of the above as soon as possible.
– Shyam Pandya

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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