Resolution Application by Operational Creditors: Interpretation of the Term “Dispute”

[Post by Nitu
Poddar
, Associate at Vinod Kothari & Company, Corporate Law and
Resolution Division (
[email protected])
Other posts on related topics can be found here
and here.]
To
file an application under the Insolvency and Bankruptcy Code, 2016 (the Code), an
operational creditor has to serve a demand notice on the corporate debtor ten days
prior to the application. The corporate debtor can either make payment on
receipt of such demand notice or bring to the notice of the operational the
creditor existence of a dispute, if any, and record of pendency of the suit or
arbitration proceedings filed before the receipt of such notice. In case
payment has already been made, the corporate debtor should send the proof of
such payment to the operational creditor.  
What
the operational creditor essentially receives is either payment or a ‘notice of
dispute’. If proven that a dispute existed “before” the receipt of the demand
notice by the corporate debtor, the operational creditor cannot initiate the
corporate insolvency resolution process against such debtor. Accordingly, apart
from existence of “default” which is required to initiate the process, there
should be a “non-existence of dispute”.
Having
said so, it is necessary to note quite a number of cases have emerged before
different benches of the National Company Law Tribunal (NCLT) and the National
Company Law Appellate Tribunal (NCLAT) over the interpretation of the terms “dispute”
and “existence of dispute”. Most recently, the NCLAT has interpreted the meaning of “dispute” at
length
in Kirusa
Software Private Ltd. v. Mobilox Innovations Private Limited
(discussed here).
Demand
notice is a mandatory condition precedent
Alhough the word “may” has been used in
section 8(1) of the Code with respect to sending a demand notice, upon reading
of sections 8 and 9 as a whole, an ‘operational creditor,’ upon the occurrence
of a default, is mandatorily required to deliver a notice of demand.
In Seema Gupta v. Supreme
Infrastructure
,
the NCLAT reiterated that
no application can be
preferred under section 9 of the Code without a notice under section 8(1). Similar
question was considered by NCLAT in Era
Infra Engineering Ltd v. Prideco Commercial Projects Pvt Ltd
. Notices
issued under winding up provisions cannot be considered as compliance of
section 8 of the Code.
Pre-existence
of dispute
The dispute must be in existence before the receipt
of demand notice by the corporate debtor. The whole intent of the provisions of
sections 8 and 9 will be rendered redundant if the dispute created after
receipt of the demand notice is taken into consideration.
Existence of a valid dispute
While
ascertaining the existence of a dispute, the Adjudicating Authority shall
ensure that the dispute is a valid one.
In
accordance with the definition of dispute in section 5(6), dispute can be with
respect to three aspects only, viz
(a) amount of debt; (b) quality of service; (c) breach of any representation /
warranty.  The definition of “dispute” is
illustrative and non-exhaustive. Accordingly, the same has to be interpreted in
a wider sense, subject to the fact that the interpretation should be within the
ambit of the aforesaid three aspects only and not as a dispute being raised by
simply showing a record of dispute in a pending arbitration or suit.
Merely
raising a dispute for the sake of it, unrelated or related to clauses (a), (b)
or (c) of section 5(6), 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.
However,
a question remaining for interpretation is – in spite of the fact that the
definition of dispute is an inclusive one – is it necessary for the same to be
pending before any adjudicating authority for eligible to be called so under
the Code?
The author’s
submission is that to curb frivolous practices of the corporate debtor so as to
avoid acceptance of application under the Code, only disputes pending before
any adjudicating authority should be regarded. Mala fide dispute to stall the
insolvency proceedings cannot be considered.
In any
case, the intent of not accepting any application, which is sub-judice /
pending elsewhere is to disallow parallel proceedings relating to the same
matter before different forums. In case the dispute is not pending before any
appropriate forum, the same can be adjudged by the NCLT.
  
Whether dispute pending in
arbitration / civil court only valid
While
section 5(6) refers to disputes pending in arbitration / civil court, however,
the same does not render dispute pending in any other judicial forum invalid.  In any case, as mentioned above, the
definition of “dispute” is an inclusive one. To substantiate its interpretation
the NCLAT obtained reference from the judgement of the Supreme Court in Mithlesh Singh v. Union of
India
, (2003) 3 SCC 309:
It
is not a sound principle of construction to brush aside word (s) in a statute
as being inapposite surplusage: if they can have appropriate application in
circumstances conceivably within the contemplation of the statute. In the
interpretation of statutes the Courts always presume that the Legislature
inserted every part thereof for a purpose and the legislative intention is that
every part of the statute should have effect. The Legislature is deemed not to
waste its words or to say anything in vain.
Accordingly,
while the dispute should be in relation to the three aspects mentioned in clauses
(a), (b) and (c) of section 5(6), however, it can go beyond arbitration or civil
suits. For example, a dispute pending under section 59 of Sales of Goods Act (remedy
for breach of warranty), or before any government authority, or dispute pending
before labour court would be some such.
What if the dispute is resolved?
Form
5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority)
Rules, 2016 recognises “particulars of an order of a court, tribunal or
arbitral panel adjudicating on the default, if any” as a particular of “debt”.
Accordingly, in case a suit or arbitration or otherwise is decided and is not
pending, the application will be maintainable as a petition under section 9 of
the Code.
Conclusion
To
conclude, the essentials of filing of resolution application by an operational
creditor may be summarised as follows:
1.   There should be a
right to payment;
2.   Such payment
should become due and payable and should remain unpaid; and
3.   There should be no
dispute with respect to such right;
The above interpretation with respect to the
expression “dispute” has also been referred to by the NCLAT in Meyer Apparel Ltd and Others v Surbhi Body
Products Pvt Ltd and Godolo & Godolo Exports Pvt Ltd
.


Nitu Poddar

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.

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics