Interpretation of the Term ‘Dispute’ under IBC, 2016

Senguttuvan K- Partner

Kshithija PrakashanAssociate

INTRODUCTION

Dispute is defined under Section 5 (6) of the Insolvency and Bankruptcy Code, 2016 as: “Dispute” includes a suit or arbitration proceedings relating to —

1) the existence of the amount of debt;

2) quality of goods or service;

3) the breach of a representation or warranty;

Dispute is significant for the maintainability of every application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016. First acid test for admission of ever application filed under section 9 IBC is whether dispute exists between parties. The term includes is a very wide term and it includes various aspects but not limited to certain issues only.[1]

Under the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution process (CIRP) can be initiated by an operational creditor if there is no dispute in relation to the default on the part of the corporate debtor.

Section 8 provides for the requirements which should be complied with prior to filing an application under Section 9 of ‘I & B Code’. The application filed with the National Tribunal (NCLT) must be preceded, under Section 8, by a demand to repay the debt. The corporate debtor should, within a period of 10 days from the date of receipt of notice, either repay the unpaid operational debt or mention the existence of a dispute or record of the pending suit or arbitration proceedings filed before the receipt of such notice or an invoice in relation to such a dispute. Section 9 enshrines the right to file an application for the initiation of corporate insolvency resolution process after the expiry of 10 days from the date of delivery of demand notice.

While a record of a pending suit or an arbitration proceeding filed before the receipt of notice or invoice in relation to the dispute would lead to an immediate cessation of further proceedings, the stand-alone term “dispute” has lent itself to interpretation by the courts.

EVALUATION OF DISPUTE [2]

The definition clause provides that the term “Dispute” shall include a suit or an arbitration proceeding. Principles of statutory interpretation provide that the word in respect of which “includes” is used, bears both its extended statutory meaning and its ordinary, popular and natural sense, whatever is properly applicable. Also, the definition in relation to which “includes” is used would have an extended meaning, and cannot be restricted to receive its ordinary, popular and natural meaning.

Further, where the word is defined to “include” something, the definition is prima facie extensive. The word “include” is generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the statute. In view of the above, the meaning of the term “dispute” as defined in the code would include other forms of dispute which have not culminated in judicial proceedings, in addition to the suit or arbitration proceedings.

According to the definition of “Dispute”, suits or arbitrations are examples of dispute. However, such suits or arbitrations should be specifically related as provided under section 5(6) of the code.

On 21 September 2017, the Hon’ble Supreme Court delivered a landmark judgment regarding the interpretation of the terms “Dispute” and “Existence of Disputes” and the extent of the authority of the National Company Law Tribunal (Adjudicating Authority) to ascertain if a dispute exists under Section 8 and 9 of the Insolvency and Bankruptcy Code 2016 (Code). [3]

A. Mobilox Innovations Pvt Ltd v Kirusa Software Pvt Ltd [4]

Mobilox Innovations Pvt. Ltd. (hereinafter referred to as “Appellant” or “Corporate Debtor”) was engaged by Star TV for conducting tele-voting for the “Nach Baliye” program on Star TV, who in turn subcontracted the work to the Kirusa Software Pvt. Ltd. (Respondent) and subsequently, a Non-Disclosure Agreement (NDA) was also executed between the parties in this regard. The Respondent provided the requisite services and raised monthly invoices, which were payable within 30 days of receipt of the invoice. After several follow- ups, the Appellant wrote to the Respondent that the payments are being withhold on account of breach of NDA.

Finally, a demand notice was sent under Section 8 of IBC, to which the Appellant asserted that there exist serious and bona fide disputes between the parties. Then, the Operational Creditor filed an application under section 9 of the Code before the NCLT which was dismissed. Next, an appeal was filed before the National NCLAT, wherein it was held that the Hon’ble NCLT had acted mechanically by rejecting the application, without examining and discussing the issue in context and the case was remitted to Adjudicating Authority.

NCLAT DECISION

In appeal before the NCLAT, it was held that:

The term dispute as defined in sub-section (6) of Section 5 cannot be limited to proceedings within the limited ambit of a suit or arbitration and the term “includes” ought to be read as “means and includes” and therefore the definition is inclusive. The definition of dispute must relate to the specified nature in clause (a), (b) and (c) of Sub-section (6) of section 5 but such dispute is not capable of being discerned only in the form of suit or arbitration. The NCLAT held that the Adjudicating Authority acted mechanically by rejecting the application and the dispute raised by the Corporate Debtor in the present case was vague and allowed the appeal to the Apex Court.

SUPREME COURT DECISION

One of the important questions that came up for consideration and where the Supreme Court laid down directions to the AA, wherein the NCLT will be required to determine certain questions, while examining the admissibility of an application under Section 9 IBC was:

  1. Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

It is was held that, once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility.It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties.” Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

Further, with respect to the question of “existence of dispute”, it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellant Tribunal was wholly incorrect in characterizing the defense as vague and motivated to evade liability. Therefore, the appeal is allowed, and the judgement of the Appellant Tribunal has been set aside.

OBSERVATIONS BY THE SUPREME COURT

The following observations were made in the judgment:

(i) Analysis of the Insolvency and Bankruptcy Bill, 2015

The Court analysed the Insolvency and Bankruptcy Bill, 2015 (‘Bill’) and the notes on clauses annexed to the Bill. Three significant observations were made by the Court in this regard:

  • The words “the existence of a dispute” are used as opposed to the present Code where the words used are “existence of a dispute, if any and record of pendency of the suit or arbitration proceeding“.
  • The word “includes” has substituted the word “means” in the definition of the term ‘dispute‘ used in the Bill.
  • In the Bill, Section 5(4) defined “dispute” as meaning a “bona fide suit or arbitration proceedings…”. However, Section 5(6) of the Code excludes the expression “bona fide“.

(ii) Inclusive Definition of Dispute

The word “and” occurring in Section 8(2)(a) must be read as “or” considering the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”. If read as “and”, disputes would include only a pending suit or arbitration proceedings and not otherwise which would result is great hardship.

It is possible that a dispute may arise a few days before triggering of the  insolvency process when there is no time to approach either an arbitral tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them.

This leads to an anomaly which could not have been intended by the legislature. One of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. Therefore, the threshold has been set at establishing the existence of a dispute between the parties.

Therefore, a dispute is said to exist when there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6) of the Code. However, Section 5(6) only deals with suits or arbitration proceedings which must “relate to” one of the three sub-clauses, either directly or indirectly.

(iii) Plausible Contention Test:[5]

The court scrutinized the object of IB code and laid down the plausible contention test to determine the “existence of dispute”. The court has to determine whether there is plausible contention which requires further investigation.

(iv) Existence of genuine Dispute:[6]

The Court relied on and summarized various foreign Judgments and focused on the word genuine dispute while interpreting the word Dispute under section 8(2). According to the court the word ‘Genuine Dispute’ means, a dispute which is bonafide and truly exist in fact and the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

(v) Role of Adjudicatory Authority:

The adjudicating authority is to see at the stage, when application is filed, is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster.

The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

On the basis of the above observations, the Supreme Court held that the correspondence between the parties established the existence of a dispute between them. Hence, for rejection of an insolvency application, the adjudicating authority does not have to go into the merits of the dispute as to whether such a dispute would withstand judicial scrutiny. However, it is important that the authority determines two things – firstly that the dispute raised is valid in its estimation and secondly that the dispute has been brought to the notice of the creditor before the notice is served.[7]

B. Samee Khan v. Bindu Khan [8]

It is settled law that the expression ‘and’ may be read as ‘or’ in order to further the object of the statute and/or to avoid an anomalous situation. The word ‘and’ need not necessarily be understood as denoting a conjunctive sense. In Stroud’s Judicial Dictionary, it is stated that the word ‘and’ has generally a cumulative sense, but sometimes it is by force of a context read as ‘or’. Maxwell on Interpretation of Statutes has recognised the above use to carry out the interpretation of the legislature. This has been approved by this Court in, Ishwar Singh Bindra v. State of U.P.[9]

CONFLICTING INTERPRETATIONS OF THE TERM ‘DISPUTE’ [10]

Various benches of NCLT have had contradictory views on interpretation of the term ‘dispute’. In the matter of One Coat Plaster, Shivam Construction Company v. Ambience Private Limited,[11] the Delhi Bench of NCLT held that the “term ‘dispute’ needs to have a broad and inclusive definition. The Delhi bench further held that it is not mandatory on part of the debtor to have initiated a suit or arbitration proceeding prior to the receipt of demand notice to assert the existence of a dispute. Mere response to the demand notice showcasing existence of a bona fide dispute shall suffice.” Further, 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.[12]

Similarly, in the case of DF Deutsche Forfait AG and Another v. Uttam Galva Steel Limited,[13] the Mumbai Bench of NCLT held that “the ‘existence of a dispute’ means that a suit or arbitration proceedings must be pending before an operational creditor serves a demand notice. Raising a dispute in reply to the demand notice does not amount to notice of an existing dispute. Similarly, filing a suit or initiating arbitration proceedings subsequent to receipt of demand notice shall not amount to an existing dispute.” Further, it was also 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 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.[14]

Another instance is the case of Ahluwalia Contracts Ltd. v. Raheja Developers [15], wherein, Ahluwalia Contracts (India) Ltd (“Operational Creditor”) entered into agreements with Raheja Developers Ltd (“Corporate Debtor”) for construction and plumbing works at Gurgaon, Haryana.  The Operational Creditor served a demand notice dated 28 April 2018 under Section 8 of the IBC for unpaid invoices amounting to Rs. ₹3.37 Crores, in respect of works performed for the Corporate Debtor. The Corporate Debtor did not respond to the demand notice within the stipulated period of 10 days, but instead issued a notice invoking arbitration on the Operational Creditor after almost one month from the date of receipt of the demand notice. Meanwhile, the Operational Creditor had already preferred an application under Section 9 of the IBC before the National Company Law Tribunal, New Delhi Bench.

DECISION OF NCLT

The NCLT observed that the “dispute existed prior to the issuance of demand notice to the Corporate Debtor and held that the claim raised by the Operational Creditor fell within the ambit of disputed claim and therefore, rejected the application in accordance with Section 9(5)(ii)(d) of the I&B Code.”

DECISION OF NCLAT

The Operational Creditor preferred an Appeal before the NCLAT from the order of the NCLT. A Three-judge Bench of the NCLAT set aside the decision of the NCLT while observing that, “the dispute must be pre-existing. On the date of issuance of demand notice, no arbitration proceeding was initiated or pending, and the arbitration notice was filed after receipt of the demand notice under Section 8 of the IBC. Therefore, the Corporate Debtor cannot rely on arbitration notice to suggest a pre-existing dispute.”

Apart from the notice invoking arbitration, there was nothing on record to suggest that the Corporate Debtor raised any pre-existing dispute. In the absence of any evidence to suggest that dispute was raised prior to the issuance of demand notice, the dispute cannot be held to be pre-existing by merely showing the arbitration notice.

Hence, the parameters to ascertain as to whether there is a dispute or otherwise, can be summarized as below:[16]

  1. The dispute should be prima facie bona fide and exists naturally in a given fact;
  2. The grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory or misconceived.
  3. The existence of a dispute need not require further to be proved.
  4. The dispute should be natural and not made to believe dispute.

The judgment of the NCLAT appears to be a literal interpretation of what was stated by the Supreme Court in the Mobilox judgment.

[1] https://www.latestlaws.com/articles/what-amounts-to-dispute-under-ibc-can-a-settlement-be-arrived-at-once-insolvency-and-resolution-mechanism-is-initiated-by-sparsh-jain/

[2] https://www.vantageasia.com/existence-dispute-insolvency-code/

[3] https://blog.ipleaders.in/insolvency-and-bankruptcy-3/

[4] (2018) 1 SCC 353

[5] https://blog.ipleaders.in/insolvency-and-bankruptcy-3/

[6] https://blog.ipleaders.in/insolvency-and-bankruptcy-3/

[7] https://www.vantageasia.com/existence-dispute-insolvency-code/

[8] (1998) 7 SCC 59

[9] AIR 1968 SC 1450

[10] https://www.lakshmisri.com/insights/articles/disputing-a-dispute-under-insolvency-and-bankruptcy-code-2016/#

[11] [2017] 138 CLA 104 (NCLT)

[12] https://www.moneycontrol.com/news/trends/expert-columns-2/getting-a-fix-on-the-term-dispute-under-the-insolvency-and-bankruptcy-code-2431387.html

[13] Civil Appeal No: 20041 OF 2017

[14] http://www.bulwarksolicitors.com/bankruptcy-insolvency/nclat-clarifies-the-meaning-of-the-term-dispute-under-insolvency-code/

[15] Company Appeal (AT) (Insolvency) No. 703 of 2018.

[16] https://www.latestlaws.com/articles/what-amounts-to-dispute-under-ibc-can-a-settlement-be-arrived-at-once-insolvency-and-resolution-mechanism-is-initiated-by-sparsh-jain/

 

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