‘Dispute’ meaning settled for corporate insolvency cases

By Vivek Vashi and Utkarsh Srivastava, Bharucha & Partners
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The National Company Law Appellate Tribunal (NCLAT), in Kirusa Software Pvt Ltd v Mobilox Innovations Pvt Ltd, has finally decided the scope of the term “dispute” under section 9 of the Insolvency and Bankruptcy Code, 2016.

Vivek Vashi Bharucha & Partners
Vivek Vashi
Bharucha & Partners

The NCLAT was hearing an appeal by Kirusa, an operational creditor, against an order passed on 27 January by the National Company Law Tribunal (NCLT), Mumbai. The order rejected Kirusa’s petition filed under section 9 of the code on the ground that Mobilox, the corporate debtor, disputed the debt.

The only issue before the NCLAT was: what does “dispute” and “existence of dispute” mean for the purpose of determining a petition under section 9 of the code.

The NCLAT drew an analogy between sections 8 and 9 of the code and section 8 of the Arbitration and Conciliation Act, 1996, and held that just as a judicial authority has to prima facie determine the existence of a valid arbitration agreement before exercising jurisdiction in relation to a dispute brought before it, if the adjudicating authority concludes that the notice of dispute in fact raises a dispute within the parameters of the definitions of “debt” and “default” under the code, the authority has to reject the application and no other factual ascertainment is required.

The NCLAT further held that the definition of “dispute” was clearly intended to be illustrative and not exhaustive. Relying on Mithilesh Singh v Union of India, in which the Supreme Court held that the legislature is deemed not to waste words, the NCLAT observed that if the legislature intended that a demand by an operational creditor can be disputed only by showing a record of pending suit or arbitration proceeding, the definition of “dispute” would have simply stated “dispute means a dispute pending in arbitration or suit”.

Utkarsh Srivastava Associate Bharucha & Partners
Utkarsh Srivastava
Associate
Bharucha & Partners

In this regard, the NCLAT highlighted that section 8(2) mandates that if a corporate debtor intends to dispute the claims raised by an operational creditor, it must bring to its notice, “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”. Thus, if section 5(6) is read harmoniously with section 8(2), it will be evident that the term “disputes, if any” as used in section 8(2) would apply to all kinds of disputes in relation to a debt and default and not be restricted to those pending suits and proceedings.

The NCLAT further found that the onus to prove that there is a dispute pending consideration before a court of law or adjudicating authority is on the debtor.

Additionally, “dispute” under section 8(2) of the code will include disputes which are pending before any judicial authority including mediation, conciliation, etc. A dispute concerning execution of a judgment or decree passed in a suit or award passed by an arbitral tribunal can be used to prove a dispute under the code. Any action taken by the debtor under any law will come within the ambit of dispute under sections 5(6) and 8(2) of the code.

However, a corporate debtor cannot simply assert a dispute. Sufficient particulars must be provided. Further, section 9(5) does not confer any discretion on the adjudicating authority to verify adequacy of the dispute. However, a sham or illusory dispute (raised for the first time) cannot be a tool to reject the application for initiating the corporate insolvency resolution process.

On the basis of the above, the NCLAT held that the dispute raised by Mobilox was vague and motivated to evade liability. Accordingly, the matter was remanded back to NCLT, Mumbai, for admission if the application is otherwise complete.

The meaning of the term “dispute” has been a matter of debate since the notification of the code. Indeed, NCLTs across India were interpreting the term differently, resulting in the development of non-uniform jurisprudence as regards admission of petitions filed under section 9 of the code. By this judgment, the NCLAT has provided definitional clarity and has tried to formulate yardsticks to be followed by the adjudicating authorities, i.e. NCLTs, for the purpose of admission of petitions filed under section 9. This will help prevent situations where the petitions are rejected by NCLTs mechanically owing to a dispute being raised by the corporate debtor. NCLTs will now have look into the merits of the dispute raised by the debtor to ensure that the dispute is not merely hogwash and a tactic to prevent a creditor from exercising its rights under the code.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Utkarsh Srivastava is an associate.

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