NCLAT clarifies ‘dispute’ under the insolvency code

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The National Company Law Appellate Tribunal (NCLAT) recently held in an appeal against the Allahabad bench of the National Company Law Tribunal (NCLT) that any disputes within a corporate debtor company is not one that is defined under the Insolvency and Bankruptcy Code, 2016 (IBC), which only takes into consideration disputes between a debtor and its operational creditors.

In Mr Chetan Sharma v Jai Lakshmi Solvents Pvt Ltd, the corporate debtor appealed against an order passed by the NCLT for separate appeals filed by different operational creditors, who were owed a total of `60 million (US$870,000) by the corporate debtor. In response to applications filed under section 9 of the IBC, the NCLT admitted one application, passed a moratorium order, appointed an interim resolution professional and disposed of the other applications.

The corporate debtor alleged that the delivery of goods for which payment had been claimed by the creditors was taken by its managing director, Dinesh Arora, who had since undertaken all liabilities of the corporate debtor which were fraudulently incurred by him. Thus, a novation of the contract took place, which made the alleged sums recoverable only from Arora, and not from the corporate debtor.

NCLAT dismissed the appeal and held that the dispute was merely one that was between the stakeholders of the debtor company and one not between the debtor and its creditors. It stated that while a debt was an asset of the creditor, which could be assigned to an assignee of a will, the liability to pay off a debt was not transferable, and the burden of repayment, which could be shifted from one stakeholder of the debtor company to another, does not absolve the debtor company of its liability. Since Chetan Sharma as the head of the company had taken over the shares of the other stakeholder, Arora, the former would be responsible for payment of the entire debt.

NCLAT noted that the memorandum of understanding was between different stakeholders of the same company and the issue of who received delivery of the goods was also an internal matter of the debtor company.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.