The Author, Sparsh Jain, is a student of 2nd year, BBA.LLB (H), Symbiosis Law School, Pune. He is currently interning with Latestlaws.com.
What amounts to dispute under IBC?
What is dispute?
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; or
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.
The definition of dispute also resulted in many situations where Court had to draw a line of demarcation finally as to what will be construed as a prima facie dispute.
What is to be construed as dispute?
(Case analysis- Mobilox Innovations Pvt. Ltd v. Kirusa Software Pvt. Ltd.)
For determining what is to be construed as dispute, it is imperative to analyze landmark judgement of Supreme Court in case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.-
NATIONAL COMPANY LAW TRIBUNAL (Decision)
In this case the Corporate Debtor had sub-contracted his work to the Operational Creditor and a Non-Disclosure Agreement (NDA) was also executed between the parties. The Corporate Debtor withheld the payments to the Operational Creditor contending that there was a breach of the Non- Disclosure Agreement.
The Operational Creditor filed a demand notice which was replied to by the Corporate Debtor stating that there exists a bona fide dispute between the parties regarding the breach of the Non-disclosure agreement. The Operational Creditor filed an application under section 9 of the Code.
The NCLT Mumbai Bench held that since the default of payment was disputed by the Corporate Debtor therefore the petition is rejected.
NATIONAL COMPANY LAW APELLATE TRIBUNAL(Decision)
In appeal before the NCLAT, the following was held:
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.
SUPREME COURT (Decision)
The Apex Court held that,
“40. It is clear, therefore, 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.
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…….
45. Going by the aforesaid test of “existence of a 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. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.
47. We, therefore, allow the present appeal and set aside the judgment of the Appellate Tribunal. There shall, however, be no order as to costs.”
2. Ahluwalia Contracts ltd. v. Raheja Developers
In Present case, NCLAT has held that an application under section 9 of the Insolvency and Bankruptcy Code 2016 can only be rejected if the dispute in relation to the claim pre-exists the date of receipt of demand notice or invoice issued under section 9 of the Insolvency and Bankruptcy Code, 2016.
Facts
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. While doing so, the NCLT also relied upon the arbitration notice sent by the Corporate Debtor to the Operational Creditor after it was served with the demand notice.
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.
Conclusion
The parameter to ascertain as to whether there is a dispute or otherwise, can be summarized as below:
i. The dispute should have prima facie bona fide and exists naturally in a given fact;
ii. The grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory or misconceived.
iii. The existence of a dispute need not require further to be proved.
iv. The dispute should be natural and not a 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. While the judgment will discourage corporate debtors from raising frivolous disputes after a section 8 notice has been issued, the emphasis on the timing of the dispute, rather than examination of whether the dispute itself is genuine may result in a situation where even genuine disputes are ignored by the NCLT.
Given this judgment, corporate debtors will now need to be prompt in raising any disputes they have pertaining to claims made on them by Operational Creditors.
Can a settlement be arrived at once Insolvency and Resolution mechanism is initiated?
Settlement after Insolvency Resolution mechanism is initiated
Parties who enters into settlement post insolvency resolution Withdrawal of an application by the operational creditor or the financial creditor post its acceptance by the NCLT was a debatable issue since there was no specific provision(s) under IBC, which empowers the NCLT to allow withdrawal of the application for invoking insolvency resolution process post its acceptance.
The operational creditor or the financial creditor, which has already settled the matter with the corporate debtor, did not have any option except filing of an appeal to the National Company Law Appellate Tribunal ("NCLAT") for appropriate relief. However, the NCLAT did not grant any relief to the corporate debtor.
Thereafter, the aforesaid controversy also reached the Honorable Supreme Court in the matter of Lokhandwala Kataria Construction Private Limited v. Nisus Finance and Investment Manager LLP.
Facts of the Case
The NCLT, Mumbai, accepted the application of Nisus/respondent and passed the order for commencement of insolvency resolution process.
Thereafter, parties agreed to settle the matter and an appeal was filed by Lokhandwala before the NCLAT to allow withdrawal of application by Nisus in terms of the agreed settlement. The NCLAT dismissed the appeal and held that there are no specific provisions under IBC, which allow withdrawal of an application filed by the financial creditor and held that the inherent power as given under Rule 11 cannot be exercised post acceptance of application by the NCLT.
The relevant texts of Rule 11 of National Company Law Appellate Tribunal Rules, 2016 ("NCLAT Rules") are reproduced below for ease of reference:
"Inherent powers – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders or give such directions as may be necessary form meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal"
Supreme Court’s Verdict
The Honorable Supreme Court observed that inherent power under Rule 11 of NCLAT Rules, 2016, cannot be adopted as the application has already been accepted
The Honorable bleSupreme Court utilized power provided in Article 142 of Indian Constitution which states that the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and in view of the same, allowed the settlement between the parties.
The Honorable Supreme Court adopted a similar view in the matter of Mothers Pride Dairy India Private Limited v. Portrait Advertising and Marketing Private Limitedand in UttaraFoods and Feeds Private Limited v. Mona Pharmachem, where the settlement was allowed and the said applications were disposed by utilizing its inherent power under Article 142 of the Indian Constitution.
Reports of the Insolvency Law Committee
Subsequent to above, the Insolvency Law Committee was constituted on November 16, 2017, to make recommendation to the Government in relation to the issues arising from the implementation of IBC.
The Committee recommended that Rule 8 of Relevant Rules may be amended and an application may be withdrawn post admission, only if the Committee of Creditors approves such action by a voting share of 90%.
In line with the aforesaid recommendation of Committee, an ordinance was promulgated on June 6, 2018 and the hindrance in withdrawal of application after the acceptance by the Adjudicating Authority has been cured by inserting section 12A to IBC.
Application of section 12A
Section 12A: "The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety percent voting share of the committee of creditors, in such manner as may be prescribed".
Recently, the NCLAT has adjudicated upon the new Section 12A in the matter of VijenderKumar Singlav. Oriental Bank of Commerce & Anr, wherein, the withdrawal of application was allowed after the acceptance of the application filed by the financial creditor as the settlement was agreed between the corporate debtor and the financial creditor and withdrawal of such application was approved by 100% of the voting shares of the COC fulfilling the mandatory requirement mentioned under Section 12A of IBC.
Conclusion
The insertion of Section 12A is a welcome move on the part of the Government. Now, the Government has settled the position regarding the withdrawal of an application post its acceptance by the NCLT.
However, the threshold of 90% (Ninety Percent) of voting share of CoC as mandatorily required for withdrawal of an application post its acceptance seems to be a stringent condition, which is not easy to be complied with since each lender may have its own view with respect to revival or restructuring of the corporate debtor.
References:
3) Mobilox Innovations Pvt. Ltd v. Kirusa Software Pvt. Ltd, (2018) 1 SCC 353
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