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INTRODUCTION

Insolvency and Bankruptcy Code was enacted on May 28, 2016 with a view to consolidate, amend and streamline the dispersed laws relating to Insolvency Proceedings in India. The code was enacted as a measure to provide for rehabilitation of the company lurching under debt. Ever since its inception, the legislation is undergoing various judicial tests in order to render its provisions robust and effective. Interpretations of various provisions of IBC have been the focal point in plethora of cases before the Adjudication Authorities; pronouncing conflicting judgements giving rise to various inconsistencies in such interpretation.

One such significant and debatable interpretation was of the term ‘Dispute’ which has been interpreted by various benches of Adjudicating Authorities in a varied outlook. It is comprehensible from the bare reading of Section 9 of the code that the word ‘dispute’ is significant for maintainability of every application under the said section. In other words, first acid test for admission of an application under Section 9 is prima facie “whether there exists any dispute or otherwise”.

UNDERSTANDING THE TERM DISPUTE AND ‘EXISTENCE OF DISPUTE’

The term has been defined under Section 5 (6) of the IB Code as;

“Dispute” includes a suit or arbitration proceedings relating to —

1. the existence of the amount of debt;
2. the quality of goods or service; or
3. the breach of a representation or warranty;

Unlike a Financial Creditor who may directly file an application before the NCLT to initiate CIRP, an Operational Creditor is required to send a demand notice or a copy of invoice as per the requirements of Section 8 to the Corporate Debtor for the outstanding dues in respect of which the default has occurred. Further, as per the provisions of Section 8 a 10-day grace period is given to the Corporate Debtor to either repay the outstanding amount or bring to the notice of the Operational Creditor an existing dispute if any and record of the pendency of such suit or arbitration proceedings filed before the receipt of the invoice or the notice.

The Delhi Bench in the case of One Coat Plaster, Shivam Construction Company v. Ambience Private Limited opined that the term dispute is an inclusive term having a broad connotation. It is not mandatory for the Corporate Debtor to have initiated any suit or arbitration proceedings in order to assert the existence of dispute prior to the receipt of the notice or invoice. Mere response to the notice or invoice intimating the existence of a bonafide dispute would suffice.

However, Mumbai Bench in the case of DF Deutsche Forfait AG and Another v. Uttam Galva Steel Limited showcased contrasting views. The Bench held that “existence of dispute” means that there has to be a suit or arbitration proceedings pending before an Operational Creditor serves the notice or invoice. Raising a dispute in reply to the notice or invoice does not amount to notice of an existing dispute. Likewise, filing a suit or initiating arbitration proceedings subsequent to receipt of demand notice shall not amount to an existing dispute.

INTERPRETATION OF ‘DISPUTE’ AND ‘EXISTENCE OF DISPUTE’ – THE KIRUSA CASE

In order to put rest to the controversy surrounding the interpretation of terms ‘dispute’ and ‘existence of dispute’, it would be ideal to shed some light on the landmark judgement passed by the Hon’ble Supreme Court in 2017 in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. The judgement enumerated detailed 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.

FACTS

Kirusa Software Private Ltd. (‘Kirusa’), operational creditor, filed a petition under Section 9 before the Adjudicating Authority to initiate Corporate Insolvency Resolution Process against Mobilox claiming its outstanding dues. Disputing the claim, it was alleged by the Corporate Debtor that Kirusa had disclosed confidential client information on a public domain thereby leading to breach of trust and breach of the non-disclosure agreement between the parties, hence, withholding of the amounts due. As a result, the application was dismissed u/s 9(5)(ii)(d) of the Code and subsequently appeal was preferred by Kirusa before the NCLAT.

NLCAT DECISION

The point for consideration before NCLAT was the interpretation of the terms ‘dispute’ and ‘existence of dispute’ for the purpose of application u/s 9 of the Code. NLCAT allowed the appeal and held that the definition of the term dispute is inclusive not exhaustive and should be given the widest possible interpretation. It further becomes necessary to determine the circumstances under which the dispute has been raised by the Corporate Debtor. The dispute has to be a real, genuine dispute and should not have traces of malafides to hinder the Insolvency Process. The dispute as defined under section 5 of the Act is not limited to Suit or Arbitration proceedings but it shall include any proceeding before any court or tribunal including mediation and conciliation.  As far as disputes relating to existence of debt or default are concerned, the following shall also be construed as a dispute:

• If the operational creditor has issued a notice under Code of Civil Procedure, 1908 which is disputed by the corporate debtor or
• Dispute by a labourer or an employee with the state government to a notice issued under Section 59 of Sale of Goods Act, 1930
• Dispute pending before labour court
• If the corporate debtor raises a dispute about ‘quality’ and brings to notice of the operational creditor to take appropriate steps.

SUPREME COURT DECISION

The Supreme Court allowed the appeal stating that there existed a dispute between the parties. The analysis of the same is as follows:

1. Legislative Intent:

The judgement underlined the intention of the legislature quo Operational Creditors/debts. The object of the code is to ensure that the Operational creditors whose debts are usually smaller than that of the Financial Creditors, do not shove the Corporate Debtors into Insolvency Resolution Process prematurely or to initiate the process for extraneous considerations. 

• Substituting ‘And’ with ‘Or’:

The word ‘and’ mentioned in Section 8(2)(a) must be read as ‘or’ to give effect to legislative intent and also for the fact that an aberrant situation would arise if not read as ‘or’. If read as ‘and’ disputes would only include pending suit or arbitration proceedings and not otherwise. This would lead to some serious hardships in cases wherein dispute has arisen few days before triggering the insolvency process leaving no time to approach any court or tribunal. Further, owing to the long limitation periods of upto three years there are chances that such individuals or entities would be kept outside the purview of said section leading to commencement of insolvency proceedings against them.

• Role of Adjudicating Authority:

The role of the Adjudicating Authority is to ensure, when the application is filed, 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 becomes imperative to sieve out a spurious defence which is a mere bluster. However, the Court does not need to be satisfied that the defence is likely to succeed. The court at this stage does not examine the merits of the dispute.

• Existence of a genuine dispute:

The court has time and again while pronouncing various judgements has emphasized the existence of a genuine dispute. A genuine dispute means a real dispute truly existing in facts and the grounds alleging the said dispute are authentic and not illusionary, spurious or hypothetical. As long as a dispute truly exists in fact and does not have the traces of malafides, the adjudicating authority has to reject the application.

• Definition of dispute is inclusive:

The judgement clearly stated that the definition of ‘dispute’ is inclusive and is not restricted to only pending suits or arbitration proceedings. Section 5(6) only deals with suits or arbitration proceedings falling within the three conditions mentioned therein, either directly or indirectly. However, present scenario is not a case of suit or arbitration proceeding filed before receipt of the notice indicating that as long as there exist a genuine dispute regarding payment between the parties, the same would fall within the purview of the definition of ‘dispute’.

On the basis of the facts in the present case, the Supreme Court held that the correlation between the parties established the existence of a dispute between them. The corporate debtor raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. It was held that a real dispute truly exists in fact between the parties, which may or may not ultimately succeed.

CONCLUSION

In the Kirusa judgement, the Supreme Court yet again clarified another important aspect of IBC giving wide connotation to the term ‘dispute’. The definition of ‘dispute’ is inclusive and is not restricted only to pending suits or arbitration proceedings and also includes correspondence exchanged between the parties establishing a dispute relating to payment of debts.

Further, merely raising a hypothetical dispute in response to a notice or invoice would not suffice as the basis to reject an application if the Adjudicating Authority has sufficient reasons to believe that there exist a real debt and default at the end of the Corporate Debtor. Additionally noting that the Adjudicating authority is required to verify the bona fides of a dispute if the application to initiate insolvency proceedings is filed by the Financial Creditor. However, this is not the case wherein application is filed by the Operational creditor as the onus to prove the same shifts from the Operational creditor to the Corporate Debtor. Thus, the judgement mandates scrutinizing the circumstances in order to decide whether there exists a genuine dispute or otherwise. The Adjudicating Authority is bound to reject the application if there exist a genuine dispute in facts not surrounded by traces of malafides.

“Article by Ms Purvi Devpura under internship of Adv Shankarlal Raheja and updated in January 2021.

The Views herein are personal and while careful attention has been given to ensure that the information is accurate and assume no liability or responsibility for any reliance thereon. This article is merely information and knowledge sharing activity and is not a substitute to legal advice. We shall not be liable for any loss or damage caused due to any reliance thereof”.