The Insolvency and Bankruptcy Code, 2016 (“the Code”) enables a financial creditor and an operational creditor to initiate insolvency proceedings against a corporate debtor. While in case of a financial creditor, the creditor may initiate a case without serving “demand notice” on the corporate debtor; an operational creditor, before taking action under section 9, shall first serve a demand notice on the corporate debtor. If in response, the corporate debtor intimates existence of a “dispute”, the operational creditor cannot proceed under section 9. Therefore, “dispute” becomes a crucial word as it decides whether an operational creditor has a “cause of action” against the corporate debtor.
Recently, the Mumbai Bench of NCLT (“the Bench”) in M/s DF Deutsche Forfait AG and Anr. v. M/s Uttam Galva Steels Ltd. [C.P. no. 45/I&BP/NCLT/MAH/2017] deliberated on the scope of the definition of “dispute” under section 5 (6) of the Code, and the interpretation of the words “existence of dispute”, in the context of sections 8 and 9 of the Code, besides several other things.
The discussion below dwells upon certain important observations made by the Bench, which will be useful in interpreting the relevant provisions of the Code in times to come. Before going in-depth, the definition of “dispute” may be reproduced as under:
“(6) “dispute” includes a suit or arbitration proceedings relating to—
(a) the existence of the amount of debt;
(b) the quality of goods or service; or
(c) the breach of a representation or warranty;”
With the definition in focus, the following may be noted.
Facts of the case
M/s Uttam Galva Steels Ltd. (hereinafter referred to as “Uttam” or “the corporate debtor” or “the buyer”) is engaged in steel rolls manufacturing dealing with export and import business in relation to steel. Uttam entered into a sales contract with AIC Handels GmBH (“AIC” or “the seller”) for supply of prime steel billets. It was decided that in case of any dispute, the arbitration shall be pursued in accordance with Swiss Rules of International Arbitration of the Swiss Chambers of Commerce, and that AIC is entitled to pursue payment obligation of Uttam before any competent court where a specially abbreviated form of legal procedure exists. Once the shipment was executed by AIC, Uttam accepted faultless performance of the seller and confirmed that the amount set out in the invoice represents entire purchase price. It was further stated that the confirmation should form an integral part of the contract.
As a risk management measure, AIC entered into a discounting (forfaiting) agreement with DF Deutsche Forfait AG (“Deutsche”), thereby assigning the entire debt with present and future rights, claims, and demands to it by endorsing the bills of exchange accepted by Uttam. A letter of notification was issued by AIC to Uttam for information of the latter, which was confirmed by Uttam.
Deutsche, in turn, subsequently assigned part of its debts to Misr Bank Europe GmBH (“Misr”) through another forfaiting agreement. A notification of the same was sent by Deutsche to Uttam; however, was not confirmed by Uttam.
Observations of the Bench
- Preliminary observations as to format of application
There cannot be any pleadings part in the Forms prescribed under the Code to initiate corporate insolvency resolution process in accordance with sections 7, 9, and 10, except giving information column-wise.
There is no such terminology as “petitioner/respondent” or “plaintiff/defendant” under the Code. Since, most of the procedure is inbuilt in the Code, this has been named a “Code”, and not an “Act”.
- On seeing the Code as “draconian”
One have to go by what laws says, one cannot read into something that is not present – hence, it shall not be presumed that the court proceedings in India are adversarial only, as from the reading of the Code, it does not make one infer that it is an adversarial proceeding.
If the Code is being looked down as “draconian” gobbling the companies and the orders passed thereunder are being branded harsh, then “we remain where we are”. One cannot wish away the mandate of this nation come through Parliament.
- Whether mere denial of claim amounts to “dispute” under the Code
The corporate debtor argued that the definition of “dispute” is inclusive; therefore, mere denial to the claim will be understood as “dispute” under the Code. Accordingly, the conjunction “and” used in section 8 (2) (a) shall be read and understood as “or” for the purpose of harmonious reading of the provision with the definition of “dispute”.
The Bench observed that whether the definition of “dispute” under section 5 (6) is exhaustive has to be understood in the light of the intent an purpose of sections 8 and 9 only, since the definition of “dispute” is primarily meant for application where notice has been served by an operational creditor under section 8, and corporate insolvency resolution process is initiated under section 9. In view of the opening words of section 5 “unless the context otherwise requires . . .”, the definition has to be read in harmony with the context in which it has been used in the substantive section; hence, two things are clear – (i) definition will not govern the substantive section (which is section 8 in the context); and (ii) definition has to be construed in the context of substantive section, and not otherwise.
“Dispute” is genesis, pendency of suit or arbitration is species. Though the word “includes” is normally considered as extensive, yet there are situations where “includes” has to be inferred as “means” to enable the courts to achieve the purpose of legislation. South Gujarat Roofing Tiles Manufacturers Association v. State of Gujarat, (1976) 4 SCC 601; N.D.P. Namboothiripad v. Union of India (2007) 4 SCC 502; Karnataka Power Transmission Corporation and another v. Ashok Iron Works Pvt. Ltd. (2009) 3 SCC Page No. 240, relied. The dispute in a suit or arbitration is inherently included in the word “dispute”, therefore, it need not be shown as “included”. Hence, the only meaning that can be drawn out is that the dispute “means” the dispute pending in a suit or arbitration proceeding – the word “dispute” is qualified as such.
Considering “mere denial of claim” as “dispute” will be virtually ousting any operational creditor to file a case under section 9. If bare denial of claim is labelled as dispute, sections 8 and 9 would become exactly like “cobra without fangs”, or a mere show up, which was not the intent of the Parliament.
- “Existence of dispute”
Going by section 8 (1) of the Code, existence of dispute means pendency of either suit or arbitration proceeding before the receipt of section 8 notice from the operational creditor. Uttam filed a suit before Hon’ble High Court of Bombay after receipt of notice; this will not amount to “existence of dispute” as stated under section 8 of the Code.
- Whether Deutsche and Misr operational creditors when there is no privity of contract between Uttam and each of the forfaiters
The corporate debtor submitted that the debts claimed by Deutsche and Misr are two complete distinct unconnected debts, and there is no privity of contract between Uttam and Deutsche and Uttam and Misr. Besides, the assignment by Deutsche to Misr has not been confirmed by Uttam. Therefore, Deutsche and Misr are not “operational creditors” and thus, do not have any locus to maintain the case.
The Bench remarked that the assignment of debts in India need not be confirmed by the corporate debtor. As regarding privity of contract, there need not be any separate contract of each of these parties with Uttam – the two creditors decided the share debt between themselves. Once the debt is assigned (to Deutsche, and later by Deutsche to Misr), the assignee will automatically come into the shoes of the original operational creditor (here “AIC”)
- English law vs. Indian law
As earlier mentioned, the sales contract between Uttam and AIC was governed by English law; therefore, the corporate debtor raised an objection that the operational creditors cannot proceed without dealing with English law. The objection was raised in the context of requirement of the acknowledgement of the corporate debtor for confirmation of the assignment. The operational creditors claimed that if any party says that English law is differing from Indian law, it is the party’s bounden duty to prove that foreign law is contrary to Indian law. If the party to fails to prove the same, it has to be presumed that Indian law is applicable.
- On “interest” claimed by operational creditors
The corporate debtor claimed that interest, if claimed basing on bills of exchange, would become a “financial debt”, and not “operational debt”.
The Bench opined that there are two types of debts categorised under the Code – either financial or operational. There cannot be a debt other than these two types. The basic difference between the two types of debts is – financial debt is money borrowed to repay on future date alongwith interest, whereas operational debt is normally based on an agreement to pay for goods and services. Trade payables are payments deferred for a fixed time. If the debtor fails to repay within the fixed time, then interest may be claimed over an operational debt as well. In both types of transactions (financial or operational), money is involved, and money has “time value”. For the reason, it is nowhere stated that the operational creditor is barred from claiming interest.
In Law relating to Insolvency and Bankruptcy Code 2016, the authors deliberate on whether for the debtor, the only option is to raise a dispute by way of a suit or arbitration proceedings. For instance, say a demand is raised by an operational creditor for goods and services, which the corporate debtor contends not to have been supplied (or supplied not to the satisfaction of the corporate debtor). In such a case, the debtor may refuse to accept the demand and in this scenario, it will be unreasonable to expect from the corporate debtor to run for filing a suit or initiating an arbitration proceeding so that a “dispute” may be shown. In fact in situations like this, it would be the creditor who may raise a dispute. Note that the Code does not specify who should have filed the suit or arbitration proceeding.
In the context of deciding whether there is a “dispute” at all; in general, the following points may be considered –
- (i) Where the very basis of the claim is doubted, and there is no evidence of mutually accepted commercial transactions, it cannot be argued that the “onus” lies on the debtor to dispute a claim, which he has not accepted at all. No one can be expected to defend a baseless claim. Here, the rules relating to “burden or onus of proof”  have to be given due consideration. See as follows.
The rule of “burden of proof” and “onus of proof” goes as – where a person desires the court to give judgement as to any legal right or liability dependent on the existence of facts asserted by that person, he must prove that those facts exist. When a person is bound to prove the existence of any fact, it is said that the burden of proof lies on that person. Also, the burden of proof in a suit or a proceeding lies on that person who would fail if no evidence at all were given on either side. An exception is allowed only if it provided by any law that the proof of a fact shall lie on any particular person. Therefore, as is evident, in case of commercial transactions giving rise to claims, prima facie the onus to prove that a claim exists lies on the claimant and not the person from whom the amount is claimed. Where this principle is applied, it becomes difficult to infer a situation where the (alleged) debtor raises a dispute in respect of a claim which has not even been proved by the claimant. However, if the claimant has enough material to shift the onus on the debtor (to prove that the debt does not exist), the debtor comes under spotlight, and as such, he must prefer a dispute.
When the provisions of the Code are seen in the light of the aforesaid principles, it becomes clear that it is not upon the debtor to raise and prove a dispute in the form of a suit or arbitration proceeding where the claim itself was baseless. Though in case where the creditor has already filed a suit or initiated an arbitration proceeding and also plans to initiate action under the Code, the debtor may conveniently show the existence of such a dispute and defer the proposed action of the creditor.
Last but not the least, it must be remembered that the Code is not a means of recovering money; it seeks to facilitate resolution. Though operational creditors have been allowed to initiate corporate insolvency resolution process against the corporate debtor, these creditors will not form part of the committee of creditors. The Code calls for paying off liquidation value due to operational creditors before the financial creditors. As such, the idea of an operational creditor initiating resolution process under the Code seems paradoxical as the objective of an operational creditor initiating resolution process will more often be “recovery” than “resolution”. The focus being on resolution, the Code cannot be used a forum to fight over a right or a claim for recovery of their debts.
- (ii) NCLT is not expected to sit and decide the basic question as to existence of claims or adjudicate on the legal rights of the parties where the proceedings are not in the nature of a civil suit. The proceedings under the Code are summary proceedings. Hence, the parties are not expected to bring contentious claims.
- (iii) For the reason similar to the above, it is not for the NCLT to get into deciding the amount of the claim. The proceedings under the Code are not to prove, disapprove, or establish the claim. The interim resolution professional or the resolution professional or the liquidator, as the case may be, have been given the responsibility to verify and determine the quantum of claims
As regards “existence of dispute”, the observations made by the Bench resonate with the view of the authors in Law relating to Insolvency and Bankruptcy Code 2016 wherein it has been noted that there must be a dispute in existence before the date of receipt of the demand notice by the corporate debtor.
 Vinod Kothari and Sikha Bansal, Taxmann; see comments under section 5 (6) and section 8 for details.
 Refer to sections 101 and 102 of the Indian Evidence Act, 1872. “Burden of proof” and “onus of proof” have been distinguished as – burden of proof lies upon the person who has to prove a fact and it never shifts, but the onus of proof shifts. Burden of proof has two distinct meanings, namely, (i) the burden of proof as a matter of law and pleadings, and (ii) the burden of proof as a matter of adducing evidence. Section 101 of the Indian Evidence Act deals with the former and section 102 of the Indian Evidence Act with the latter. The first remains constant but the second shifts. Such a shifting of onus is a continuous process in the evaluation of evidence. Raghavamma v. Chenchamma, AIR 1964 SC 136; Ranchhodbhai Somabhai and Anr. v. Babubhai Bhailalbhai and Ors., AIR 1982 Guj 308.
By:- Sikha Bansal [firstname.lastname@example.org]