Interpretation of the word “Dispute” – Resolution application by the operational creditors, by Nitu Poddar

For filing application under the Insolvency and Bankruptcy Code, 2016 (IBC), the operational creditor has to serve a prior 10 days demand notice to the corporate debtor. The corporate debtor can either make payment on receipt of such demand notice or bring to the notice of the operational creditor existence of dispute, if any, and record of pendency of the suit or arbitration proceedings filed before the receipt of such notice. In case payment has already been made, the corporate debtor should send back the proof of such payment to the operational creditor.

So basically what the operational creditor receives is either payment or a ‘notice of dispute’.

If proven that there was existence of dispute “before” the receipt of the demand notice by the corporate debtor, the operational creditor cannot initiate the corporate insolvency resolution process against such debtor.

Accordingly, apart from existence of “default” which is required to initiate the process, there should be “non- existence of dispute”.

Having said so, this should be noted that there have been quite a back and forth made in the interpretation of the term and phrase “dispute” and “existence of dispute” by the different benches of NCLT and the NCLAT.

Lately, the NCLAT has, in the matter of Kirusa Software Private Ltd. v. Mobilox Innovations Private Limited[1], interpreted the meaning of “dispute” at length.

Demand notice is a mandatory condition precedent

Though the word “may” has been used in section 8(1) of the Code with respect to sending of demand notice, however on reading of section 8 and section 9 as a whole, an ‘Operational Creditor,’ on occurrence of a default, is mandatorily required to deliver a notice of demand.

In the matter of Seema Gupta vs Supreme Infrastructure[2], NCLAT reiterated that, no application can be preferred under Section 9 of the Code without a notice under sub-section (1) of Section 8. Similar question was considered by this Appellate Tribunal in “Era Infra Engineering Ltd Vs Prideco Commercial Projects Pvt Ltd[3], Company Appeal (AT)(Ins) No.3 1 of 2017″. Notices issued under winding up provisions cannot be considered as compliance of section 8 of the Code.

Pre-existence of dispute

The dispute must be existing before the receipt of demand notice by the corporate debtor. The whole intent of the provision of section 8 and 9 will lose if dispute created after receipt of the demand notice is taken into consideration.

Definition of dispute

Dispute is defined in section 5(6) of the Code as:

“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.

Further, section 8(2)(a) of the Code uses the expression –

(a) 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;

Where section 5(6) of the Code includes any arbitration proceedings as a “dispute”, section 8(2)(a) seems to exclude the same from the definition of dispute. The reason for the same is that, if as per section 5(6) arbitration proceedings are already covered in the definition of dispute, the same need not be explicitly mentioned after using the term “dispute”.

Existence of a valid dispute

While ascertaining the existence of dispute, the Adjudicating Authority shall ensure that the dispute should be a valid one.

As per the definition of dispute in section 5(6), dispute can be with respect to three points only, viz (a) amount of debt; (b) quality of service; (c) breach of any representation / warranty. The definition of “dispute” is illustrative and non-exhaustive. Accordingly, the same has to be interpreted in a wider sense subject to the fact that the interpretation should be within the ambit of the aforesaid three pointers only and not as a dispute being raised by simply showing a record of dispute in a pending arbitration or suit.

Mere raising a dispute for the sake of dispute, unrelated or related to clause (a) or (b) or (c) of section 5(6), if not raised prior to application and not pending before any competent court of law or authority cannot be relied upon to hold that there is a ‘dispute’ raised by the corporate debtor.

However, a question still left for interpretation is – inspite of the fact that the definition of dispute is an inclusive one – is it necessary for the same to be pending before any adjudicating authority for eligible to be called so under the Code?

Author’s submission with respect to the same is that to curb frivolous practices of the corporate debtor so as to avoid acceptance of application under the Code, only dispute pending before any adjudicating authority should be regarded. Malafide dispute to stall the insolvency proceedings cannot be considered.

In any case, the intent of not accepting any application, which is sub-judice / pending elsewhere is to disallow parallel proceedings of same matter in different forums. In case the dispute is not pending before any appropriate forum, the same can be adjudged by the NCLT.

Whether dispute pending in arbitration / civil court only valid

While section 5(6) refers to disputes pending in arbitration / civil court, however, the same does not render dispute pending in any other judicial forum invalid. In any case, as mentioned above, the definition of “dispute” is an inclusive one. To substantiate its interpretation the NCLAT took reference from the judgement of the Hon’ble Supreme Court in the matter of Mithlesh Singh Vs. Union of India (2003) 3 SCC 309[4].

It is not a sound principle of construction to brush aside word (s) in a statute as being inapposite surplusage: if they can have appropriate application in circumstances conceivably within the contemplation of the statute. In the interpretation of statutes the Courts always presume that the Legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect. The Legislature is deemed not to waste its words or to say anything in vain.

Accordingly, while the dispute should be in relation to the three pointers as mention in the clause (a), (b), (c) of section 5(6), however, it can be beyond arbitration / civil suit. For eg – dispute pending under section 59 of Sales of Goods Act (Remedy for breach of warranty) before any Government, dispute pending before labour court

What if the dispute is decided?

Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 recognises “particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any” as a particular of “debt”. Accordingly, in case a suit or arbitration or otherwise is decided and is not pending, the same will b maintainable as a petition under section 9 of the Code.

Conclusion

To conclude, the essentials of filing of resolution application by an operational creditor

There should be a right to payment;
Such payment should become due and payable and should remain unpaid; and
There should be no dispute with respect to such right;

The above interpretation wrt “dispute” has also been referred and quoted by the NCLAT in the matter of Meyer Apparel Ltd and Others vs Surbhi Body Products Pvt Ltd and Godolo & Godolo Exports Pvt Ltd[5].

Related Article:

Article on “Dispute as to Dispute” – by Sikha Bansal

[1] Company Appeal (AT) (Insolvency) 6 of 201

[2] Company Appeals (AT) (Insolvency) No.53 of 2017

[3] Company Appeals (AT) (Insolvency) No.31 of 2017

[4] https://indiankanoon.org/doc/1650517/

[5] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/31052017AT33342017.pdf

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Nitu Poddar (nitu@vinodkothari.com)