Existence of dispute under insolvency code

Under the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution process (CIRP) can be initiated by an operational creditor if there is no dispute in relation to the default on the part of the corporate debtor.

The application filed with the National Tribunal (NCLT) must be preceded, under section 8, by a demand to repay the debt. The corporate debtor should, within a period of 10 days from the date of receipt of notice, either repay the unpaid operational debt or mention the existence of a dispute or record of the pending suit or arbitration proceedings filed before the receipt of such notice or an invoice in relation to such a dispute.

While a record of a pending suit or an arbitration proceeding filed before the receipt of notice or invoice in relation to the dispute would lead to an immediate cessation of further proceedings, the stand-alone term “dispute” has lent itself to interpretation by the courts. Under section 5(6) of the code, “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.

Evaluation of dispute: The definition clause provides that the term “dispute” shall include a suit or an arbitration proceeding. Principles of statutory interpretation provide that the word in respect of which “includes” is used, bears both its extended statutory meaning and its ordinary, popular and natural sense, whatever is properly applicable. Also, the definition in relation to which “includes” is used would have an extended meaning, and cannot be restricted to receive its ordinary, popular and natural meaning.

Further, where the word is defined to “include” something, the definition is prima facie extensive. The word “include” is generally used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the statute. It is also instructive to note that in the code as enacted, the word “includes” was substituted for the word “means”, which occurred in the Insolvency and Bankruptcy Bill.

In view of the above, the meaning of the term “dispute” as defined in the code would include other forms of dispute which have not culminated in judicial proceedings, in addition to the suit or arbitration proceedings.

According to the definition of “dispute”, suits or arbitrations are examples of dispute. However, such suits or arbitrations should be specifically related as provided under section 5(6) of the code.

As discussed, being inclusive, the definition of “dispute” can be extended. The Supreme Court, in Mobilox Innovations Pvt Ltd v Kirusa Software Pvt Ltd (2017), held that the dispute in the form of suits or arbitration proceedings must relate to one of three conditions laid down under section 5(6) of the code either directly or indirectly. Further, the Supreme Court has held that passing of an arbitral award and steps taken to challenge the arbitral award constitutes a valid dispute with regard to operational debt, as well as a pending appeal under the Arbitration and Conciliation Act, 1996.

A part settlement of the disputed amount as opposed to arbitration proceedings would not entitle the creditor to contend that a dispute did not exist.

Existence of dispute: The Supreme Court has observed that the dispute must be pre-existing prior to the receipt of the demand notice or invoice. A dispute raised after the application for CIRP cannot be a ground for rejection of such application.

The true meaning of section 8(2)(a) read with section 5(6) of the code clearly brings out the intent of the code, that the corporate debtor must raise a dispute with sufficient particulars. In case a dispute is being raised by showing the records of dispute in a pending suit or arbitration, the dispute must also be relatable to the conditions provided under section 5(6). In addition, such dispute should have been raised with or brought to the notice of the creditor.

Hence, for rejection of an insolvency application, the adjudicating authority does not have to go into the merits of the dispute as to whether such a dispute would withstand judicial scrutiny. However, it is important that the authority determines two things – firstly that the dispute raised is valid in its estimation and secondly that the dispute has been brought to the notice of the creditor before the notice is served. The first of these two aspects is subjective, but the second is an objective assessment. Remedying this, in the authors’ view, would lead to better solutions under the law.