NO INSOLVENCY RESOLUTION PROCESS WHEN THERE IS A DISPUTE ON DEFAULTED AMOUNT

[Mr. M. GOVINDARAJAN]

Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) was enacted to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order or priority of payment of Government dues.

Part II of the code provides the procedure for insolvency resolution and liquidation for corporate persons.

Initiation of Corporate insolvency resolution process

Section 6 of the Code provides that where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor.

Initiation by operational creditor

Section 8 of the Code provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in Form 3 and 4.

The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice bring to the notice of the operational creditor-

• 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;
• the repayment of unpaid operational debt-

• by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
• by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

After the expiry of the ten days from the date of delivery of the notice or invoice demanding payment the operational creditor does  not receive payment from the corporate debtor or notice of the dispute the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process

Existence of dispute

From the perusal of the above provisions of section 8 and 9 of the code that if the corporate debtor copy of any record showing the pendency of the suit or arbitration proceedings filed before the receipt of such notice in relation to such dispute the operational creditor cannot proceed the insolvency resolution process against the corporate debtor.  The pendency of the litigation must be before the receipt of notice or demand from the operational creditor.

Debt

Section 3(11) defines the term ‘debt’ as a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Dispute

Section 4(6) defines the term ‘dispute’ includes a suit or arbitration proceedings relating to-

• the existence of the amount of debt;
• the quality of goods or service; or
• the breach of a representation or warranty

In ‘Philips India Limited V. Goodwill Hospital & Research Centre Limited’ – 2017 (7) TMI 1 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI the appellant had preferred two separate applications for the initiation of corporate insolvency resolution process against ‘Goodwill Hospital & Research Centre Limited’ and ‘Karina Health care (P) Limited.  The appellant entered into a annual maintenance contract with both the companies.    Both the respondents defaulted to make payment of debts giving rise to filing of the petitions under the code.

The corporate debtor have taken plea that there was an existence of dispute which they have brought to the notice of the operational creditor in reply to notice issued under section 8 of the Code.   The corporate debtor pointed out that the appellant issued a notice under section 433(e) read with section 434(1)(a) of the Companies Act on 09.03.2016 to the respondents, 

 The Adjudicating Authority noticed the following-

• the work order placed by the corporate debtor primarily related to maintenance of equipments;
• the bare perusal of invoices would show that it has included the charges of material and labor apart from the relevant taxes;
• there was no document placed on record certified by the corporate debtor or his authorized representativeor a medical technician that the work has been done satisfactory in accordance with the standard of norms/quality stipulated in the agreement;

The Adjudicating Authority also analyzed the nature of dispute.  The corporate debtor gave a reply to the notice issued by the appellant-

• the dues as claimed by the appellant were never outstanding and the demand notice is barred by law of limitations and hence untenable under law;
• a comprehensive annual maintenance contract withthe respondents for the maintenance of installed Allura Xper FD 20C at its hospital to keep the same in a good and good proper working condition but the appellant in the most unprofessional manner failed to keep up with the contractual obligation;
• the officials of the appellant had failed to visit the premises of the respondents in a periodic manner for the upkeep of the medical equipment due to which the functioning of the equipment was majorly affected;
• the unprofessional approach by the officials of the appellant has caused major loss of reputation for the respondents and caused severe inconvenience to the patient awaiting their treatment at the hospital of respondents due to which the payment was deducted and the same was informed to the appellants;

The Tribunal held that the dispute under the code must relate to specified nature – existence of amount of debt or quality of goods or service or breach of representation or warranty.  However it is capable of being discerned not only from in a suit or arbitration from any document related to it.  For example, the operational creditor has issued notice under Code of Civil Procedure prior to initiation of the suit against the operational creditor which is disputed by corporate debtor.  Similarly notice under section 59 of Sales and Goods Act if issued by one of the party, a laborer/employee who may claim to be operation creditor for the purpose of the code may have raised the dispute with the State Government concerning the subject matter i.e., existence of amount of debt and pending consideration before the competent Government. 

The Tribunal held that the scope of ‘existence of dispute’, if any, which includes pending suits and arbitration proceedings cannot be limited and confined to suit and arbitration proceedings only.  It includes any other dispute raised prior to the issuance of notice under section 8 of the code.  It must be raised in a court of law or authority and proposed to be moved before the court of law or authority and not any got up or mala fide dispute just to stall the insolvency resolution process.

The Adjudicating Authority rejected the application filed by the appellant for initiation of insolvency resolution proceedings against the respondents.  The appellant, aggrieved against the order of the Adjudicating Authority, filed the present appeal before the Appellate Authority i.e., National Company Law Appellate Tribunal. 

The Appellate Tribunal held that the respondent corporate debtor muchprior to issuance of notice under section 8 of the code, raised a dispute relating to quality of service/maintenance pursuant to notice under section 433(3) and 434(1)(a) of the Companies Act, 1956 to the notice of the operational creditor.  In the view the Appellate Tribunal held that there is ‘existence of dispute’ about the claim of debt.   The objection cannot be called to be mere objection raising a dispute for the sake of ‘dispute’ and/or unrelated to clause (a) or (b) or (c) of section 5(6) of the code.  For the said reason if the Adjudicating Authority has refused to entertain the application, no ground is made out to interfere with such order.