REJECTION OF APPLICATION OF INSOLVENCY RESOLUTION PROCESS BY OPERATIONAL CREDITOR FOR EXISTENCE OF DISPUTE

[Mr. M. GOVINDARAJAN]

Insolvency and Bankruptcy Code

Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) is an act 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 of  priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India (‘Board’ for short) and for matters connected therewith or incidental thereto.

Corporate Insolvency resolution process

Chapter II of Part II of the Code deals with the corporate insolvency resolution process.  Section 6 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 in the manner as provided in Chapter II.  Section 7 provides the procedure for initiation of corporate insolvency resolution process by financial creditor.  Section 8  and 9 provides the procedure for initiation of corporate insolvency resolution process by an operational creditor.  Section 10 provides the procedure for initiation of corporate insolvency resolution process by the corporate applicant.

Corporate debt

Section 3(8) defines the expression ‘corporation debt’ as a corporate person who owes a debit to any person.

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.

Default

Section 3(12) defines the term ‘default’ as nonpayment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Demand notice

The expression ‘demand note’ is defined by the explanation to section 8 as a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

Dispute

Section 5(6) defines the term ‘dispute’ as including 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.

Insolvency resolution by operational creditor

Demand notice by operational creditor

Section 8 and 9 provides the procedure for insolvency resolution by operational creditor.  Section 8(1) 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.  An operational creditor shall deliver to the corporate debtor, the following documents-

• a demand notice in Form 3; or
• a copy of an invoice attached with a notice in Form 4.

The demand notice or the copy of the invoice demanding payment may be delivered to the corporate debtor-

• at the registered office by hand, registered post or speed post with acknowledgement due; or
• by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

A copy of the demand notice or invoice demanding payment served by an operational creditor shall also be filed with an information utility, if any.

Reply by corporate debtor

Section 8(2) of the Code provides that 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-

(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;

(b) 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 the record that the operational creditor has encashed a cheque issued by the corporate debtor.

Application by operational creditor

Section 9 of the Code provides that after the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under section 8(2) of the Code, the operational creditor may file an application before the Adjudication Authority for initiating a corporate insolvency resolution process.

The application shall be in Form 5. The fee payable is ₹ 2,000/-.  The operational creditor shall, along with the application furnish-

• a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
• an affidavit to the effect that there is no notice given by the corporate debtor relatingto a dispute of the unpaid operational debt;
• a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
• such other information as detailed below-

• Particulars of the applicant;
• Particulars of corporate debtor;
• Particulars of the proposed interim resolution professional, if proposed;
• Particulars of operational debt;
• Particulars of operational debt (documents, records and evidence of default;

• Written communication by the proposed interim resolution professional in Form No. 2;
• Proof that the specified application fee has been paid.

The operational creditor shall dispatch a copy of the application filed with the Adjudicating Authority, by registered post or speed post to the registered office of the corporate debtor.

Order of Adjudicating Authority

Section 9(5) provides that the Adjudicating Authority shall, within 14 days of the receipt of the application, by an order-

(i) Admit the application and communicate the decision to the operational creditor and the corporate debtor, if-

(a) the application is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution professional proposed, if any;

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if-

(a) the application made is incomplete;

(b) there has been repayment of unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

(e) any disciplinary proceedings is pending against any proposed resolution professional.

The Adjudicating Authority shall before rejecting an application give a notice to the applicant to rectify the defect in his application within seven days of the receipt of such notice from the Adjudicating Authority.

Commencement of corporate insolvency resolution process

Section 9(6) of the Code provides that the corporate insolvency resolution process shall commence form the date of admission of the application.

Rejection of application for existence of dispute

As we seen earlier the application filed by the operational credit for initiating insolvency resolution process may be rejected by the Adjudicating Authority may be rejected by the Adjudicating Authority if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility.  In ‘One Coat Plaster and another V. Shivam Construction Company and another’ – 2017 (3) TMI 1554 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI the Adjudicating Authority held that section 9 clearly discloses that the Adjudicating Authority has the power, inter alia, also to reject the application of the operational creditor under section 9(5)(ii)(d) of the Code in case the notice of dispute has been received by the operational creditor or there is a record of dispute with information utility.  Where dispute cannot be dislodged by the material submitted by the petitioner, the Adjudicating Authority will be inclined to reject the petition for operational creditor to set in motion the insolvency resolution process.

In ‘Meyer Apparel Limited and another V. Godolo & Godolo Exports (P) Limited’ – 2017 (8) TMI 1197 - NATIONAL COMPANY LAW TRIBUNAL, CHANDIGARH the Appellate Tribunal held that where dispute raised by the corporate debtor falls within the ambit of expression ‘dispute’ as defined under section 5(6), if any, as mentioned under section 8(2), the order passed by the Adjudicating Authority admitting the application of the operational creditor to set in motion the corporate insolvency resolution process is to be set aside.

Dispute – inclusive definition

Section 5(6) defines the term ‘dispute’.  The term dispute is not actually defined.  It is inclusive definition.  The word ‘includes’ should  always be read as a word of extension without reference to the context as held by Supreme Court in ‘NDP Namboodripad V. Union of India’ – 2004 (4) TMI 583 - SUPREME COURT. 

The definition under section 5(6) is illustrative in nature.  There could be various other types of disputes which have not been mentioned in the definition so as such the list in the body of the definition is exhaustive and the term ‘includes’ used by the legislature cannot be read down to include only these three types of dispute and has to be assigned a wider meaning.

            In ‘Kirusa Software (P) Limited V. Mobilox Innovation (P) Limited’ – 2017 (6) TMI 984 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, MUMBAI the appellant, an operational creditor filed petition under Section 9 of the Code before the Tribunal to initiate corporate insolvency resolution process.  The corporate debtor replied that there is a dispute since the appellant breached the Non Disclosure Agreement by which the payment was withheld.  The Tribunal rejected the application on the contention that there is a dispute between the operational debtor and the corporate debtor.  Against the order of the Tribunal the appellant filed appeal before the Appellate Tribunal.  The appellant before the Appellate Tribunal contended that mere disputing a claim of default cannot be a ground to reject the application.  The Appellate Tribunal held that the term ‘dispute’ defined in section 5(6) cannot be limited to a pending ‘lis’ within the limited ambit of a suit or arbitration proceedings, the word ‘includes’ ought to be read as ‘means and include’, including the proceedings initiated or pending before the Consumer Court, tribunal, labor court or mediation, conciliation etc.,  The Appellate Tribunal further held in the present case the adjudicating authority has acted mechanically and rejected the application under sub-section (5)(ii)(d) of Section 9 without examining and discussing the aforesaid issue. If the adjudicating authority would have noticed the provisions as discussed above and what constitute and as to what constitute 'dispute' in relation to services provided by operational creditor then would have come to a conclusion that condition of demand notice under subsection (2) of Section 8 has not been fulfilled by the corporate debtor and the defence claiming dispute was not only vague, got up and motivated to evade the liability. The Appellate Tribunal remanded the matter to the Tribunal to find out whether the application is complete.

            Against this order the operational creditor filed appeal before the Supreme Court in ‘Mobilox Innovations Private Limited V. Kirusa Software (P) Limited’ – 2017 (9) TMI 1270 - SUPREME COURT OF INDIA.    Kirusa Software (P) Limited, the respondent in this case, contended that the definition of ‘dispute’ would indicate that since the NDA does not fall within any of the three sub clauses of section 5(6), no dispute is there on the facts of the case.  The Supreme Court did not accede to such a contention.  First and foremost the definition is an inclusive one.  Secondly the present case is not a case of a suit or arbitration proceeding filed before receipt of notice.  A dispute is said to exist , so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition.  The correspondence between the parties would show that on 30.01.2015 the appellant clearly informed the respondent that the respondent had displayed the appellant’s confidential client information and client campaign information on a public platform which constituted a breach of trust and a breach of the NDA between the parties.  They were further told that all amounts that were due to the respondents were withheld till the time the matter is resolved.   The Supreme Court observed that a dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defence as vague, got-up and motivated to evade liability. The Supreme Court allowed the appeal and  set aside the order of the Appellate Tribunal.

Existence of dispute

There are two ways in which a demand of an operational creditor can be disputed-

• by bringing to the notice of an operational creditor ‘existence of dispute’;
• by simply bringing to the notice of an operational creditor, record of the pendency of a suit or arbitral proceedings to a dispute.

Dispute prior to the notice

The dispute raised by the corporate debtor much before issuance of notice under section8 by the operational creditor is treated as ‘existence of dispute’.  In ‘Philips India Limited V. Goodwill Hospital & Research Centre Limited’ – 2017 (7) TMI 1 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI the Appellate Tribunal held that there where corporate debtor, much prior to issuance of notice under section 8 had raised a dispute relating to the quality of service/maintenance pursuant to notice under section 433 (3) and 434(1)(a) of Companies Act, 1956, it can be safely stated that there is ‘existence of dispute’ about the claim of debt.  Such objections cannot be called mere objection for the sake of ‘disputes and/or unrelated to clause (a) or (b) or (c) of sub section (6) of section 5 of the Code.  Where Adjudicating Authority has accordingly refused to entertain the application under section 9 of the Code, no ground is made out for the interference with such orders.

In ‘Annapurna Infrastructure (P) Limited & Others V. Soril Infra Resources Limited’ – 2017 (8) TMI 1330 - NATIONAL COMPANY LAW TRIBUNAL, NEW DELHI  the Adjudicating Authority held that where the respondent has disputed the existence of operational debt on the ground that the arbitration proceedings have not come to an end as the appeal and also execution proceedings for enforcement of award are pending and claimed that the default within the meaning of Section 8(1) read with section 2(12) is deemed to have occurred, admission of application for passing an order for initiating corporate insolvency process is not warranted.

In ‘MCL Global Steel (P) Limited and another V. Essar Projects India Limited and another’ – 2017 (5) TMI 1774 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI the Appellate Tribunal held that where there was ‘existence of dispute’ even prior to the enactment of the code and notice under section 8, the petition under section 9 preferred by the operational creditor was not maintainable

Dispute with sufficient particulars

The corporate debtor while replying to the notice of the operational creditor has to establish the ‘existence of dispute’ with sufficient particulars.   Mere raising a dispute for the sake of evading the repayment of debt will not suffice.      In ‘Macquarise Bank Limited V. Uttam Galva Metallics Limited’ – 2017 (7) TMI 505 - NATIONAL COMPANY LAW TRIBUNAL, CHANDIGARH the Tribunal held that the true meaning of section 8(2)(a) of the Code read with section 5(6) of the code clearly brings out the intent of the Code, namely the corporate debtor must raise a dispute with sufficient particulars.   Mere raising a dispute for the sake of dispute, unrelated tor related to section 5(6)(a) or (b) or (c), 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.  Further by merely giving a dispute a color of genuine dispute or illusory raised for the first time while replying to the notice cannot be a tool to reject an application under section 9 of the Code, if the Operational creditor otherwise satisfied the Adjudicating Authority that there is a debt and there is a default on the part of the corporate debtor.  The onus to prove that there is no default of debt or that there is a dispute pending consideration before a Court of law or Adjudicating Authority from the creditor to debtor and operational creditor to corporate debtor.  The Tribunal held that the respondent having raise the dispute of quality of the goods to the statutory notice sent in terms of section 433 and 434 of Companies Act, 1956, i.e., much before the coming into force of the Code, would be sufficient to attract the provisions of section 9(5)(ii)(d) of the Code.

Dispute raised after the issue of notice

The dispute could not be raised by the corporate debtor after the issuance of notice.  The dispute is to be existed before the issuance of the notice.  In ‘DF Deutsche Forrait AG V. Uttam Galva Steel Limited’ – 2017 (4) TMI 1111 - NATIONAL COMPANY LAW TRIBUNAL, MUMBAI, the Tribunal held that the objection of the corporate debtor is that so many complexities are existing in this dispute for which they have filed a suit before the High Court, Bombay after receipt of notice under section 8 the insolvency petition is to be dismissed, cannot be sustained, because filing of suit or arbitration proceedings subsequent to the receipt of notice under section 8 will not amount to ‘existence of dispute’ as stated under section 8 of the Code.

In ‘Essar Projects India Limited V. MCL Global Steel (P) Limited’ – 2017 (4) TMI 1156 - NATIONAL COMPANY LAW TRIBUNAL, MUMBAI the Tribunal held that the corporate debtor  has not raised objection disputing the existence of debt nor filed any civil suit or other proceedings against the operational creditor in respect of the defaulted amount, but disputed the liability only when the statutory notice under section 8(1) was issued, there being no dispute in existence at the time of receipt of notice the petition is liable to be taken as complete and liable to be admitted declaring moratorium with suitable directions.

Conclusion

From the above discussions we can infer that the existence of dispute, if established by the corporate debtor will lead to the rejection of the application by the operational creditor who initiates the insolvency resolution process, by the Adjudicating Authority.  The burden is on the corporate debtor to prove that there is existence of dispute and at the same time if the operational creditor is able to prove that there is a default the application may be admitted by the Adjudicating Authority.  The Adjudicating Authority is required to examine before admitting or rejecting an application under section 9, whether the ‘dispute’ raised by a corporate debtor qualifies as a ‘dispute’ defined under section 5(6) and whether notice of dispute given by the corporate debtor fulfils the conditions stipulated in section 8(2).