[Post by Shyam Pandya, who is a partner at Desai & Diwanji. Views are personal.
Disclosure: The author represented the respondent in the matter, i.e., Mobilox Innovations Private Limited]
In the context of a corporate insolvency resolution process initiated by an operational creditor against a corporate debtor under section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), a corporate debtor can, at a preliminary stage, resist such initiation (within the prescribed time limit under the IBC) in one of the two ways:
(a) it can bring to the notice of the operational creditor the existence of a dispute, if any, and record of pendency of the suit or arbitration proceedings filed before the receipt of notice or invoice in relation to the dispute; or
(b) it can repay ‘the unpaid operational debt……’.
If the operational creditor receives neither a ‘notice of dispute’ (from the corporate debtor within the time prescribed under the IBC) nor a payment (from the corporate debtor), the operational creditor is entitled to make an application before the adjudicating authority for initiating a corporate insolvency resolution process.
Once such an application from an operational creditor has been received, the adjudicating authority is required (within the prescribed time) to either:
(a) admit the application, if, inter alia, no payment has been made by the corporate debtor or ‘no notice of dispute has been received by the operational creditor ….’ or
(b) reject the application, if, inter alia, ‘notice of dispute has been received by the operational creditor ….’.
Under section 5(6) of the IBC, ‘dispute’ has been defined as follows:
‘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;’
An important question before the National Company Law Appellate Tribunal (“NCLAT”) in Kirusa Software Private Limited v. Mobilox Innovations Private Limited was, inter alia, the true meaning and interpretation of the expression ‘dispute’ for the purposes of section 9 of the IBC.
While interpreting the definition of ‘dispute’ in favour of corporate debtors, the NCLAT held the following:
- the definition of ‘dispute’ under the IBC is an inclusive definition and not exhaustive; the expression ‘includes’ used in the definition of ‘dispute’ should be read as ‘means and includes’;
- the definition of ‘dispute’ under the IBC it cannot be limited to pending proceedings or ‘lis’ within the limited ambit of suit or arbitration proceedings;
- ‘dispute’ will embrace not just suits or arbitrations but its ambit will extend to proceedings initiated or pending before consumer courts, tribunal, labour court or mediation and conciliation, as well as any action taken by a corporate debtor under any act or law such as replying to a notice under section 80 of the Code of Civil Procedure, 1908, or an action under section 59 of the Sale of Goods Act, 1930 or an action regarding the quality of goods or services provided by an operational creditor;
- such actions, suits, arbitrations, proceedings before any court, tribunal, or mediations etc. must be in the context of a debt, or quality of goods or services or breach of representation or warranty;
- ‘dispute’ must be raised (by the corporate debtor) prior to the notice for insolvency resolution by an operational creditor under section 8 of the IBC;
- raising a pending ‘dispute’ (by the corporate debtor) cannot be a mala fide effort to stall the insolvency resolution process;
- while the adjudicating authority is not empowered to verify the adequacy of the ‘dispute’, a ‘dispute’ giving the colour of a genuine dispute, or an illusory dispute (raised for the first time), cannot be a tool to reject the application for initiating the corporate insolvency resolution process.
The above interpretation allows the corporate debtor to be cautious when it is supplied with sub-standard quality of goods or services by its vendors and, as is common business practice, the corporate debtor withholds payments to its vendors in this regard. Some key takeaways of the above judgement of the NCLAT which corporate debtors can bear in mind in such a scenario are below:
- the corporate debtor should ensure that if it is dissatisfied with the quality of goods or services supplied by its vendor and, as a result, the corporate debtor withholds payment to such vendor, it does so by giving reasons;
- the corporate debtor should factually link the non-payment to its vendor to, inter alia, a breach of quality of goods or services promised by the vendor (or indicated by the corporate debtor) or breach of representation or warranty furnished by such a vendor; and
- the corporate debtor should inform (in writing to) its vendor of the above as soon as possible.
- Shyam Pandya