Defining dispute: How NCLAT new rules can clarify ambiguity between operational creditors and debtors

By: | Published: May 30, 2017 6:17 AM

Experts now feel that the ambiguity on disputes between operational creditors and debtors, and how the term ‘dispute’ is to be interpreted, is clear.

NCLAT, Insolvency & Bankruptcy Code, Kirusa Software Pvt Ltd, Essar Projects India Ltd, Global Steel, Mobilox Innovations, NCLAT judgmentIn its first ever ruling under Sections 8 and 9 of the Code in the case Kirusa Software Pvt Ltd vs Mobilox Innovations, the NCLAT has held that the term ‘dispute’ is illustrative and not exhaustive.

The National Company Law Appellate Tribunal (NCLAT) has passed a few significant rulings clarifying various ambiguities that have risen during resolution of insolvency disputes under the new Insolvency & Bankruptcy Code, 2016, be it the timelines drawn for setting such disputes or what qualifies a ‘dispute’ and ‘existence of dispute’ under the new legislation that came into effect in May last year.

In its first ever ruling under Sections 8 and 9 of the Code in the case Kirusa Software Pvt Ltd vs Mobilox Innovations, the NCLAT has held that the term ‘dispute’ is illustrative and not exhaustive. The definition of ‘dispute’ cannot be limited to pending suit or arbitration, but also encompasses disputes raised in various fora including response to demand notice. The question before the appellate tribunal was what do ‘dispute’ and ‘existence of dispute’ mean for the purpose of initiation of insolvency proceedings under Section 9 of the Code.

Two contrary judgments by the National Company Law Tribunal (NCLT), Mumbai, had created some confusion over what constituted disputed debt. In one case, it had held that a debt would be taken as disputed only if a suit was filed in court before insolvency proceedings were initiated. In Essar Projects India Ltd vs MCL Global Steel, the tribunal, while interpreting the definition of ‘dispute’ under the Code, held that ‘dispute in existence’ means and includes raising a dispute in a court of law or arbitral tribunal before the receipt of the Demand Notice issued under Section 8 of the Code. It also said that a dispute raised by a corporate debtor for the first time in its reply to the demand notice cannot be treated as a dispute in existence in the absence of the same being disputed before any court of law prior to the receipt of the demand notice.

The same view was taken by the NCLT in the case of Deutsche Forfait vs Uttam Galva Steel. It said that the NCLT had made it clear that such a dispute must be validated by raising the issues in dispute before a court or arbitral tribunal prior to the date of receipt of a demand notice. Merely contesting the amount in question did not constitute a ‘dispute’ within the meaning of the code.

In another case, it recognised a debt as disputed even without a case being filed in a court. The tribunal in a plea for insolvency filed by creditor Kirusa Software against debtor Mobilox Innovations observed the claim amount owed was disputed, although there was no prior suit in court before the insolvency petition was filed. Experts now feel that the ambiguity on disputes between operational creditors and debtors and how the term ‘dispute’ was to be interpreted is clear.

Devansh Mohta, the lawyer who represented Mobilox Innovations, said that “the NCLAT has taken a balanced view for corporate debtors as this is the only mode by which the demand of debt by an operational creditor can be disputed before any insolvency resolution process is initiated.”

In another landmark judgment in the case of Innoventive Industries Ltd vs ICICI Bank, the appellate tribunal has held that the NCLT is bound to issue only a limited notice to the corporate debtor before admitting a case under Section 7 of the Insolvency Code. It clarified that adherence to principles of natural justice would not mean that in every situation the tribunal is required to afford reasonable opportunity of hearing to the corporate debtor before passing its order.

The NCLAT judgment clarified that under Section 7(5), the tribunal is only required to be satisfied itself on whether the corporate debtor has defaulted, an application filed by the financial creditor is complete, and disciplinary proceeding is pending against the insolvency resolution professional, proposed by the financial creditor. If the NCLT is satisfied that it is required to admit the application but the application is incomplete, the financial creditor can be granted seven days’ time to complete the application, according to the appellate body.

In another significant ruling in the case of JK Jute Mills Co Ltd vs Surendra Trading Co, the NCLAT examined whether the time limits prescribed under the Code, including those for the admission or rejection of an insolvency application by the NCLT, are mandatory or directory.

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The NCLAT held that the time limit of 14 days for the NCLT to admit or reject an application for initiating insolvency proceedings under sections 7, 9 and 10 is directory rather than mandatory, and that the NCLT has inherent powers to extend the 14-day period on a case-to-case basis in the interest of fairness and justice.

Further, it observed that since the NCLT’s registry verifies whether an application is complete and in proper form, which is a time-consuming process, the 14-day time period cannot be counted from the ‘date of filing of the application’ but has to be counted from the date when such application is “listed for admission/order,” it stated. However, it said that the 270-day period prescribed under the Code for completing the insolvency resolution process is mandatory in nature and all stakeholders would be bound by it.

Legal experts, however, feel that the ruling weakens the mechanism by “delaying quick resolution.” This means courts do not have to necessarily adhere to the deadline. “The timeline of the Code was the essence and the strongest pillar of the Code. If that is not maintained, then the efficacy of the Code is weakened,” according to Sapan Gupta of Shardul Amarchand Mangaldas, a law firm.

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