Corporate debtors required to have initiated litigation/arbitration against creditor before receiving insolvency notice under S. 8(1) of IBC  

Earlier this month, the Mumbai Bench of the National Company Law Tribunal (NCLT) decided an important issue arising under the Insolvency and Bankruptcy Code, 2016 (the Code). This development was first reported here by Varun Marwah, an alumnus of ILS Law College, Pune. This matter was also extensively worked upon and argued before the NCLT by Vividh Tandon, associate, Cyril Amarchand Mangaldas, Mumbai. He is also an alumnus of ILS Law College, Pune.

In the present case, Essar Projects India Ltd. (Essar) filed an insolvency-petition against corporate debtor MCL Global Steel Pvt. Ltd. (MCL). MCL argued that Essar cannot proceed under Section 8(1) and 9 of the IBC since MCL seriously disputed the amount Essar has quoted in its invoices on various grounds. On the other hand, Essar argued that MCL turned a deaf ear to all previous invoices and raised an objection for the first time on receiving the statutory demand notice under Section 8(1) of the Code, which is reproduced herein below:

Section 8 of the Code

(1) 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 such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) 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;

Furthermore, sub-section (6) of Section 5 defines the term “dispute” to mean the following:

Section 5 of the Code

(6) “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;

The Code subsequently empowers an operational creditor to file an insolvency application to the adjudicating authority upon the lapse of the abovementioned 10-day hiatus if, and only if, the debtor either fails to repay the amount or if he fails to serve a notice of dispute upon the operational creditor.

The Verdict

In a short and succinct order, the Tribunal held that MCL cannot claim benefit under Sections 8 and 9 of Code to preclude the initiation of insolvency proceedings since it did not dispute any of Essar’s invoices before a court of law or an arbitral tribunal before receiving the statutory demand notice under Section 8.

Upon a wholesome reading of Sections 5(6), 8 and 9 of the Code, the Tribunal observed that the term ‘dispute in existence’ means formally raising dispute a before a court of law or an arbitral tribunal before receiving the statutory demand notice under Section 8. MCL admitted all of Essar’s invoices but failed to raise any such dispute before any of the aforementioned authorities. Therefore, the Tribunal declared Essar’s petition as complete and passed an order inter alia restraining MCL from bringing any action against Essar before any judicial or quasi-judicial authority.

Short Comment

The Tribunal’s interpretation of the relevant provisions of the Code appears to be sound at first sight. However, it may be argued that Section 5(6) of the Code provides for an inclusive, as opposed to an exhaustive, definition of the term ‘dispute’:

Section 5(6) of the Code

“dispute” includes a suit or arbitration proceedings relating to […]

Accordingly, it may be plausible to interpret this provision to lay down ‘suit’ and ‘arbitral proceedings’ as illustrations added to the general legal meaning of the term ‘dispute’. This is mainly because ideally, a dispute may ‘exist’ even in the absence of a pending suit or arbitral proceeding; the latter two are only forums created to formally take cognizance of an already existing dispute.

Besides, there could be other methods of mutually confirming the existence of a dispute over payment of debts. For instance, if before the receipt of a statutory notice from the creditor, the corporate debtor may be able to persuade the creditor to enter into negotiation or mediation or conciliation proceedings with the creditor in relation to a dispute over the amount claimed. These proceedings may eventually fail. If one were to subscribe to the Tribunal’s present interpretation, neither of these proceedings will disentitle a bona fide corporate debtor from taking benefit of Sections 8 and 9 to preclude the filing of an insolvency petition against it. This, it may be argued, will defeat the purpose of these provisions and mischief will ensue.

 

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