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As Insolvency & Bankruptcy Code passes its “formative days”, NCLT Mumbai Bench clarifies provisions

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The National Company Law Tribunal, Mumbai Bench presided over by Justice (Retd.) B.S.V Prakash Kumar has on April 10, 2017 passed a detailed order interpreting certain provisions of Insolvency and Bankruptcy Code, 2016. This order came to be passed in an application filed by DF Deutsche Forfait AG (Operational Creditor) under Section 9 of the Code for initiation of corporate insolvency resolution process against Uttam Galva Steel Ltd. (Corporate Debtor).

Terminology and Procedure under the Code

Discussing the nature of proceedings in applications under Sections 7, 9 and 10 of the Code, NCLT Bench has observed that there is no requirement of pleadings except for information sought in the concerned forms. Further in such applications, there are no pleading or defending parties and the such proceedings lack the presence of terminologies like petitioner/respondent or plaintiff/defendant. Bench has pointed out that the term used for this legislation is Code and not Act because most of the procedure is inbuilt in the Code itself. Further, the Bench was of the view that instead of following the conventional approach of an adversarial legal proceeding, NCLT benches should follow the mandate given by legislature. Bench has observed:

“We have to grow along with changing times to come out of bottlenecks suffocating the system.”

Requirements under section 8 of the Code

Discussing about the requirements of the notice to be sent by operational creditors to the corporate debtors, NCLT has observed that by a reading of the Code, it is clear that when a notice is issued by an operational creditor, the corporate debtor has to reply within 10 days of receipt of such notice. In the case in hand, the Corporate Debtor had replied on the same date on which it had received the notice but without providing any averment with regard to pending suit or arbitration proceeding pending before receipt of the notice. In the absence of any such pending suit or arbitral proceedings, reading the definition of dispute along with section 8 of the Code, NCLT admitted the application filed by Operational Debtor.

Interpretation of ‘dispute’

The term ‘dispute’ been has defined under Section 5 of the Code as:

“PART II – Insolvency Resolution and Liquidation for Corporate Persons
Section 5. In this Part, unless the context otherwise requires –

(6) “dispute” includes a suit or arbitration proceedings relating to—

1. the existence of the amount of debt;
2. the quality of goods or service; or
3.the breach of a representation or warranty;”

Section 5 affirms that the defined terms have to be used in the way they have been defined unless the context demands any term to be defined otherwise. Further, NCLT bench has observed that the above definition of dispute should be read along with sections 8 and 9 of the Code and which leads to the conclusion that for meaningful construction of the sections, “includes” used in the definition of ‘dispute’ has to be read as “means”. Thus if the definition meant that ‘dispute’ includes suit or arbitration then no definition is needed to be provided as pendency of a suit or arbitration always denotes a dispute and it is futile to be stated separately. Thus the Bench has opined that a valid ‘dispute’ under the Code shall arise only on existence of a pending suit or arbitration proceedings. Bench has observed:

-“If reply given denying the claim despite default occurrence is clear, does it mean that no application can be filed by any operational creditor even though the operational creditor makes the case of default occurrence? If that is so, it will be virtually ousting operational creditor filing any case under Section 9. If this scenario emerges, then it will be nothing but throwing this law into dustbin.”

Thus by virtue of this order, , on receipt of a demand notice under section 8 of the Insolvency and Bankruptcy Code, a corporate debtor is left with only two options:

  • to bring to the notice of the operational creditor, if there is existence of any dispute with respect to which a suit or an arbitration proceeding has been filed before receipt of the demand notice/invoice; or
  • if the payment is done then either send an attested copy of the record of electronic transfer of the unpaid debt or send an attested copy of the record that the operational creditor has encashed a cheque issued by the corporate debtor.

Difference of opinion

The Ld. Bench has deviated from the view taken by the same Bench on January 27, 2017 in Kirusa Software Pvt. Ltd. v. M/s Mobilox Innovations Pvt. Ltd. wherein, the application filed by the operation creditor was rejected merely on the ground that the claim was disputed in the reply to the notice given by the operational creditor. In the present matter, while giving its opinion on the order passed in Kirusa Software Pvt. Ltd. v. M/s Mobilox Innovations Pvt. Ltd., the NCLT Bench has observed that the order in the said case was passed during the “formative days” when the Code came into existence. Bench observed:

“…moreover this point that dispute means pendency of suit or arbitration, to our remembrance, had not been argued by the counsel of operational creditor, frankly speaking that as not noticed by us. It does not mean a miss out in one case can become a ratio to repeat the same mistake gain and defeat the object of enactment.”

NCLT Bench has further differed from the orders passed by the Principal Bench, Delhi in One Coat Plaster & Ors. v. Ambience Pvt. Ltd., Shivam Construction Co. & Ors. v. Ambience Pvt. Ltd. and Philips India Ltd. v. Goodwill Hospital & Research Centre Ltd. wherein, the Principal Bench has opined that an application filed by an operational debtor for initiation of corporate insolvency resolution process will be rejected even if a notice of dispute has been received by the operational creditor or if there is a record of dispute in the information utility. However it is worth mentioning that NCLT’s Chandigarh Bench has relied upon the above mentioned order passed by the Principal Bench, Delhi in the matter titled as Surbhi Body Products (P) Ltd. v. Meyer Apparel Ltd.

The complete order can be read here.

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