#NCLT: Debtors rendered remediless on application by operational creditors under IBC

The Mumbai Bench of the NCLT has recently passed an order admitting an insolvency petition which highlights a (possible) serious lacunae in the Insolvency and Bankruptcy Code, 2016 (Code)..Essar Projects India Ltd. (Essar), represented by Cyril Amarchand Mangaldas, had filed an application against MCL Global Steel Pvt. Ltd. (MCL) in its capacity as an operational creditor, under Sections 8 & 9 of the Code read along with Rule 6 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiation of corporate insolvency resolution process..An aggregate disputed amount of ₹9,10,60,788 remained unpaid by MCL to Essar, since 2014 for which several invoices had been raised by Essar..On 28th December 2016, Essar issued a statutory notice u/s 8 (1) of the Code; this provision provides the debtor with a ten-day period to pay the debt, before an application is filed by the creditor u/s 9(1) of the Code..MCL opposed the said notice, among other things, on grounds of disputes regarding quality and timeline of construction as well as loss suffered due to delay. Although, previous invoices raised by Essar did not elicit any objections..Further, Section 8(2) of the Code allows the debtor to ‘dispute’ the demand made by the creditor, within a period of ten days, which is provided u/s 8(1). However, interestingly, one of the key ingredients of this section is that that the dispute in question must be proved by the way of a ‘pending suit or arbitration proceeding’, which was initiated ‘prior to’ the serving of the notice under Section 8(1), by the creditor..This leads to a problematic situation wherein a dispute raised by a debtor will not be a valid one unless an action was initiated prior to serving of the notice. Therefore, in the absence of a prior (legal) action , the debtor is very much rendered remediless..In this regard, the NCLT notes,.“Since the same (debt) is not disputed before any court of law before receipt of notice issued u/s 8. of the Code, the dispute raised by the corporate debtor reply to the notice u/s 8 of the Code cannot be treated as dispute in existence at the time of receipt of the notice u/s 8 for two reasons, one- due to admission of raising invoices and two- due to raising it as dispute in the reply only after notice u/s 8 has been issued.”. Based on the above, the NCLT has held that,.“It is evident that the Corporate Debtor defaulted in making payments as mentioned above, the disputes raised by the Corporate Debtor are not sustainable, therefore the petition under sections 8& 9 are taken as complete, according this Bench hereby admits this petition declaring Moratorium…”.A judicial precedent has been effectively established which mandates that every debtor must have initiated legal proceedings against a creditor, if the debt owed is disputed; otherwise their objection would not be held valid..Would be interesting to see if the Code will face another writ following this order..(Read the order)