ELP Note: NCLAT reads “dispute” under #IBC as illustrative, not exhaustive

The NCLAT has held that the term “dispute” as defined in the IBC is illustrative and not exhaustive. However, such dispute must be relatable to the debt or default claimed. Therefore, the word “includes” ought to be read as “means and includes” and would pertain to the proceedings initiated or pending before consumer court, tribunal, labour court or mediation, conciliation etc.

Interestingly, this has been the major moot point before various benches of the National Company Law Tribunal (NCLT).

Factual Matrix

The appeal before the NCLAT had arisen out of an order passed by the NCLT, Mumbai Bench, dated 27 January of this year. The Bench had rejected the claim of the operational creditor on the ground of dispute being raised with respect to existence of debt by the operational debtor.

The operational creditor, in the appeal filed before the NCLAT, took the plea that merely disputing a claim of default of debt cannot be a ground to reject the application under Section 9 of the IBC, till the corporate debtor refers any dispute pending.

The question that was taken up for deliberation before the NCLAT was what do “dispute” and “existence of dispute” mean for the purpose of determination of a petition under section 9 of the IBC.

Findings of the NCLAT

1. The NCLAT drew an interpretational analogy between section 8 and 9 of the IBC and Section 8 of the Arbitration and Conciliation Act, 1996, whereunder the judicial authority is required to prima facie determine the existence of an arbitration agreement before it can exercise jurisdiction in relation to a dispute brought before it;
2. The intent of the Legislature, as evident from the definition of the term “dispute”, is that it wanted the same to be illustrative and not exhaustive. If the intent of the Legislature was that a demand by an operational creditor can be disputed only by showing a record of suit or arbitration proceeding, the definition of “dispute” would have simply said ‘dispute means a dispute pending in arbitration or suit’;
3. Section 8(2) of the IBC cannot be read to mean that a dispute must be pending between the parties prior to the notice of demand and that too in arbitration or a civil court;
4. Even a dispute concerning execution of a judgment or decree passed in a suit or award passed by an arbitral tribunal can be used to prove a dispute under the IBC;
5. The onus to prove that there is a dispute pending consideration before a court of law or adjudicating authority shifts from the operational creditor to the corporate debtor;
6. The adjudicating authority, that is NCLT, is required to examine before admitting or rejecting an application under Section 9, whether the ‘dispute’ raised by the corporate debtor qualifies as a ‘dispute’ as defined under sub-section (6) of Section 5, and whether notice of dispute given by the corporate debtor fulfils the conditions stipulated in sub-section (2) of Section 8 of the IBC.
7. If one discovers the true meaning of sub-section (2)(a) of Section 8 of the IBC, having regard to the context of Sections 8 and 9 of the IBC, it emerges both from the object and purpose of the IBC and the context in which the expression is used, that disputes raised in the notice sent by the corporate debtor to the operational creditor would be covered within sub-section (2) of Section 8 of the IBC.

Applying the aforementioned principles, the NCLAT came to the conclusion that in the instant case, the defence raised for dispute by the operational debtor was vague and motivated to evade liability. Accordingly, it has remitted the case back to the NCLT, Mumbai Bench for admission of the application if the application is otherwise complete.

PRA Law represented Kirusa Software and the team was led by Partners Jawahar Lal and Sanjeev Jain along with Apoorva Agrawal and Shyamal Anand while Desai & Diwanji represented Mobilox Innovations. The Desai & Diwanji team included Partner Shyam Pandya, Senior Associate Puneet Singh Bindra and Associates Debashree Dey and Rohan Kaushal. Desai & Diwanji instructed Mr. Devansh Mohta as its counsel.

Read the NCLAT Order, Desai Diwanji and PRA’s written submissions: