INDIA: National Company Law Appellate Tribunal Clarifies the Circumstances for Initiation of Corporate Insolvency Resolution Process , and Disputes Raised under the Insolvency and Bankruptcy Code
June 11, 2017
India’s new Insolvency and Bankruptcy Code, 2016 has brought a paradigm shift in bankruptcy law in India, and the National Company Law Appellate Tribunal continues to forge ahead with new judgments, illuminating the sections of the code and creating a body of jurisprudence that is developing by the day.
One such recent judgment is Kirusa Software Private Ltd v Mobilox Innovations Private Ltd (Company Appeal (AT) (Insolvency) 6 of 2017), where the Tribunal had the opportunity to examine Section 9 of the Code, which covers the application for initiation of corporate insolvency resolution process by operational creditor.
Section 5(6) of the Code defines disputes as including a suit or arbitration proceeding relating to:
The existence of the amount of debt
The quality of goods or service
The breach of a representation or warranty
In Kirusa (supra), the court looked into the question of whether a “dispute” could only cover a suit or arbitration proceeding, or whether the definition given in the Code was an inclusive and not an exhaustive one. Ultimately, the Tribunal held that the definition was an inclusive one, and could not be said to cover only a “lis” in terms of a suit or arbitration proceedings.
The Tribunal held that any action pending before a quasi-judicial body, such as a tribunal, consumer court, or mediation or conciliation, as well as any action taken by a corporate debtor, or an action with regard to the quality of goods or services provided by an operational creditor, would be considered a “dispute”. Section 5(6) uses the term “dispute includes a suit or arbitration proceeding”, and Section 8(2) of the Code uses the words “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings”. Therefore, the Tribunal held that the latter would be rendered otiose in the event that dispute was considered to be only as related to a pending suit or arbitration.
Such an action would have to be in the context of a debt, the quality of goods and services, or the breach of a representation or warranty (harkening back to Section 5(6)). The Tribunal writes: “Though the words ‘prima facie’ are missing in Sections 8 and 9 of the Code, yet the Adjudicating Authority would examine whether notice of dispute in fact raises the dispute and that too within the parameters of two definitions - ‘debt’ and ‘default’
The Tribunal also held that the dispute must be raised by the corporate debtor prior to the notice of insolvency resolution by operational creditor under Section 8 of the Code. However, raising of the dispute cannot be a mala fide effort by the corporate debtor to stall the insolvency resolution process. Further, while the adjudicating authority is not empowered to rule on the adequacy of a dispute, a prima facie mala fide dispute cannot be used to reject the application for initiating the corporate insolvency resolution process.
The judgment does appear to allow corporate debtors to withhold payment in cases of substandard goods and services, as is common commercial practice. This non-payment (or delayed payment) must be backed by reasons, communicated in writing to the vendor, and then also linked to the breach in representations or warranties as made by the vendor.
The clarification by the Tribunal ensures that common practice continues, but also prevents against the use of mala fide disputes to stall necessary proceedings.