According to the Section 9 of Insolvency and Bankruptcy Code of 2016 (IBC), power is given to the operational creditors of a company to initiate corporate insolvency resolution process after default. Before that, he has to send a demand notice of unpaid operational debtors along with a copy of an invoice demanding payment of the amount involved in the default under S. 8(1) of IBC. After 15 days of sending such demand notice if the Corporate debtor sought no reply to such demand notice, then the application for CIRP may be filed under S.9 of IBC. Such application can be dismissed by the adjudicating authority if there lies a pre-existing dispute as to the amount of the claim by the operational creditor.  This article tends to clear as to what may constitute a pre-existing dispute.

The word dispute is defined under S.5(6) of IBC, ad verbatim, include a suit or an arbitration proceeding relating to –

  • The existence of the amount of debt,
  • Quality of goods or services; or
  • The breach of a representation or warranty.

The definition of  pre-existing dispute’ has always been the question of contention. Over a period of time,  of these terminologies have been developed by the interpretation and judgements of the courts and tribunals.

The definition of the word dispute provided under the code was well elaborated and explained by Hon’ble Supreme, in the case of re. Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd[1], in the following words:

That vide Para 40 of the judgment – “It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under S.9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility”.

“However, in doing so, the NCLT does not need to be satisfied that the defence is likely to succeed. The NCLT does not at this stage examine the merits of the dispute except to the extent indicated above.”

The definition clause also states the inclusion of a suit or an arbitration proceeding. For maintainability, every application filed under S. 9 of IBC, dispute holds significant importance. The IBC is not a substitute for a recovery forum. Also, the existence of a dispute between the parties puts a clog on the corporate insolvency resolution process (CIRP) provided under the IBC.

The intent of Legislature is very vital for interpreting any law, which can be well deduced from the words of S.8(2)(a) of IBC ‘existence of a dispute if any’.  It can be easily inferred that dispute shall not be limited to instances specified in the definition as provided under S.5(6), as it has far arms, apart from pending Suit or Arbitration as provided Under S.5(6) of IBC.

S.9 of the IBC makes it very clear for the Adjudicating Authority to either admit or reject the application within fourteen days from the receipt of the application under sub-Section (2). The dimension of S.9 is two-fold. Sub-Section (5) (i) (d) of the section states that the Adjudicating Authority can admit the application “if no notice of dispute is received by the Operational Creditor and there is no record of the dispute in the information utility.” Whereas, on the other hand, S.9 also states that the Adjudicating Authority “reject the application so filed if the Operational Creditor has received a notice of a dispute from the Corporate Debtor”.

A CIRP can be initiated if the Operational Creditor, did not receive any payment or the notice of a dispute from the Corporate Debtor[2]. In support re. Yash Technologies Ltd. Vs. Base Corporation Ltd.[3]The Appellate Tribunal had noted the objections, which were raised by the Corporate Debtor before the filing of the Petition, and it was held that NCLT, not a competent authority to decide upon dispute rather only a competent civil Court could address such issue. Hence, the application under S.9 of IBC, 2016 was not maintainable.

Moreover, the understanding of the pre-existing dispute was recently cleared by the three-member bench, headed by Chairman S J Mukhopadhaya, in the case of Ahluwalia Contracts (India) Ltd Vs Raheja Developers Ltd[4]. In this case the counsel on the behalf of Raheja Developer that is the Operational Creditors argued before the NCLT that the petition should be dismissed on the grounds of claim being a disputed claim as the Arbitration Proceedings in the respect of the same claim are ongoing and hence there CIRP cannot be initiated as the claims by the Ahluwalia Contracts falls within the ambit of Disputed Claims. As to this reason the application was dismissed by the NCLT.

However, the Corporate Debtor filed an appeal in the NCLAT regarding the order passed by NCLT, and the counsel on the behalf of the Ahluwalia Contracts (India) Ltd argued that the Arbitration Proceedings were initiated by the Operational Creditor after serving of the demand notice as per S.8(1) of IBC. After observing this, NCLAT dismissed the order passed by NCLT and held that “the of dispute must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice”. Moreover, NCLAT also said that the application under S.9 of IBC cannot be rejected on the  mere the grounds of the claim being Disputed Claim and held that “disputed claim” cannot be a ground to reject an application under Section 9 of the Insolvency and Bankruptcy Code (IBC) to initiate insolvency proceedings, if it is not raised before issuance of demand notice.

[1] (2018) 1 SCC, Civil Appeal No. 9405 of 2017.

[2] S.9, IBC, 2016, No. 31, Acts of Parliament, 2016 (India)

[3] Company Appeal (AT) (Insolvency) No. 01 of 2019.

[4] Company Appeal (AT) (Insolvency) No. 703 of 2019.

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