Introduction

An operational creditor is eligible to send a demand notice to a corporate debtor upon default in payment u/s. 8(1) of the Insolvency and Bankruptcy Code (“IBC”).[1] After that, the debtor may choose either of the two courses of action available to them u/s. 8(2), IBC: – (1) notify the operational creditor of the existence of a ‘dispute’, or (2) notify the operational creditor of the repayment of the operational debt.[2]

This article analyses whether the tests laid down in the Mobilox Innovations Case and Jindal Steel Case have resolved any of the confusion surrounding the determination of existence of a dispute under the IBC, which they were expected to at the time of their decision.

How to Determine the Existence of a Dispute

The meaning of ‘existence of a dispute’ as it appears in the IBC has been debated before the Adjudicating Authorities and the Supreme Court (“SC”). Consequently, in a landmark ruling in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,[3] the SC settled the issue by holding that a dispute for the purposes of s. 8(2), IBC must be a real dispute is as covered by its meaning u/s. 5(6) of the IBC. Section 5(6), IBC provides an inclusive definition of a dispute which must specifically concern at least one of the three conditions, namely, (i) the existence of the amount of debt, (ii) the quality of goods or service, or (iii) the breach of a representation or warranty.[4]

While an Adjudicating Authority (such as the NCLT or the NCLAT) is only empowered to check the ‘existence of a dispute’ between the parties in an application for initiation of CIRP, such a check includes testing whether there exists ‘plausible contention’ in the claims of the party claiming the existence of a dispute between them.[5] The Adjudicating Authority must satisfy itself that the dispute existing is a real dispute and not a spurious feeble legal argument meant to halt CIRP against them.[6]

The Plausible Contention Test

The ‘plausible contention’ test established by the SC in the Mobilox Innovations case has been applied by the Adjucating Authorities to determine whether CIRP can be initiated against a Corporate Debtor u/ss. 8 and 9 of the IBC.

While the Mobilox Innovations case is widely credited with having established the ‘plausible contention’ test for determination of ‘existence of a dispute’ on initiation of CIRP in India, the test originated in Australian jurisprudence in the case of Spencer Constructions Pty. Ltd. v. G. & M. Aldridge Pty. Ltd.[7] The SC in Mobilox Innovations case, when adapting the test to the requirements of Indian law categorically stated that the Adjudicating Authority must not decide the ‘dispute’ on its merits but only verify its existence by finding that the contention raised by the Corporate Debtor against the demand notice u/s. 8(1) of the IBC is plausible enough so that the dispute really exists and is not merely an attempt by the debtor to delay the initiation of CIRP u/s. 8 and 9 of the IBC. The existence of a dispute must be accompanied by documentary evidence by the Corporate Debtor to prove a pre-existing dispute at the time of receiving the demand notice u/s. 8(1) of the IBC.[8]

Despite requirement of a strict proof of evidence for the ‘existence of a dispute’ being reaffirmed in Ramco Systems Ltd. v. Spicejet Ltd.,[9] the NCLAT has accepted the understanding of a moratorium to not increase the rent rates for a period of 6 years as a ‘plausible contention’ based on facts which require further investigation even when such dispute was not accompanied by any documentary evidence of the Corporate Debtor.[10]

Operational Debt as a parameter to determine Existence of a Dispute

The IBC is a relatively newer legislation and in almost all cases where the application for initiation of CIRP u/ss. 8 and 9, IBC has not been accepted due to a pre-existing dispute, the dispute surrounds a question of what is to be termed as ‘operational debt.’ What constitutes ‘operational debt’ is relevant for the purposes of determining the ‘existence of a dispute’ u/s. 8(2) of the IBC because a dispute can only arise over an ‘operational debt.’ Since initiation of CIRP can only be challenged by a Debtor by claiming the existence of a dispute between the parties, the meaning of ‘operational debt’ is crucial to understand whether CIRP should be initiated by the Adjudicating Authority.

In Ravindranath Reddy (discussed above), whether the providing of lease by a landlord to a Corporate Debtor amounts as operational debt was in question before the Tribunal. The Court therein, referred to the ruling of the NCLT (Delhi) in Jindal Steel & Power Ltd. v. DCM International Ltd.[11] where it has been stated that ‘operational debt’ u/s. 5(21) of the IBC must be a debt u/s. 3(6) owed due to direct input or output produced or supplied by the Corporate Debtor.

In Neeraj Jain v. Cloudwalker Streaming Technologies Pvt. Ltd., the NCLAT accepted that damages claimed in lieu of customs and excise duties could amount to ‘operational debt.’[12] However, both the claimed disputes of lease agreement in Ravindranath Reddy and excess customs duties in Neeraj Jain do not relate to direct input or output of goods or services, which is a necessary condition for fulfilment of the criteria of ‘Operational Debt’ u/s. 5(21) of the IBC, as interpreted by the judgment in Jindal Steel.

Conclusion

A lack of clarity over the definition of what constitutes ‘Operational Debt’ leads to inconsistent judgments regarding ‘existence of disputes.’ CIRP cannot be initiated in cases which do not relate to ‘Operational Debt.’ Therefore, the IBC must be amended or clarifications must be issued to clarify the definition of ‘operational debt’ to provide clarity as to the ‘disputes’ that could be raised before an Adjudicating Authority u/s. 8(2) against the initiation of CIRP u/ss. 8 and 9 of the IBC.

Thus, it is only through legislative intervention that the meaning of operational debt could be clarified, and thereby, that of existence of a dispute to ease the CIRP process under the IBC.

The author has screened 52 and cited 7 judgments for the purposes of their research for this submission.

[1] Insolvency and Bankruptcy Code 2016 (IBC 2016) s 8(1).

[2] IBC 2016, s 8(2).

[3] 2018 1 SCC 353 [52]-[54].

[4] IBC 2016, s 5(6).

[5] Mobilox Innovations (P) Ltd v Kirusa Software (P) Ltd 2018 1 SCC 353 [51].

[6] ibid (n 3); OPGS Power Gujarat Pvt. Ltd. v. R. L. Steels and Energy Ltd. 2018 SCC OnLine NCLT 15872 [17].

[7] (1997) 76 FCR 452.

[8] ibid (n 5); Vanita Bhargava and Shweta Kabra, ‘Supreme Court Interprets the Definition of “Dispute” Under the Insolvency and Bankruptcy Code, 2016’ (2017) PL (CL) November 90, 93.

[9] 2019 SCC OnLine NCLAT 354.

[10] M Ravindranath Reddy v G Kishan and Ors 2020 SCC OnLine NCLAT 84 [45]-[47].

[11] 2017 SCC OnLine NCLAT 441 [10].

[12] 2020 SCC OnLine NCLAT 445 [51].

Author Bio

Qualification: LL.B / Advocate
Company: N/A
Location: Prayagraj, Uttar Pradesh, India
Member Since: 03 Aug 2022 | Total Posts: 1

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