Pre-existing Dispute in the Company between Corporate Debtor & Corporate Creditor

The pre-existing issue that can be used to dismiss an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”) must be a genuine disagreement, conflict, or controversy. The response to the Demand Notice, as anticipated by Section 8(2) of the Code, should reveal any such conflict of claims or rights. “Demand notice refers to a notice sent to a corporate debtor by an operational creditor seeking repayment of the operational obligation on which the default has occurred.”

As the court held the in the case of Shailendra Sharma vs Ercon Composites & Ors, 2021[1] that, the burden of proof is on the Corporate Debtor.

The operational creditors of a firm are given the right to start corporate insolvency resolution following a default under Section 9 of the Insolvency and Bankruptcy Code of 2016 (IBC). Prior to that, he must issue a demand notice to unpaid operational debtors, together with a copy of an invoice, requesting payment of the amount involved in the default, as required by Section 8(1) of the IBC. If the corporate debtor does not respond within 15 days after receiving the demand notice, an application for CIRP may be filed under Section 9 of the IBC. If there is a pre-existing dispute over the amount of the claim by the operational creditor, the adjudicating body might dismiss the application. This article attempts to clarify what constitutes a pre-existing disagreement.

The word dispute is defined under Section 5(6) of IBC, ad verbatim, including 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 topic of what constitutes a “pre-existing disagreement” has always been a source of debate. These terms have evolved through time as a result of the interpretation and decisions of courts and tribunals.

In the case of Re. Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. 2017[2], the Hon’ble Supreme expanded and described the definition of the word dispute granted under the code:
“It is clear, therefore, that if the operational creditor has received notice of dispute or there is a record of dispute in the information utility, the adjudicating authority must reject the application under Section 9(5)(2)(d) once the operational creditor has filed an otherwise complete application,” says paragraph 40 of the judgement.

“However, the NCLT does not have to be convinced that the defence has a good chance of succeeding.” Except to the degree mentioned above, the NCLT does not investigate the merits of the disagreement at this time.”

A lawsuit or an arbitration action is also included in the defining clause. For the sake of maintainability, every application submitted under Section 9 of the IBC must include a disagreement. The IBC is not a replacement for a support group. Furthermore, the existence of a dispute between the parties stymies the IBC’s corporate insolvency resolution process (CIRP).

The legislature’s purpose is critical for interpreting any statute, as the phrases “presence of a dispute if any” in Section 8(2)(a) of the IBC demonstrates. Apart from ongoing Suit or Arbitration as given under Section 5(6) of the IBC, it is easy to deduce that a conflict shall not be restricted to the instances indicated in the definition as provided under Section 5(6), since it has broad arms.

The Adjudicating Authority is required under Section 9 of the IBC to admit or reject the application within fourteen days of receipt of the application under sub-Section 1. (2). Section 9 has a two-dimensional dimension. “Where the Operational Creditor receives no communication of disagreement and there is no record of the issue in the information utility,” the Adjudicating Authority can approve the application,” according to Section (5) I (d). The Adjudicating Authority, on the other hand, is required by Section 9 to “deny the application thus submitted if the Operational Creditor has received a notification of a disagreement from the Corporate Debtor.”

If the Operational Creditor has not received payment or notification of a disagreement from the Corporate Debtor, a CIRP might be started. In support of Yash Technologies Ltd. vs. Base Corporation Ltd., 2019,[3] the Appellate Tribunal noted the objections raised by the Corporate Debtor prior to the filing of the Petition, and it was determined that the NCLT was not a competent authority to resolve the dispute, and that only a competent civil court could do so. As a result, the application under Section 9 of the IBC, 2016 could not be maintained.

Furthermore, in the matter of Ahluwalia Contracts (India) Ltd v. Raheja Developers Ltd., 2019,[4] a three-member panel led by Chairman S J Mukhopadhaya recently cleared the understanding of the pre-existing disagreement. In this case, the counsel for Raheja Developer, also known as the Operational Creditors, argued before the NCLT that the petition should be dismissed on the grounds that the claim is a disputed claim because the Arbitration Proceedings in respect of the same claim are still ongoing, and thus no CIRP can be initiated because the claims by the Ahluwalia Contracts fall under the category of Disputed Claims. The NCLT rejected the application as a result of this.

Conclusion

The law on the necessity of proof demonstrating the existence of a pre-existing disagreement relating to the amount of the debt, the quality of the item or service, or a breach of a representation or warranty has been decided in countless permutations and combinations. However, the parties have varied perspectives on the status of various forms of adjudicatory processes pertaining to the operational debt.

About the Author: Abhishek Singh is 2^nd year student at Bharati Vidyapeeth Deemed To Be University, New Law College, Pune.

Note: The views in this article are personal only.

 References

Case Laws:

1. [1] Shailendra Sharma vs Ercon Composites & Ors on 13 January, 2021
2. Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. 2017
3. Yash Technologies Ltd. vs. Base Corporation Ltd., 2019
4. Ahluwalia Contracts (India) Ltd Vs Raheja Developers Ltd., 2019

Statute:

1. Section 5 of Insolvency and Bankruptcy Code of 2016 (IBC)
2. Section 8 of Insolvency and Bankruptcy Code of 2016 (IBC)
3. Section 9 of Insolvency and Bankruptcy Code of 2016 (IBC)

End Notes

[1] Shailendra Sharma vs Ercon Composites & Ors on 13 January, 2021

[2] (2018) 1 SCC, Civil Appeal No. 9405 of 2017.

[3] Yash Technologies Pvt. Ltd vs Base Corporation Limited on 3 January, 2019

[4] Ahluwalia Contracts (India) Ltd vs Raheja Developers Ltd on 23 July, 2019