SUBJECT

National Company Law Tribunal (“NCLT”) while hearing the cases filed under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is empowered to admit and entertain case wherein there is clear cut admission but does not admit cases in which a clear dispute is made out between the parties. The present note focuses on the ambit of the word dispute and the import of which is explained based on the case laws and references mentioned herein along with the legislative intent that can be inferred from the IBC.

IBC

The important sections to be referred fir this discussion are S.8 and 9; s 61, 62 and 64.

The heading of S 8– Insolvency resolution by Operational Creditor.

The heading of S 9– Application for initiation of corporate insolvency resolution process by Operational Creditor.

S 61,62 and 64 talks about the time limit for appeals in NCLAT (30days) and the Supreme Court (45 days) with extension of 15 days which depends on the discretion of the adjudicatory body.

A BRIEF HISTORY:

The Bankruptcy Law Reforms Committee was set up by the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of Shri T.K. Viswanathan. This Committee submitted an interim report in February 2015 and a final report in November of the same year. It was, as a result of the deliberations of this Committee, that the present Insolvency and Bankruptcy Code of 2016 was finally born.

Annexed to this Committee Report is the Insolvency and Bankruptcy Bill, 2015.

Interestingly, Section 5(4) defined “dispute” as:

5. Definitions

In this Part, unless the context otherwise requires-

(4) “dispute” means a bona fide suit or arbitration proceeding regarding (a) the existence or the amount of a debt; (b) the quality of a good or service; or (c) the breach of a representation or warranty.

And the new definition as per the IBC, 2016

(6) “dispute” includes a suit or arbitration proceedings relating to—

(a) the existence or the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;”

 

So 2 thing can be noted that from the aforementioned definition,

1. The word ‘means’ is now substituted by the word ‘includes’
2. The words ‘bona fide’ are omitted.

The definition of “dispute” under Section 5(6) of the Code is an inclusive one and the original draft bill not only had the word “means” instead of the word “includes”, but also the word “bona fide” before the words “suit or arbitral proceedings”, which is missing in the present Code. Therefore, the moment there is existence of a dispute, meaning thereby that there is a real dispute to be tried, and not a sham, frivolous or vexatious dispute, the Tribunal is bound to dismiss the application.This being the case, it not open to the adjudicating authority to then go into whether a dispute does or does not exist.

 

Changes in S 8 and 9

In Section 8(1), the words “through an information utility, wherever applicable, or by registered post or courier or by any electronic communication” have been deleted.

Likewise, in Section 8(2), the period of “at least 60 days … through an information utility or by registered post or courier or by any electronic communication” has also been deleted.

In Section 9(5), the absence of a proviso similar to the proviso occurring in Section 7(5) was also rectified. Further, the time periods of 2 and 3 days were uniformly substituted, as has been seen above, by 7 days, so that a sufficiently long period is given to do the needful.

Therefore, the adjudicating authority, when examining an application under Section 9 of the Act will have to determine:

• Whether there is an “operational debt” as defined exceeding Rs.1 lakh? (See Section 4 of the Act)
• Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and
• Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

 

If any one of the aforesaid conditions is lacking, the application would have to be rejected.

Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.

 

Section 64 of the Code mandates that where these timelines are not adhered to, either by the Tribunal or by the Appellate Tribunal, they shall record reasons for not doing so within the period so specified and extend the period so specified for another period not exceeding 10 days.

 

All this clearly shows the legislative intent that the reason NCLT can try the cases of IBC was to provide speedy trials like provided in summary cases.

 

Discussion on ‘AND’ & ‘OR’

8(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of theinvoice mentioned in sub-section (1) bring to the notice of the operational creditor-

• existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute

Case Laws on the same

Mobilox Innovations Private Limited v.  Kirusa Software Private Limited A I R2017SC4532

The word “and” occurring in Section 8(2)(a) must be read as “or” keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”. If read as “and”, disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them. Such an anomaly cannot possibly have been intended by the legislature nor has it so been intended. We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of 73 such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the parties.

It is settled law that the expression “and” may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation.

The Supreme Court reviews the entire scheme relating to Corporate Insolvency Resolution Process applications filed by operational creditors and holds that what is important is that the existence of the dispute and/or the suit or arbitration proceeding must be“pre-existing”i.e.it must exist before the receipt of demand notice.

Samee Khan v. Bindu Khan (1998) 7 SCC 59 at 64

This Court held: “Since the word “also” can have meanings such as “as well” or “likewise”, cannot those meanings be used for understanding the scope of the trio words “and may also”? Those words cannot altogether be detached from the other words in the sub-rule. Here again the word “and” need not necessarily be understood as denoting a conjunctive sense.

In Stroud’s Judicial Dictionary, it is stated that the word “and” has generally a cumulative sense, but sometimes it is by force of a context read as “or”.

Maxwell on Interpretation of Statutes has recognised the above use to carry out the interpretation of the legislature.

This has been approved by this Court in Ishwar Singh Bindra v. State of U.P. [AIR 1968 SC 1450 : 1969 Cri LJ 19]. The principle of noscitur a sociis can profitably be used to construct the words “and may also” in the sub-rule.”

 

Gujarat UrjaVikas Nigam Ltd. v. Essar Power Ltd. (2008) 4 SCC 755 at 765

This Court held: “It may be noted that Section 86(1)(f) of the Act of 2003 is a special provision for adjudication of disputes between the licensee and the generating companies. Such disputes can be adjudicated upon either by the State Commission or the person or persons to whom it is referred for arbitration. In our opinion the word “and” in Section 86(1)(f) between the words “generating companies” and “to refer any dispute for arbitration” means “or”. It is well settled that sometimes “and” can mean “or” and sometimes “or” can mean “and” (vide G.P. Singh’s Principles of Statutory Interpretation, 9th Edn., 2004, p. 404).

In our opinion in Section 86(1)(f) of the Electricity Act, 2003 the word “and” between the words “generating companies” and the words “refer any dispute” means “or”, otherwise it will lead to an anomalous situation because obviously the State Commission cannot both decide a dispute itself and also refer it to some arbitrator. Hence the word “and” in Section 86(1)(f) means ‘or’.”

 

Maharishi Mahesh Yogi Vedic Vishwavidyalaya v. State of M.P. (2013) 15 SCC 677 at 718

This Court held: “Besides the above two decisions, which discuss about the methodology of interpretation of a statute, we also refer to the following decisions 75 rendered by this Court in Ishwar Singh Bindra [Ishwar Singh Bindra v. State of U.P., AIR 1968 SC 1450 : 1969 Cri LJ 19], wherein in para 11 it has been held as under: (AIR p. 1454)

 “ … It would be much more appropriate in the context to read it disconjunctively. In Stroud’s Judicial Dictionary, 3rd Edn., it is stated at p. 135 that ‘and’ has generally a cumulative sense, requiring the fulfilment of all the conditions that it joins together, and herein it is the antithesis of or. Sometimes, however, even in such a connection, it is, by force of a context, read as ‘or’. Similarly in Maxwell on Interpretation of Statutes, 11th Edn., it has been accepted that ‘to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions “or” and “and” one for the other’.”

 

“EXISTENCE of DISPUTE”

The expression “existence” has been understood as follows:

The Shorter Oxford English Dictionary gives the following meaning of the word “existence”:

1. a) Reality, as opp to appearance.
2. b) The fact or state of existing; actual possession of being. Continued being as a living creature, life, esp. under adverse conditions.

Something that exists; an entity, a being. All that exists.

(Page 894 – Oxford English Dictionary)

The Supreme Court reviews the entire scheme relating to Corporate Insolvency Resolution Process applications filed by operational creditors and holds that what is important is that the existence of the dispute and/or the suit or arbitration proceeding must be“pre-existing”i.e.it must exist before the receipt of demand notice.

CONCLUSION

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 Section 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. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties.

Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

All the case references and the legislative intent behind the IBC and NCLT rules, clearly shows that NCLT is to try the cases in a speedily manner like the summary cases under ORDER XXXVII of CPC. If prima facie it can be shown that there is a dispute u/s 8(2)(a) and it satisfies the condition of s9(5)(ii)(a), the application has to be rejected.

The Supreme Court has clearly dictated that the power conferred upon the NCLT does not allow it to dig deep in the dispute between the parties rather establish and acknowledge the fact that if there exists a dispute which is not spurious, hypothetical or illusory, NCLT has to reject the application without going into the derails of the matter.

Moreover an appeal can then be filed to the Appellate Tribunal under Section 61 of the Act within 30 days of the order of the Adjudicating Authority with an extension of 15 further days and no more.

Section 64 of the Code mandates that where these timelines are not adhered to, either by the Tribunal or by the Appellate Tribunal, they shall record reasons for not doing so within the period so specified and extend the period so specified for another period not exceeding 10 days.

Even in appeals to the Supreme Court from the Appellate Tribunal under Section 62, 45 days’ time is given from the date of receipt of the order of the Appellate Tribunal in which an appeal to the Supreme Court is to be made, with a further grace period not exceeding 15 days.

The strict adherence of these timelines is of essence to both the triggering process and the insolvency resolution process. As we have seen, one of the principal reasons why the Code was enacted was because liquidation proceedings went on interminably, thereby damaging the interests of all stakeholders, except a recalcitrant management which would continue to hold on to the company without paying its debts. Both the Tribunal and the Appellate Tribunal will do well to keep in mind this principal objective sought to be achieved by the Code and will strictly adhere to the time frame within which they are to decide matters under the Code which clearly indicates and highlights the intent of the legislature in drafting the IBC, 2016.

Article by

Vatsalya Kumar (Student, Faculty of Law)

Sushant Chaturvedi

References-

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited A I R2017SC4532
• Samee Khan v. Bindu Khan (1998) 7 SCC 59
• Ishwar Singh Bindra v. State of U.P. [AIR 1968 SC 1450 : 1969 Cri LJ 19]
• Gujarat UrjaVikas Nigam Ltd. v. Essar Power Ltd. (2008) 4 SCC 755
• Maharishi Mahesh Yogi Vedic Vishwavidyalaya v. State of M.P. (2013) 15 SCC 677

• Stroud’s Judicial Dictionary, 3rd Edn.
• Shorter Oxford Dictionary
• Maxwell on Interpretation of Statutes, 11th Edn.