16 May 2017

Existence of “dispute” in terms of Insolvency Code bars initiation of insolvency process

Key points

  • The definition of the word “dispute” is not exhaustive but illustrative. A corporate debtor has the right to reject a demand on any sustainable ground other than showing a pending suit, arbitration proceeding or the breach of representation or warranty. The sustainability of such grounds shall depend on the facts and circumstances of each case.
  • If the applicant of a corporate insolvency resolution process has already availed an effective remedy, the provisions of Section 10 of the Civil Procedure Code, 1908 shall come into picture and application of corporate insolvency cannot be allowed to proceed.

In the present case, an application under Section 9 (Application) of the Insolvency and Bankruptcy Code, 2016 (Code) was initiated by the applicant(s) against the respondent company for initiating the corporate insolvency and resolution process. Prior to the aforesaid application, an arbitral award had been passed on 9-9-2016 in favor of the Applicant with respect to disputes regarding a lease deed entered between the applicant and the respondent.

The Award directed the Respondent to pay accrued rent along with interest and damages, which was subsequently challenged by it under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) and was dismissed by an order dated 19-12-2016 (Order). The execution proceedings to recover the amounts due under the arbitral award were filed and are pending before the Delhi High Court.

Pursuant to the above, demand notice(s) were issued by each of the applicant(s)under Section 8 of the Code (Notice), which requires that the “corporate debtor” should (i) bring to the notice of an “operational creditor” the existence of a dispute, if any; (ii) repay the operational debt, within 10 days of the receipt of demand notice. Upon receipt of the said demand notice, the Respondent(s) filed an appeal under Section 37 of the Arbitration Act against the Order. Simultaneously, the respondents disputed the existence of “operational debt” in their response to the Notice.

The Principal Bench, NCLT dwelled on the definition of “dispute” as stated under Section 5(6) to be read with Section 8(2) of the Code and observed that the term “dispute” has been defined under the Code in an inclusive manner, thereby giving the “corporate debtor” the ammunition to contest the demand on any sustainable ground.

A conjoint perusal of Section 8(2)(a) and Section 9(1) of the Code leads to the understanding that the existence of “dispute” shall clearly bar the initiation of insolvency process. The NCLT in its Order dated 24-3-2017 further observed that the arbitration proceedings are yet to attain finality, since the respondent has the right to appeal against the award within 30 days of the Order, which has been rightly availed by the Respondent.

The aforesaid fact(s) coupled with the fact that the applicant(s) have already initiated execution proceeding(s) led the Bench to believe that allowance of insolvency proceedings would result in the promotion of “forum shopping”, which is wholly impermissible in law. Based on the above, the Principal Bench at New Delhi dismissed the application. 


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