The word “Dispute” is significant for the maintainability of every application filed under Section 9 of the IB Code.
It will be not wrong to say that the first acid test for an admission of an application under Section 9 is prima facie
“whether there is any dispute or otherwise.”
It is pertinent to refer to Section 9(5) of IB Code as below:
Section 9 (5)“The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—
(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—
(a) the application made under sub-section (2) is incomplete;
(b) There has been repayment of the unpaid operational debt.
(c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;
(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or”
In other words, if there is an existence of a dispute between the Operational Creditor and the Corporate Debtor then the adjudicating authority may reject the application under IB Code.
Dispute is defined under Section 5 (6) of the IB Code as;
"Dispute" includes a suit or arbitration proceedings relating to —
- the existence of the amount of debt;
- the quality of goods or service; or
- the breach of a representation or warranty;
It must be also noted that the term “includes” is a very wide term and it includes various aspects but not limited to certain issues only.
The definition of dispute also resulted many situations where Court had to draw a line of demarcation finally as to what will be construed as a prima facie dispute.
ISSUE – WHAT IS TO BE CONSTRUED AS A DISPUTE?
In MOBILOX INNOVATIONS PVT LTD V. KIRUSA SOFTWARE PVT. LTD.
NATIONAL COMPANY LAW TRIBUNAL
In this case the Corporate Debtor had sub-contracted his work to the Operational Creditor and a Non-Disclosure Agreement (NDA) was also executed between the parties.
The Corporate Debtor withheld the payments to the Operational Creditor contending that there was a breach of the Non- Disclosure Agreement.
The Operational Creditor filed a demand notice which was replied to by the Corporate Debtor stating that there exists a bon fide dispute between the parties regarding the breach of the NDA. The Operational Creditor filed an application under section 9 of the Code.
The NCLT Mumbai Bench held that since the default of payment was disputed by the Corporate Debtor therefore the petition is rejected.
NATIONAL COMPANY LAW APELLATE TRIBUNAL
In appeal before the NCLAT, the following was held:
The term dispute as defined in sub-section (6) of Section 5 cannot be limited to proceedings within the limited ambit of a suit or arbitration and the term “includes” ought to be read as “means and includes” and therefore the definition is inclusive.
The definition of dispute must relate to the specified nature in clause (a), (b) and (c) of Sub-section (6) of section 5 but such dispute is not capable of being discerned only in the form of suit or arbitration.
The NCLAT held that the Adjudicating Authority acted mechanically by rejecting the application and the dispute raised by the Corporate Debtor in the present case was vague and allowed the appeal.
The Apex Court held that
“40. 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 defense which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defense 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…….
45. Going by the aforesaid test of “existence of a dispute”, it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.
46. Learned counsel for the respondent, however, argued that the breach of the NDA is a claim for unliquidated damages which does not become crystallized until legal proceedings are filed, and none have been filed so far. The period of limitation for filing such proceedings has admittedly not yet elapsed. Further, the appellant has withheld amounts that were due to the respondent under the NDA till the matter is resolved.
Admittedly, the matter has never been resolved. Also, the respondent itself has not commenced any legal proceedings after the e-mail dated 30th January, 2015 except for the present insolvency application, which was filed almost 2 years after the said e-mail. All these circumstances go to show that it is right to have the matter tried out in the present case before the axe falls. 47. We, therefore, allow the present appeal and set aside the judgment of the Appellate Tribunal. There shall, however, be no order as to costs.”
The parameter to ascertain as to whether there is a dispute or otherwise, can be summarized as below:
i. The dispute should have prima facie bona fide and exists naturally in a given fact;
ii. The grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory or misconceived.
iii. The existence of a dispute need not require further to be proved.
iv. The dispute should be natural and not a made to believe dispute.