What will amount to a dispute under IBC, 2016?

Facts:-

NCLT

The case probably came into light to solve the key issue which is “Dispute” and “The existence of dispute” under the IBC Code. In this case, the creditor raised certain invoices related to software services. It provided to the debtor and subsequently on non payment of the same a demand notice was sent under section 8 of the IBC. Consequently, the corporate debtor responded to the demand notice by issuing a dispute notice against the outstanding amount. NCLT, Mumbai adjudicated that the creditor was in reciept of dispute and therefore, dismissed the petition.

NCLAT

✓ Consequently, the operational creditor appealed against NCLT’s order in the NCLAT where, NCLAT determined that it is pertinent to examine the meaning of “dispute” and “existence of dispute” in under section 9 of the IBC.

✓ Dispute is defined under section 5(6) of the IBC Code as ;
Dispute include a suit or arbitration proceedings related to-
1. The existence of the amount of debt,
2. The quality of goods of services,
3. The breach of a representation or warranty.

Subsequently, NCLAT allowed Kirusa’s appeal on the ground that the reply to the Demand Notice by the Mobilox cannot be seen within the purview of Section 8(2) and Section 5(6) of the Insolvency and Bankruptcy Code. It stated that the defense raised by Mobilox was vague and motivated as the debt demanded was not in connection with the non-disclosure agreement. Further NCLAT stressed upon the interpretation of “dispute” stating the a dispute would not be limited to only arbitration proceedings or suits but shall include any proceedings initiated before any tribunal, consumer court, Labour court etc.

SUPREME COURT

The Honorable Supreme Court allowed the appeal by Mobilox, while interpreting the expression “existence of a dispute” under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Honorable Supreme Court was of the opinion that the breach of NDA was sufficient to construe the existence of a dispute to invalidate the CIRP application filed by the operational creditor.

Further, they held that while Interpreting Section 8 (2) (a): “The word “and” occurring in Section 8 (2) (a) must be read as “or”. According to the earlier interpretation,the Code provides that a dispute between operational creditor and corporate debtor would only be valid if a suit or an arbitration proceeding with respect to the dispute has been filed prior to the receipt of demand notice. The Supreme Court was of the opinion that such an understanding shall lead to “great hardship” as the corporate debtor would then be able to stave off the bankruptcy process provided a dispute is already pending in a suit or arbitration proceedings”. An important point was highlighted by the Honorable Supreme Court stating that, if the “and” mentioned under Section 8(2)(a) is not read as “or”, such persons shall be excluded from the ambit of Section 8 (2) and application of CIRP shall be easily obtained which was not the intent of the legislature.

The supreme Court has clarified the objective of the code keeping in mind the legislative intent. The court through his judgement has provided a balance between the rights of the creditors and also the remedies to the creditors of the company