INSOLVENCY RESOLUTION BY OPERATIONAL CREDITOR AND QUESTION WHETHER "DISPUTE" IN SECTION 5(6) IS AN INCLUSIVE OR EXCLUSIVE DEFINITION ?

INSOLVENCY AND BANKRUPTCY INFORMATION 

As per section 8 of the Code, an operational creditor is required to deliver a demand notice on occurrence of a default.Within ten days from the receipt of the demand notice, the corporate debtor shall bring to the notice of the operational creditor the “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” (emphasis supplied).

This is article of the series of editorials written by the Adv ACS Jeetam Kumar Saini on Corporate Laws(He also Written many articles Including Companies Act, 2013, SEBI, RBI Regulations, IBC) advocatejeetamsaini@gmail.com - 9785949998

In this regard, the decision of the 

Hon’ble Supreme Court 

in

Mobilox Innovations Private Limited v. Kirusa Software Private Limited

• clarifies that the dispute must be existing prior to the receipt of the notice and can be in a form other than a pending suit or arbitration proceeding.
• The rationale given by the court is that it couldn’t have been the intent of the legislature that a dispute be only in the form of a pending suit or arbitration proceeding, and the relevant paragraph is extracted below:

“We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which “the existence of a dispute” alone is mentioned. Even otherwise, 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.”

Further, the definition of the term ‘dispute’ in section 5(6) is an inclusive, and not an exhaustive definition. Thus, it was decided to amend section 8(2)(a) to replace ‘and’ with ‘or’, to be in line with the judgement of the Hon’ble Supreme Court discussed above, and the intent of the legislature.

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