1 August 2019

  
    IBC UPDATE | DISPUTE MUST BE RAISED PRIOR TO DEMAND NOTICE

 Introduction: 

National Company Law Appellate Tribunal (NCLAT) has recently in Ahluwalia Contracts India Limited versus Raheja Developers Limited answered the question of whether it is necessary for a dispute to be raised prior to issue of a demand notice for an application under Section 9 of the Insolvency and Bankruptcy Code 2016 (Code) to be rejected?

Facts of the Case:

The respondent entered into an agreement with the appellant in respect to civil works and plumbing works which were to be executed by the appellant. Bills were raised by the appellant in respect of the civil works and the plumbing works. The respondent in one of the emails alleged that there had been delay in execution of the works. The appellant issued a demand notice under Section 8(1) of the Code to the respondent. Thereafter, the appellant filed an application under Section 9 of Code against the respondent.

It was submitted by the appellant that there was no pre-existing dispute with regard to work done by the appellant for which bills were raised by the appellant and the bills were certified by the respondent. The appellant also submitted that as on the date of issuance of the demand notice, no arbitration proceeding was initiated or pending and that arbitration proceedings were filed by the respondent only after receipt of the demand notice.

National Company Law Tribunal, New Delhi (NCLT) rejected the application on the ground that the claim of the appellant fell within the ambit of ‘disputed claim’ and arbitral proceedings in respect of the same had been initiated. The present appeal was filed against this impugned order of NCLT.

NCLAT`s Decision:

NCLAT observed that merely because the respondent had raised a dispute did not mean that the proceedings were to be dismissed. The dispute was required to be raised prior to the issue of a demand notice. In this case, the arbitration proceedings were commenced one month after the demand notice was issued and would, therefore, not qualify as a pre-existing dispute to nullify the proceedings.

NCLAT relied on the Supreme Court`s decision in Mobilox Innovations Pvt. Ltd. Versus Kirusa Software (P) Limited (2017) that held :“If it comes to the notice of the Adjudicating Authority that the ‘operational debt is exceeding Rs. 1 lakh and the application shows that the aforesaid debt is due and payable and has not been paid, in such case, in absence of any 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’, the application under Section 9 cannot be rejected and is required to be admitted”. It also further stated “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 the demand notice or invoice.”

NCLAT also perused the Supreme Court’s decision in Innoventive Industries Ltd. Versus ICICI Bank and Another (2018) and observed that a claim means a right to payment even if it is disputed. NCLAT remarked that the Adjudicating Authority wrongly rejected the appellant’s claim on the ground that it fell within the ambit of a disputed claim.

NCLAT has held that existence of a disputed claim cannot be a ground to reject an application under Section 9 of the Code if the dispute was not raised prior to the issue of demand notice under Section 8(1) of the Code.

MHCO COMMENT:

The aforesaid judgment clarifies that an application under Section 9 of the Code cannot be rejected if the dispute was not raised prior to the issuance of demand notice under Section 8(1) of the Code. It lays down 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 the demand notice. Under the Code, the existence of a pre-existing dispute nullifies a claim for an operational debt. NCLAT’s decision may put form over substance since the time when the dispute is raised should not be that material if a dispute exists. The Supreme Court may be called upon to settle this issue.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.