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Dispute - An IBC perspective

The dispute under the Insolvency and Bankruptcy Code, 2016 (Code) has an inclusive definition. The intent of an inclusive definition is that the claim of the Operational Creditor should only be disputed basis either by showing a record of pending suit or by showing a record of a pending arbitration. The Apex Court has settled the issue regarding interpretation of existence of dispute in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited(2018) 1 SCC 353.

The definition of dispute has evolved wherein the original Bill had the expression bona fide dispute which transformed as an inclusive definition however in the course of time the term bona fide was dropped. In case of English law it is adjudged that in order to attract winding up debt has to be bona fide disputed.

Cases under IBC
1. Chetan Sharma (Appellant Corporate Debtor) vs. Jai Lakshmi Solvents (P) Ltd. Anr. ; Abhi Agro Pvt. Ltd. Anr.; JR Agro Industries Pvt. Ltd. Anr. ; Arohul Foods Pvt. Ltd. Anr.; Rungta Industries (P) Ltd. Anr. ( collectively referred as Operational Creditor)1

Facts of the Case
·The Appellant ordered for purchase of crude rice bran oil from the Operational Creditor on various occasions. However, no supplies were received by the Corporate Debtor against the various purchase orders placed by it; without delivering the products, the operational creditors raised various invoices against alleged purchase of the crude oils, as claimed and noted above.

·The Appellant Managing Director (shareholder) who was also a holding shares in the Appellant Company had fraudulently placed the Order, post discovery of the fraud a MOU was signed between the shareholder and the Appellant which stated that all the sums shall be recoverable from the shareholder and not from the Appellant basis which the debts in the books of the Appellant were written off.

·As on November 30, 2015 the Director of the Appellant confirmed that credit balance of requisite amount as per their books of accounts of the Operational Creditor.

Synopsis of Judicial Ruling

·Unilateral ‘transfer’ of liability does not constitute a ‘dispute’ within the meaning of section 5(6) of the Code. The ‘dispute’ under section 5(6) of the Code has to be between the corporate debtor and the operational creditors and an inter se dispute between two groups of shareholders of the corporate debtor does not constitute a ‘dispute’ in reference to operational creditors.

·There is absence of privity of Contract between Operational Creditor and Appellants employee is hence the operational creditor cannot enforce the claim since the Agreement is executed between the Appellant and the its employee.

·The Apex Court in para 18 of ICICI Bank Ltd. v. APS Star Industries Ltd., (2010) 10 SCC 1 had held that outstanding in the account of a borrower(s) (customer) is a debt due and payable by the borrower(s) to the bank. Secondly, the bank is the owner of such debt. Such debt is an asset in the hands of the bank as a secured creditor or mortgagee or hypo the catee. The bank can always transfer its asset. Such transfer in no manner affects any right or interest of the borrower(s) (customer). Considering the foregoing judgement the transferring the debt is solely on the prerogative of the Operational Creditor under the current case.

·In the current case an arrangement was reached between it’s the shareholder and the Appellant which per se is an unilateral transfer of liability which cannot tantamount to mean a dispute under Section 5(6) of the Code. Hence such an arrangement shall not absolve the liability of the Appellant towards Operational creditor.

2.Mr. Ajay Agarwal(Appellant Corporate Debtor) v/s. Central Bank of India and State Bank of India(Respondents)2

Facts of the Case
·The main disputed point of Appellant under current case before the Appellant Tribunal was mismatch of figures and dates of default on the face of Application and the petition shall be rejected basis the averments. The learned Counsel put forth a judgement 3 wherein it as stated that due to misleading statements i.e. mismatch of figures and date of default the Appellant Tribunal had set aside the CIRP process.

·The Respondent contended that they have also taken steps under Section 13(2) of the SARFAESI Act against the Corporate Debtor as well as the guarantors to repay entire outstanding as on December 16, 2015. The parties have moved before the Debt Recovery Tribunal, seeking recovery of the outstanding loan amount. The said matter is pending before the Debt Recovery Tribunal. According the current dues on calculation was reflected in the Form, which was filed under Section 7 Code.

Synopsis of Judicial Ruling
·Clarifying the contention of the Appellant who placed his reliance on aforesaid judgement it was stated that the Adjudicating Authority had interfered with impugned order since there was misleading statement by the Financial Creditor due to which the Adjudicating authority could not reach the conclusion of default which was contrary to the application filed. In the present case the difference is between the claim is, the interest amount payable in the meantime.

·Further Adjudicating Authority placed reliance on Apex Court judgement 4 wherein it was held that it is of no matter that the debt is disputed so long as the debt is due i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date.

·It was further held that mere mismatch of the figures will not invalidate the order initiating Insolvency process under Section 7 of the Code

·In the aforesaid case it can be observed that the Corporate Debtor in no instance disputed in existence regarding the debt and default. Even in the judgement 5 of the Appellant Tribunal it was held that the application shall be admitted where default was apparent and the Adjudicating Authority was satisfied that a default had occurred and the application was complete. Hence the CIRP process cannot be ceased on mere mismatch of figures.

3.Mr. Raj Duplex (P.) Limited (Operational Creditor Appellant) Vs Sardhana Papers (P.) Ltd. (Corporate Debtor Respondent) 6

Facts of the Case
 ·In the present case, The Corporate Debtor claimed that the Operational Creditor has entered into a settlement for the debt due and debit/credit notes were issued to the Corporate Debtor for settlement of outstanding due. Basis such a settlement the Corporate Debtor issued cheques for clearing the amount due. During the audit the Corporate Debtor realised one debit note was not entered into ledger account the same was entered at a later date and was informed the Operational Creditor. Subsequently the Corporate Debtor issued stop payment instructions to the Bank in order to reconcile the accounts.

·The Operational Creditor initiated proceedings against Corporate Debtor under section 138 of Negotiable Instruments Act. The proceedings were challenged by the Corporate Debtor in Allahabad High Court where the Court referred the matter to mediation and conciliation centre of the Court and stayed the proceedings

·The Operational Creditor further refuted any such settlement entered with the Corporate Debtor and denies execution of any debit notes. To buttress the contention the Operation Creditor appended report of forensic signature expert wherein it was stated that the reported that the signature appended to the debit notes of the Director of Corporate Debtor does not match with the actual specimen signature of the Director

Synopsis of Judicial Ruling
·The Tribunal observed that the Corporate Debtor had the debit notes were only presented during the mediation process and they have failed to produce original debit notes in their averments and the photocopy annexed is not clear. Hence such withholding of documents indicates manipulation.

·The Corporate Debtor has admitted and confirmed the ledger account maintained by the Operational Creditor of Corporate debtor and has not taken any objection about not mentioning of details of debit notes dated as claimed while approving ledger maintained by the operational creditor. Additionally the Corporate Debtor has fail to provide a correspondence stating that a dispute exists between Operational Creditor and Corporate Debtor before issuance of debit note regarding the quality of supplied goods.

·It was further stated that Corporate debtor failed to raise dispute within ten days after receipt of demand notice as per the provision of the Code, raising dispute later for the first time is devoid of merit, and cannot bar initiation of corporate insolvency resolution plan because of pendency of any mediation proceedings on dishonour of cheque.

 ·The Adjudicating Authority may decide whether there is a good, substantial and reasonable dispute. Even where the entire debt is disputed, the Adjudicating Authority can allow evidence in order for it to determine whether the dispute is genuine. The Madras High Court in its judgement7 Para 12 had observed that :-A court can deduce from the evidence, and only a reasonable deduction will have the validity of legal proof. The Court cannot recognise fanciful theories unsupported by evidence how the event might have occurred......In a settled legal position it is evidently clear that the Adjudicating Authority shall examine that whether dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence. Since the evidences were withheld by the Corporate Debtor the authenticity of the evidence provided clearly depicts

·Additionally the insolvency process is intended to be a time bound process as it has been laid down in the Preamble. The Apex Court in Innoventive Industries Ltd. v. ICICI Bank [2018] 1 SCC 407 had reiterated that speed is essence of IBC. Hence buttressing on the judgement it would be prudent for a Corporate Debtor to raise the dispute within prescribed timeline.

In simple words, there must exist a dispute which satisfies all the pre-requisites as per the Code and involves to a substantial extent disputed questions of fact and the Company must adduce evidence which supports its contention that there is a substantial dispute. The party must bring forward a prima facie case which satisfies the Adjudicating Authority that there is something which ought to be tried.
. .
1 - [2018] 208 Comp Cas 469 (NCLAT)
2 - [2018] 208 Comp Cas 402 (NCLAT)
3 - M/s. Starlog Enterprises Limited v. ICICI Bank Limited─ Company Appeal (AT) (Insolvency) No. 5 of 2017
4 - Innoventive Industries Ltd. v. ICICI Bank Anr., (2018) 1 SCC 407
5 - ICICI Bank Ltd. v. Essar Power Jharkhand Ltd. CP NO (IB) 25/PB/2018
6- CP NO (IB) 160/ALD/2017
7 - The Managing Director, Dunlop India Limited v. S.G. Krishnakumari (1993) 1 MLJ 115

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