Interpretation of the Definition of “Dispute” under the Insolvency and Bankruptcy Code, 2016

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Introduction

Ever since the inception of the Insolvency and Bankruptcy Code (“I&B Code”) in 2016, ironically, the most common dispute arising out of the I&B Code is the meaning of the term “dispute” under section 5(6) of the Code. The various benches of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) have interpreted the term in various ways and have been unable to arrive at one undisputed meaning of the term. The different interpretations have led to confusion among litigants and lawyers.

Judicial Intervention

With its judgment dated 21st September 2017, the Supreme Court cleared the air in the matter of Mobilox Innovations Private Limited v. Kirusa Software Private Limited wherein the meaning of the terms “dispute” and “existence” in the code were finally studied and decided.

In the facts of the case, Kirusa had filed a petition for commencement of insolvency resolution process against Mobilox. The application was dismissed by the NCLT on the ground that a ‘notice of dispute’ was sent by Mobilox. Kirusa filed an appeal against the dismissal and the NCLAT held that “dispute” means a bona fide dispute. It was further held that the dispute in the present case was not a bona fide dispute. Accordingly, the application was remanded to NCLT, Mumbai. Unhappy with the decision, Mobilox proceeded to file an appeal before the apex court and the issue was taken up by a bench consisting of R.F. Nariman and Sanjay Kishan Kaul.

In deciding the meaning of ‘dispute’, the Supreme Court referred to the draft of the Insolvency and Bankruptcy Code wherein ‘dispute’ meant only a bona fide dispute between the parties – either in the form of a suit or in the form of arbitration proceedings – regarding “(a) the existence or the amount of a debt; (b) the quality of a good or service; or (c) the breach of a representation or warranty”. This definition, however, was changed by the legislature and was made inclusive so as to accord a wider meaning to ‘dispute’ and not restrict it to just ‘suit or arbitration’.

The court further observed that ‘and’ in section 8(2) be read as an ‘or’. This would mean that a dispute need not exist on record for the application of insolvency resolution process to be dismissed.

Furthermore, it was observed that whether a dispute is bona fide or not is not up to the adjudicating authority to decide and that the adjudicating authority must see whether a dispute truly exists and is not “spurious, hypothetical, illusory, mere bluster, plainly frivolous or vexatious”.

 Conclusion

In the end, adjudicating upon whether the timelines in the I&B Code are mandatory or only directory, the court observed that the very reason behind the enactment of the code was to put insolvency and liquidation proceedings on a fast-track and as such, the timelines mentioned in the code must be adhered to strictly and not following them would be contrary to the objective of the code.

While the meaning of the term ‘dispute’ has been widened and would ensure justice to honest debtors, it would also allow dishonest debtors to delay insolvency proceedings with ease thus delaying the entire process and beating the purpose of the code.

The vagueness of the code has gone to become a hurdle in achieving its purpose. It is now only up to the legislature to make necessary amendments to the I&B Code. Possible interpretations of the statutes need to be assessed and ascertained to make things easier for the litigants, lawyers and the judiciary.

 

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