India: A Dispute Must Exist Prior To Issuance Of Demand Notice Under §8(1) Of The Insolvency And Bankruptcy Code

Introduction

The National Company Law Appellate Tribunal ("NCLAT") in its recent judgment in Ahluwalia Contracts (India) Ltd v Raheja Developers Ltd has held that an application under §9 of the Insolvency and Bankruptcy Code 2016 ("I&B Code") can only be rejected if the dispute in relation to the claim pre-exists the date of receipt of demand notice or invoice issued under §8 of the I&B Code.

Facts

Ahluwalia Contracts (India) Ltd ("Operational Creditor") entered into agreements with Raheja Developers Ltd ("Corporate Debtor") for construction and plumbing works at Gurgaon, Haryana. The Operational Creditor served a demand notice dated 28 April 2018 under §8 of the I&B Code for unpaid invoices amounting to c. ₹3.37 Crores in respect of works performed for the Corporate Debtor.

The Corporate Debtor did not respond to the demand notice within the stipulated period of 10 days, but instead issued a notice invoking arbitration on the Operational Creditor after almost one month from the date of receipt of the demand notice. Meanwhile, the Operational Creditor had already preferred an application under §9 of the I&B Code before the National Company Law Tribunal, New Delhi Bench ("NCLT").

Issue before the NCLT

The Corporate Debtor defended the application on the ground that the Operational Creditor failed to complete the work within time and thereafter abandoned the work, because of which the Corporate Debtor invoked arbitration.

However, the issue before the NCLT was whether the arbitration notice, or any other materials on record, could be treated as evidence revealing 'existence of dispute' or pendency of arbitration proceedings or suit, as it appears in §8 of the I&B Code, so as to be a basis for rejecting the application under §9 of the I&B Code.

Decision of the NCLT

The NCLT observed that the dispute existed prior to the issuance of demand notice to the Corporate Debtor and held that the claim raised by the Operational Creditor fell within the ambit of disputed claim and therefore, rejected the application in accordance with §9(5)(ii)(d) of the I&B Code. While doing so, the NCLT also relied upon the arbitration notice sent by the Corporate Debtor to the Operational Creditor after it was served with the demand notice.

Decision of the NCLAT

The Operational Creditor preferred an appeal before the NCLAT from the order of the NCLT. A three-judge bench of the NCLAT set aside the decision of the NCLT while observing that:

1. The dispute must be pre-existing. On the date of issuance of demand notice, no arbitration proceeding was initiated or pending, and the arbitration notice was filed after receipt of the demand notice under §8 of the I&B Code. Therefore, the Corporate Debtor cannot rely on arbitration notice to suggest a pre-existing dispute.

2. Apart from the notice invoking arbitration, there was nothing on record to suggest that the Corporate Debtor raised any pre-existing dispute. In the absence of any evidence to suggest that dispute was raised prior to the issuance of demand notice, the dispute cannot be held to be pre-existing by merely showing the arbitration notice.

The NCLAT has relied on the position taken by the Supreme Court in Mobilox Innovations Pvt Ltd v Kirusa Software (P) Ltd^[[1]^] which had observed that "What is important is 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, as the case may be."

Conclusion

The judgment of the NCLAT appears to be a literal interpretation of what was stated by the Supreme Court in the Mobilox judgment. While the judgment will discourage corporate debtors from raising frivolous disputes after a §8 notice has been issued, the emphasis on the timing of the dispute, rather than examination of whether the dispute itself is genuine may result in a situation where even genuine disputes are ignored by the NCLT.

Given this judgment, corporate debtors will now need to be prompt in raising any disputes they have pertaining to claims made on them by Operational Creditors.