Ever-Expanding Horizons of ‘Disputed Debts’ under the IBC: Analysis of the Transmission Corp. Case
[Shivani Shenoy and Yashwardhan Rajawat are fourth-year students at Symbiosis Law School, Pune.]
On October 23, 2018, the Supreme Court in Transmission Corporation of Andhra Pradesh Ltd. v Equipment Conductors and Cables Ltd. (Civil Appeal No. 9597 of 2018) (Transmission Corporation) set aside an order of the National Company Law Appellate Tribunal (NCLAT) and held that the National Company Law Tribunal (NCLT) was correct in rejecting an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by an operational creditor for initiation of a corporate insolvency resolution process (CIRP) against the corporate debtor when the debt was disputed under Section 9(5)(ii)(d) of the IBC. More importantly, it established that a dispute would be said to exist even after an award that adjudicated the claim has been set aside and such order has attained finality.
The appellant debtor initiated 82 claims against the respondent creditor in an arbitral council (Council). The Council found that claims under first 57 invoices were barred by limitation and no amount could be awarded against them. An award was passed against the latter invoices in favor of the respondent. The district court set aside the award when hearing an application under Section 34 of the Arbitration and Conciliation Act, 1996 and remanded the case for fresh determination. An appeal by the appellant debtor from an order of execution passed by the District Court, Hyderabad against the award led the court to pass an order that there was no enforceable award. The respondent creditor then filed an application to the NCLT, Hyderabad seeking initiation of CIRP against the appellant debtor. The NCLT dismissed the application on grounds that disputes existed in the adjudication of debt. The NCLAT, on appeal, passed an order that CIRP maybe initiated on merits, but gave the appellant an opportunity to settle the claims, failing which it would pass an order to initiate CIRP. A civil appeal against the impugned order was filed in the Supreme Court of India challenging the order of the NCLAT.
The primary question that arose for consideration in Transmission Corporation was whether a ‘dispute’ according to the meaning ascribed to it under Section 9(5), IBC exists around the claims.
The Supreme Court allowed the appeal and confirmed the order of the NCLT that the claim was barred by a dispute. Accordingly, it set aside the order of the NCLAT, admonishing it for lack of a well-reasoned order. In doing so, it relied squarely on the ratio of the judgment of the Supreme Court in Mobilox Innovations Pvt. Ltd. v Kirusa Software Pvt. Ltd. [(2018) 1 SCC 353] (Mobilox) to reiterate that the IBC is not a substitute for a recovery forum and that it cannot be invoked when a real dispute exists. Further, it took recourse to the steps laid down in Mobilox where the court laid down that all an adjudicating authority must see is whether there is a plausible contention which requires further investigation, and that the dispute is not a patently feeble legal argument or based on an assertion of facts unsupported by evidence (Plausible Contentions Test).
The judgment of the Supreme Court, coming after a long line of litigation, holds that the claims of the respondent creditor were disputed under Section 9(5) of the IBC, but simply fails to put its finger on what the dispute is and rather states that the order of the NCLT is justified. Ironically, this lack of a clear determination comes at the backdrop of the Supreme Court reprimanding the NCLAT for an order deficient in reasoning.
The NCLT order as confirmed by the Supreme Court also failed to give satisfying answers. It held that the claims regarding the first 57 invoices had been settled but those regarding the other invoices had been disputed. However, it did not go so far as to explain why the claim had been disputed. The confusion of the tribunal becomes evident in the roundabout lingo employed. The NCLT is quoted saying – “there is a valid dispute, rather no valid dispute as issue in question was substantially dealt with by various courts” – before finally rejecting the application for non-fulfillment of conditions under Section 9(5)(i) of the IBC.
Despite affirmation by the Supreme Court of the NCLT’s order, the two adjudicating authorities seem to be resonating different rhythms. The NCLT found that the first 57 invoices were not disputed but the others were. However, the Supreme Court has taken the tone throughout as though finding a dispute in the first 57 invoices, while categorically declaring that they were not concerned with the other invoices.
The scope of what constitutes a ‘dispute’ has been expanded and narrowed over time. In Madhusudan Godhandas v Madhu Woollen Industries Pvt. Ltd., [(1972) 2 SCR 201], the court held that a petition presented on the ground that a company is unable to pay its debts can only be dismissed if the debt is a bona fide disputed debt. This means that the defense of the debtor ought to be genuine, substantial and likely to succeed on a point of law. While the Insolvency and Bankruptcy Bill, 2015 still required the dispute to be bona fide, the IBC, as we know it today, omits the phrase altogether. In fact, in Macquarie Bank Ltd. v Uttam Glava Mettalics Ltd. [C.P. (IB) No. 22/Chd/Hry/2017], the tribunal held that even if a contention or disagreement regarding the parameters laid down in Section 5(6) of the IBC is raised in reply to the demand notice sent by the operational creditor, the same would suffice to attract the provisions of Section 5(9)(ii) of the IBC.
In Mobilox, the Supreme Court discussed the scope of ‘dispute’ by holding that even a disagreement regarding the payment of debt which arose on account of withholding payments as a result of breach of a non-disclosure agreement is a dispute even though no legal proceeding has been initiated towards recovery of such debt. In Transmission Corporation, the Supreme Court has gone one step further and effectively held that even if an award that has determined claims is set aside, it will still constitute a dispute under the IBC. The significance of this judgment read with the Mobilox one is that the scope of ‘disputed debt’ has been further broadened thanks to the Plausible Contentions Test.
The judgment of the Supreme Court in this case read with the NCLT order also gives us clarity that when claims are barred by limitation, they do not constitute a ‘dispute’. This is consistent with the position held by the Supreme Court in K. Kishan v Vijay Nirman Company Pvt. Ltd. [2018 (10) SCALE 256] where it was remarked by the court that only when the primary statutory period of limitation and the additional discretionary period pursuant to passing an award has concluded can a CIRP be initiated even if a belated application is filed afterward. The judgment gives further clarity on the position that a dispute which culminates in the first stage of the proceedings continues even after the award until the final adjudicatory process under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 have taken place. The judgment in K. Kishan also explained that in the event that a dispute becomes barred by limitation on account of being filed in a court without jurisdiction, no CIRP may be initiated until a decision is rendered on the application under Section 14 of the Limitation Act, 1963 which the parties may have advanced.
The concept of a ‘dispute’ under section 9(5)(ii)(d) of the IBC, earlier confined to a ‘dispute-in -law’, is now becoming increasingly associated with a ‘dispute-in-fact’, as a result of the Plausible Contentions Test. While this broad interpretation of a dispute exists so that operational creditors do not initiate CIRP for extraneous claims, this slippery slope created will impede the CIRP from being initiated until all appeals, reviews and revision mechanisms have been exhausted or the corporate debtor itself is willing to initiate CIRP and extend full cooperation.
This judgment of the Supreme Court in Transmission Corporation seems to be defeating the purpose of the IBC in its quest to fulfill its purpose. While defining ‘dispute’ broadly, the Supreme Court shoos disputed debts away from the IBC mechanism with an intent to maintain its streamlined objective. At the same time, there is a real apprehension that such a broad interpretation of ‘dispute’ will impede the speedy resolution of claims, since a hostile corporate debtor may keep litigation flowing infinitely so as to not fall into the net of the IBC.