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[2018] 99 taxmann.com 147 (Article)

[2018] 99 taxmann.com 147 (Article)

Date of Publishing: October 20, 2018

Dispute – An IBC perspective

MANDAR D. RANE
CS/LLB

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 (P.) Ltd. v.
Kirusa Software (P.) Ltd. [2017] 85 taxmann.com 292/144 SCL 37".

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 v. Jai Lakshmi Solvents (P.) Ltd.; 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") [2018] 94 taxmann.com 3/147 SCL 522 (NCL - AT)

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 fraudently 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
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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.

Comments

♦ The Apex Court in para 18 of ICICI Bank Ltd. v. APS Star Industries Ltd. [2010] 7 taxmann.com
72/104 SCL 37 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 hypothecatee. 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 v. Central Bank of India & State Bank of India [2018] 91 taxmann.com 69 (NCL - AT)

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 Starlog Enterprises Ltd.
v. ICICI Bank Ltd. [2017] 82 taxmann.com 189/142 SCL 1 (NCL - AT) 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

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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 Innoventive Industries
Ltd. v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625 (SC) 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

Comments

♦ 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 ICICI Bank Ltd. v. Essar Power
Jharkhand Ltd. [2018] 93 taxmann.com 47 (NCLT - New Delhi) 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.) Ltd. v. Sardhana Papers (P.) Ltd. [2018] 94 taxmann.com 183/148 SCL 211 (NCLT -
All.)

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

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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.

Comments

♦ 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 judgement
The Managing Director, Dunlop India Limited v. S.G. Krishnakumari [1993] 1 MLJ 115 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. (supra) 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.

Conclusion

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.

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