The Section 5(6) of the Insolvency & Bankruptcy Code gives a very restrictive meaning to the term 'dispute'. It gives an inclusive definition to the term in the following words-
“..include a suit or arbitration proceedings relating to – (a) the existence of the amount of the debt; (b) the quality of the goods or service; or (c) the breach of a representation or warranty”
Upon scrutiny of this definition, the intent of the legislature seems clear in limiting the scope of the term 'dispute', to only mean the pendency of a proceeding, be it either a suit or an arbitration. Even if it is argued that the definition of 'dispute' under the Code can be said to be inclusive, it cannot extend to a situation of mere denial of the claim.
The following two legislations make an attempt at explaining the scope of Section 5 (6) of the Code:
Essar Projects India Ltd. ("Essar") v. MCL Global Steel Private Limited
The controversy arose before the Mumbai Bench of National Company Law Tribunal in the background of a contract wherein Essar was appointed to execute certain civil work and other related works. After completion of the work, Essar raised certain invoices and the same remained unpaid despite repeated reminders.
Having left with no choice, the creditor issued a demand notice under section 8 of the Code. The debtor disputed the contents and the amount stated in the said notice due to disagreement regarding the quality of construction, timeline, etc. and enforceability of the contract. A revised notice was thereafter sent by the creditor and consequently, an insolvency petition was filed under section 9 of the Code.
The debtor argued before the Adjudicating Authority that there was a 'dispute' in existence and therefore a petition under section 9 of the Code cannot be maintained. The creditor was quick to point out there were no proceedings pending before any authority and it was for the first time that the debtor raised a dispute in reply to the notice sent by the Creditor under section 8 of the Code.
Rejecting the defense, the Hon'ble Bench categorically held that the term dispute in existence means and include "raising a dispute in a court of law or arbitral tribunal before receipt of notice under section 8." Accordingly, the Hon'ble Bench admitted the petition.
Kirusa Software Private Limited v. Mobilox Innovations Private Limited
The case discussed the important issue of "dispute" and " the existence of dispute" under the Code. The NCLAT discussed the issue at length and remitted the case back to the Tribunal. In the instant case, the creditor raised certain invoices related to software services it provided to the debtor and subsequently on non-payment a demand notice under section 8 of the Code was sent.
The debtor disputed the debt in its reply. The Hon'ble Appellate Tribunal, in light of the Legislative intent, upon reading of the code, opined that the term "dispute" ought to be given its natural and ordinary meaning.
The width of the expression "dispute" should cover all disputes on debt, default etc. and not be limited to only two ways of disputing a demand made by the operational creditor, i.e. either by showing a record of pending suit or by showing a record of a pending arbitration.
The Hon'ble Appellate Tribunal further reasoned that once parties are already before any judicial forum/authority for adjudication of disputes, notice becomes irrelevant and such an interpretation renders the expression 'existence of a dispute, if any, in sub-section (2) of Section 8, otiose. It was held that the definition of the dispute is not exhaustive but illustrative and the same ought to be given a wide and broad interpretation.
By extending the settled principle of ejusdem generic, it appears to be clear that the word 'includes' can, at best, be extended only to any pending legal proceedings other than a pending suit or arbitration proceedings.
Though 'notice of dispute' has not been defined in the Code, it cannot be extended to mean a mere notice, inter alia, denying the claim. Any denial to a demand notice must necessarily raise a 'dispute' in terms of Section 5(6) of the Code. In conclusion, “dispute” is Genesis, the pendency of suit or arbitration is the species.
Though the word “includes” is normally considered as extensive, yet there are situations where “includes” has to be inferred as “means” to enable the courts to solve the purpose of litigation.
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