NCLT orders on disputed debt create ambiguity for insolvency professionals

Two different verdicts left ambiguity on how the term 'dispute' was to be interpreted

Two judgments by the National Company Law Tribunal (NCLT), Mumbai, have left insolvency professionals confused as to what constitutes disputed debt. 

In one case, the NCLT, Mumbai, ruled that a debt would be taken as disputed only if a suit was filed in court before insolvency proceedings were initiated. In another case, it recognised a debt as disputed even without a case being filed in a court.

Essar Projects, an operational creditor, moved the NCLT against MCL Global Steel. The debtor challenged the insolvency proceedings on the ground that the amount of debt was disputed. 

The tribunal upheld the petition for insolvency, observing there was no pre-existing dispute, as no legal proceedings were initiated against the creditor. It also held that the debtor raised the dispute after a demand notice was served on it by the creditor. 

The same view was taken by the NCLT, Mumbai, in the case of Deutsche Forfait versus Uttam Galva Steel.

“The ability of a corporate debtor to insulate itself from an application for insolvency resolution by an operational creditor hinges on the pre-existence of a dispute in relation to the debt,” said an insolvency expert at Khaitan & Co.

He said the NCLT had made it clear that such a dispute must be validated by raising the issues in dispute before a court or arbitral tribunal prior to the date of receipt of a demand notice. Merely contesting the amount in question did not constitute a “dispute” within the meaning of the code.

But, the NCLT in a plea for insolvency filed by creditor Kirusa Software against debtor Mobilox Innovations, observed the amount owed was disputed although there was no prior suit in court before the insolvency petition was filed. It dismissed the creditor’s plea.

Insolvency professional Nilesh Sharma said there was ambiguity on disputes between operational creditors and debtors. 

Misha, partner at Shardul Amarchand Mangaldas, said there was ambiguity on how the term “dispute” was to be interpreted.