Issue: Whether the Arbitration clause inserted in a debt agreement amounts to Existence of Dispute?

Firstly, to start off with, we have to understand what a dispute basically means. In general, Dispute refers to an argument with respect to a particular issue. It means to debate, discuss, quarrel, argue about something.

Section 5(6)1 under IBC defines dispute as-

“dispute” includes a suit or arbitration proceedings relating to–

  • the existence of the amount of debt;
  • the quality of goods or service; or
  • the breach of a representation or warranty

The Insolvency and Bankruptcy Code, 2016 is an act which has an extraordinary and a unique power to override all the other laws. The IBC being a complete code will prevail over all the other acts including Arbitration and Conciliation Act, 1996. In general, Arbitration refers to settling of disputes with the help of an arbitrator outside the courts. In other words, it simply means out of court settlement.

According to the Arbitration and Conciliation Act, 1996-

“Arbitration” means any arbitration whether or not administered by permanent arbitral institution

When does arbitration come into picture under IBC? Arbitration comes into picture when there is a debt agreement and default created. 

IBC defines debt under Section 3(11)2 as follows:

“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt

Section 3(12)3 defines default as follows:

“default”  means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor.

Debt agreement is an agreement which is entered into between the creditor and the corporate debtor. If the corporate debtor commits a default in failure to repay the unpaid debts, the creditor has the right to initiate corporate insolvency resolution process against the corporate debtor. But, what if there is an instance wherein the corporate debtor tries to contend that there is an existence of dispute and the corporate insolvency resolution process cannot be initiated against him by the creditor? In such an instance, Section 8 comes into picture. Section 8 speaks about the insolvency resolution by the operational creditor. If the corporate debtor has committed any default, then, the operational creditor should immediately deliver a demand notice of the unpaid debt through a copy of an invoice demanding payment of the amount which has been defaulted by the corporate debtor. Once the corporate debtor receives the demand notice from the operational creditor, he should reply to the notice within 10 days of the receipt of the demand notice along with a copy of the invoice and bring to the notice of the operational creditor. If the corporate debtor fails to reply to the demand notice delivered to him by the operational creditor or fails to prove existence of dispute, the operational creditor by all means has the right to file an application under section 9.

Section 9 speaks about the filing of an application for corporate insolvency resolution process by the operational creditor. If the operational creditor does not receive any notice of repayment of debt due from the corporate debtor or proof of existence of dispute within 10 days from the delivery of the demand notice, then, the operational creditor may initiate CIRP against the corporate debtor.  

Existence of Dispute:

The dispute that comes into existence must truly exist in fact. It should not be a malafide one.


  1. Before Demand Notice:

This includes two sub-divisions:

  1. Existence of dispute
  2. Illusory or a hypothetical dispute

The first sub-division that is, Existence of dispute was clearly explained and interpreted in one of the reported case:

Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.4 reported in 2018 (1) SCC 353 wherein the Supreme Court held that: –

It is clear, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the Application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties.

 Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. So long as a dispute truly exists in fact and is not hypothetical or illusory, the adjudicating authority has to reject the Application. The Supreme Court in this case held that the definition of ‘dispute’ was an inclusive one and that the present case was not the one where a suit or arbitration proceeding had been filed before the receipt of the demand notice, only in case the dispute must “relate to” the three sub clauses of Section 5(6). 

The second sub-division that is, Illusory or Hypothetical dispute was also interpreted in the same case wherein it says:

Going by the aforesaid test of “existence of a dispute”, it is clear that without going into the merits of the dispute, the Appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defence is not spurious, mere bluster, plainly frivolous. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterising the defence as vague.

It is also important to point out that the Operational Creditor has not filed the affidavit in compliance of provision Section 9(3)(b) of the Code. The Operational Creditor submitted that the Adjudicating Authority has also dismissed the Application for non-compliance of the statutory provision of Sec 9 (3)(b) of the Code. But this cannot be ground of dismissal since the Hon’ble Supreme Court has clarified in Macquarie Bank .v. Shilpi Cable Technologies Ltd5. (2018) 2 SCC 674, para 15 that such affidavit is not mandatory when the Corporate Debtor has responded to the demand notice which the Respondent had in the present case.

In the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.5 S.C

When we come to Section 9(3)(b), it is obvious that an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt can only be in a situation where the corporate debtor has not, within the period of 10 days, sent the requisite notice by way of reply to the operational creditor. In a case where such notice has, in fact, been sent in reply by the corporate debtor, obviously an affidavit to that effect cannot be given.

On perusal of the record, it is crystal clear that about one year before the issuance of demand notice, the Corporate Debtor complained about the quality of service to the Operational Creditor and communicated that he has not provided services after 2015 and also informed that their services are no longer required.

 Hence Proved – there is existence of dispute and hence application u/s 9 shall be dismissed.

Moving on further, it is to be understood that by mere insertion of an arbitration clause, there can be no existence of dispute. 

It is pretty much clear from the previously mentioned instances and cases that if there is an existence of dispute before the demand notice, then the application filed by the operational creditor under Section 9 will be rejected by the court of law.

 If there is an existence of dispute after the demand notice has been delivered to the corporate debtor, the operational creditor by all means can file an application under the court of law.

  1. After Demand Notice:

.

This means that even if there is an insertion of arbitration clause or not in the debt agreement between the corporate debtor and the operational creditor, Arbitration proceedings can be initiated and this does not amount to the existence of dispute.

Instances where there is no existence of dispute:

Mitcon Consultancy and Engineering services Ltd.v.Vittal Corporations6:

In this particular case, conferences were held and telephonically the Respondent had disputed the claim but such submission cannot be accepted in absence of any record relating to existence of dispute. There is an agreement where arbitration clause is present. Mere mentioning of arbitration clause cannot be taken into consideration to hold that there was an existence of dispute. It was held that any dispute subsequent to issuance of demand notice cannot be taken into consideration to reject an application under Section 9 of the code.

Also, in Fairmacs Shipping and transport services Limited v Mrunmaha Agro Foods Private Limited7:

It was held that Dispute arising after the receipt of the demand notice but before filing application of corporate insolvency resolution process is not regarded as a ‘pre-existing dispute’ under the Code.

CONCLUSION :

Thus, it is clearly understood that mere insertion of an arbitration clause in a debt agreement does not amount to existence of dispute. Instead, arbitration clause acts as a remedial measure and protects the parties in case of default by first inflicting arbitration before moving directly to the legal proceeding.

References

1Section 5(6), Insolvency and Bankruptcy Code

2Section 3(11), Insolvency and Bankruptcy Code

3Section 3(12), Insolvency and Bankruptcy Code

4Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. reported in 2018 (1) SCC 353

5Macquarie Bank v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674

6Mitcon Consultancy and Engineering services Ltd.v.Vittal Corporations

About the author

Anusri.S, a student from BMS College of Law- Bangalore is currently pursuing her 5 Year BA LLB integrated programme. She completed her schooling from Carmel School, Padmanabhanagar, and pursued her undergraduate course from Jain college VV Puram-Bangalore. The reason for her choosing law was that she found it to be a very interesting and challenging career. Her passion is Music. She is a Carnatic vocalist and has been pursuing music since the age of three. She has completed her Senior grade level in music and has also won many awards and given performances at various levels. She, being a fitness freak practices yoga on a daily basis. Her other hobbies include reading and cooking. She wants to pursue further studies and aims to become a Corporate lawyer.

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