In this article, Aarthi Sashi, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the Pendency of Proceedings Under COPRA in Regard to Initiation of Insolvency Proceedings.
The Insolvency and Bankruptcy Code, 2016 (IBC or Code) which has been in existence for over a year lays down a comprehensive framework for conducting efficient insolvency and bankruptcy proceedings against corporate debtors. Of the several noteworthy provisions under the Code, an important aspect that cannot go unaddressed is, how proceedings under the IBC can be harmonized vis-à-vis proceedings under other legislation. This article seeks to do just that by highlighting the role that pending disputes under the Consumer Protection Act, 1986 (COPRA or the Act) would play in initiating a resolution proceeding under the IBC.
Nature of Consumer Claims: Whether It Is Financial or Operational Debt?
The first and foremost question to be determined for the purpose of maintainability of a Corporate Insolvency Resolution Process (CIRP) is whether the creditor filing one would be a financial creditor or an operational creditor.
A financial creditor has been defined to mean a person to whom a financial debt is owed. A financial debt has been defined to include money borrowed against payment of interest, amount raised by an acceptance credit facility or by stocks, bonds, debentures or similar instruments, liability in respect of a hire purchase contract, receivables, amounts under other transactions having commercial effect of borrowing, counter indemnity obligation, liability in respect of a guarantee or indemnity and the like. Therefore, by a bare perusal of the provisions, it can be inferred that a CIRP initiated pursuant to a debt in the nature of consumer-related aspects does not fall within the nature of claims encompassed in the definition above.
Another type of creditor who can initiate a CIRP under the IBC is an “operational creditor”. An operational creditor under the IBC is someone to whom an operation debt is owed. Further, an operational debt has been defined to mean inter alia dues with regard to the provision of goods or services.
Distinction between a Financial Creditor and an Operational Creditor
The Final Report of the Bankruptcy Law Reforms Committee (see here) in paragraph 5.2.1 drew out the distinction between an operational creditor and financial creditor.
A financial creditor is one whose relationship with the entity is a purely financial contract such as loans or debt security. The relationship of an operational creditor with the entity, however, is said to arise out of a transaction on operations. In the event that a creditor’s relationship with the entity stems from both i.e., a financial contract and a transaction on operations, the creditor would be a financial one to the extent of a financial debt and an operational one to the extent of an operational debt. This distinction was appreciated and applied by the National Company Law Tribunal (NCLT) Principal Bench, Delhi in the case of Col. Vinod Awasthy v. AMR Infrastructure Limited(see here).
Having laid down the contours differentiating an operational creditor from a financial creditor, it becomes essential to identify the nature of debt that consumer-related issues raise. The subject matter of consumer issues is essentially in the nature of goods and services. This can be evidenced by the application clause in the Consumer Protection Act, 1986 which provides that the Act applies to all goods and services. Moreover, any relationship in consumer claims essentially arises out of a transaction on operations. Therefore, it is safe to conclude that consumer-related debts are in the nature of an operational debt and not a financial one.
Consumer Disputes vis-à-vis IBC Proceedings
Given that consumer disputes are in the nature of operational debts, an application for CIRP would lie under Section 9 in accordance with Section 8 of the Code. Section 8 unlike Section 7 (which applies to financial creditors) provides that within ten days of demand notice served upon the corporate debtor, the existence of a “pending dispute” must be brought to the notice of the operational creditor which would then serve as a bar to an institution of IBC proceedings.
Pursuantly, Section 9(1) provides that an application for CIRP can be filed within ten days of providing notice to the corporate debtor only if the notice of dispute has not been filed. Accordingly, Section 9(5)(ii)(d) provides that the application under Section 9 ought to be rejected if notice of dispute has been received by the operational creditor.
Definition of ‘Dispute’ under IBC
It now becomes pertinent to discuss what the term “dispute” encompasses to identify if consumer disputes can serve as a bar to the institution of CIRP. “Dispute” has been defined under the IBC inclusively to include a suit or arbitration proceeding pertaining to the quality of goods or services, existence of debt or breach of representation or warranty.
As discussed earlier, a dispute in the nature of quality of goods and services comes within the ambit of consumer protection laws. To substantiate the same, reference shall be made to the COPRA. Section 2(f) defines defect in goods and section 2(g) pertains to the deficiency in services, both of which include in its sweep any fault, imperfection or shortcoming in inter alia quality of the goods and services.
Further, “complaint” under the Act has been defined to include defects in goods and deficiency in services. The power to deal with such complaints has been bestowed upon the District Forum, State Commission and National Commission based on their respective pecuniary jurisdictions.
Therefore, COPRA provides a well-equipped mechanism to deal with issues that arise out of the quality of goods and services and if a claim so arises, can fall within the ambit of “dispute” under the IBC. The following section containing notable judgments further substantiate this point.
Notable Judgments: Judicial Conundrum
Several noteworthy judgments in the context of IBC vis-à-vis other laws including Consumer Protection Laws are to be discussed to holistically understand the concept.
- In Kirusa Softwares Pvt. Ltd. v. Mobilox Innovations Pvt. Ltd. an important judgment warrants discussion in this regard (see here) where CIRP was sought by operational creditor Kirusa Software against corporate debtor Mobilox Innovations for a claim of debt which was disputed by the debtor on the ground that the creditor disclosed confidential information constituting the breach of trust. The application was dismissed by the NCLT. An appeal was filed to the National Company Law Appellate Tribunal (NCLAT) which was subsequently tasked with determining the scope of the terms “dispute” and “the existence of dispute”.
- The NCLAT observed that the intention of the Legislature was to raise a dispute only with sufficient particulars to that effect. Moreover, simply showing a record of the dispute would not be enough but the dispute must relate to matters enumerated in section 5(6) and the same must be pending prior to the service of notice on the corporate debtor.
- The NCLAT further unraveled the intention of the Legislature by reading the definition of “dispute” and “operational debt” together and holding that limiting the ambit of “dispute” to just a suit or arbitration proceeding would be inconsistent with it.
- Pursuantly, the NCLAT ruled that the terms “dispute” and “the existence of dispute” cannot be construed narrowly so as to be limited to pending proceedings within the ambit of suits or arbitral proceedings alone. The inclusive nature of the clause must be read as “means and includes” and must include proceedings pending before inter alia labour courts, tribunals, and consumer courts. This must be the meaning accorded while reading Section 5(6) with Section 8(2) of the IBC.
- The wide interpretation provided to the meaning of dispute to include disputes pending before every judicial authority is also to prevents the multiplicity of proceedings.
- An appeal filed to the Supreme Court further upheld the position taken by the NCLAT (see here). This position was applied and upheld in the case of Philips India Limited v. Goodwill Hospital and Research Centre Ltd. and Ors (see here).
- The judicial authorities have taken a step further in this regard. The NCLT, Principal Bench, New Delhi in Vinod Awasthy v. AMR Infrastructures Ltd. (see here) and Mukesh Kumar and Ors. v. AMR Infrastructures Ltd. (see here) has held that an application under section 9 and the definition of an operational debt cannot be interpreted so wide as to include those applicants who have a remedy available under COPRA and general law of the land.
- This principle was further applied and upheld in Satish Mittal v. Ozone Builders & Developers Pvt. Ltd. (see here).
Judicial precedents taking a twist
- On the other end of the spectrum, providing a distinct view to the position of law elaborated above is the judgment of NCLT, New Delhi on February 16, 2018, in the case of Pawan Dubey and Ors. v. J.B.K. Developers Pvt. Ltd. (see here).
- The factual matrix, in this case, pertains to a CIRP initiated by the Applicant against the Respondent in regard to alleged non-payment of assured returns on a commercial shop as against the builder-buyer agreement. One of the contentions raised by the Respondent was that the applicants had preferred two consumer complaints which were sub-judice and by filing a CIRP application, they were engaging in forum shopping.
- Negating this contention, the NCLT firstly held that when two remedies are available under law, one should not be taken as operating in derogation of another. Secondly, they held that it is a settled law that pendency of proceedings under the COPRA does not serve as a bar to the initiation of CIRP on account of the non-obstante clause contained in Section 238 of the IBC. The objection taken by the Respondent company on the existence of a “dispute” due to the pendency of complaints before the consumer forum was dismissed owing to the fact that the case had been filed under section 7 and not under section 9 to attract the defence of the existence of the dispute.
- Section 238 of the IBC provides that the provisions of the Code shall prevail over any other law in force in the event of an inconsistency. Inconsistency would mean mutual repugnancy where acceptance of one would imply abrogation or abundance of the other.
- Section 3 of the Consumer Protection Act provides that the provisions of the Act are in addition and not in derogation of any other law. Therefore, there exists no repugnancy or inconsistency between the two statutes. Moreover, it is the interpretation of the provisions of IBC [section 5(6) and section 8(2) in consonance with case laws] that provide that pendency of disputes before consumer courts serve as a bar to initiation of CIRP. Such an interpretation is not derived out of the COPRA and hence cannot be interpreted to lead to a repugnancy.
- Moreover, the presence of a provision holding that the existence of a dispute serves as a bar to the initiation of CIRP itself curbs the practices of forum shopping and multiplicity of proceedings in limine.
The presence of the terms “quality of goods and services” as a form of dispute that could serve as a restrict the initiation of CIRP by an operational creditor, has an inextricable link with COPRA as it predominantly deals with that as the subject matter. This, in addition to the fact that judicial authorities have interpreted the term “dispute” to be wide and inclusive as to include proceedings before consumer fora as well, only seeks to further reinforce this position. Although it has been held that forum shopping cannot be used as a defence against the initiation of CIRP, reading of section 5(6) with section 8(2) essentially curbs just that. Hence, consumer disputes do indeed serve as a bar to the initiation of CIRP.
 Insolvency and Bankruptcy Code 2016 s. 5(7)
 Insolvency and Bankruptcy Code 2016 s. 5(8)
 Insolvency and Bankruptcy Code 2016 s. 5(20)
 Insolvency and Bankruptcy Code 2016 s. 5(21)
 Insolvency and Bankruptcy Board of India, The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design. Available from: http://ibbi.gov.in/BLRCReportVol1_04112015.pdf [29 April 2018]
  141 SCL 70
 The Consumer Protection Act 1986 s. 1(4).
 Insolvency and Bankruptcy Code 2016 s. 8(2)
 Insolvency and Bankruptcy Code 2016 s. 5(6)
 The Consumer Protection Act 1986 s. 2(c)(ii)
 The Consumer Protection Act 1986 s. 2(c)(iii)
 The Consumer Protection Act 1986 s. 11
 The Consumer Protection Act 1986 s. 17
 The Consumer Protection Act 1986 s. 21
  142 SCL 310
 Kirusa Softwares Pvt. Ltd v. Mobilox Innovations Pvt. Ltd.,  142 SCL 310 (para. 25)
 Kirusa Softwares Pvt. Ltd v. Mobilox Innovations Pvt. Ltd.,  142 SCL 310 (para. 29)
 Kirusa Softwares Pvt. Ltd v. Mobilox Innovations Pvt. Ltd.,  142 SCL 310 (para. 35)
 Kirusa Softwares Pvt. Ltd v. Mobilox Innovations Pvt. Ltd.,  142 SCL 310 (para. 26)
 Mobilox Innovations Pvt. Ltd. v. Kirusa Softwares Pvt. Ltd.,  SCC 1154
  141 SCL 70
  141 SCL 427
  143 SCL 32
 Basti Sugar Mills Co. Ltd. v. State of U.P. & Anr., AIR  SC 262