Supreme Court Judgement on ‘Existence of Dispute’ under Insolvency and Bankruptcy Code

‘Existence of Dispute’ in case of application by Operation Creditor

This blog is in continuation to our earlier blog dated 15 September 2017 which was titled as “Dispute” is heavily disputed under Insolvency and Bankruptcy Code (IBC) and written about the NCLT Order.  https://novojuris.com/2017/09/15/dispute-is-heavily-disputed-under-insolvency-and-bankruptcy-code/ On appeal, Supreme Court has weighed in on “existence of dispute” under IBC.  Read on.

Background:

Kirusa Software Private Limited (Kirusa) had filed an application before the National Company Law Tribunal (NCLT), Mumbai for initiation of Corporate Insolvency Resolution Process (CIRP) of Mobilox Innovations Private Limited (Mobilox) under Insolvency and Bankruptcy Code, 2016 (the Code).  The NCLT, Mumbai dismissed Kirusa’s application on the ground that Mobilox has issued a Notice of Dispute. An appeal against the NCLT order was filed by Kirusa before the National Company Law Appellate Tribunal (NCLAT). The NCLAT allowed Kirusa’s appeal on the ground that Mobilox’s reply to the demand notice does not raise any dispute within the meaning of Section 5 (6) or Section 8 (2) of the Code, that Mobilox has disputed the payment merely on “some or other account” and that its defence was “vague, got up and motivated to evade the liability”. Accordingly, the NCLAT had set aside the order of NCLT, Mumbai and remitted the case to it for consideration. Mobilox has appealed the NCLAT order with the Supreme Court of India (the Court) to set aside the order of the NCLAT highlighting that there is an “existence of dispute” and therefore the CIRP application has to be dismissed.

Excerpts of the Judgement by the Supreme Court

While passing an order by the Court in relation to aforementioned case in determining “existence of a dispute” occurring in Section 8(2)(a) of the Code, the Court uplifted Mobilox’s appeal holding that there was a dispute in existence which was sufficient to withhold and dismiss the CIRP application filed by Kirusa with the NCLT, Mumbai. Few considerations by the Court before its verdict is discussed below:

Existence of Dispute prior to the Demand notice issued by the Operational Creditor

The Court contented that the CIRP applications filed by operational creditors should be dismissed, in case if it is corporate debtor is able to prove that the existence of the dispute and/or the suit or arbitration proceeding must be “pre-existing” i.e. it must exist before the receipt of the Demand Notice.

Test to be tried by the adjudicating authority and ambit of the “Dispute”

The NCLT, while admitting the CIRP application is only required to identify is whether there is a plausible contention which requires further investigation and that the “dispute” is not a deliberate legal argument or an assertion of fact unsupported by evidence. The Court also contended that, the NCLT while determining whether dispute exists or not, it is not required to satisfy itself that the defence is likely to succeed or examine the merits of the dispute. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

One of the arguments made by Kirusa was that since Non-Disclosure Agreement executed between Kirusa and Mobilox does not fall under any of the three sub-clauses of Section 5(6), no “dispute” is there on the facts of this case. However, the Court rejected the argument and said that the intention of legislature was to make the definition of “dispute” to be an inclusive one and therefore, the word “includes” substituted the word “means” which occurred in the first Insolvency and Bankruptcy Bill. The “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6). The correspondence between the parties would show that on 30 January 2015, the appellant clearly informed the Kirusa that they had displayed the Mobilox’s confidential client information and client campaign information on a public platform which constituted a breach of trust and a breach of the NDA between the parties. They were further told that all amounts that were due to them were withheld till the time the matter is resolved. Basis this Mobilox in response to the demand notice, disputed in detail in its reply dated 27 December, 2016, which set out the e-mail of 30th January, 2015. Going by the test of “existence of a dispute”, the Court held noted that without going into the merits of the dispute, the Mobilox had raised a plausible contention requiring further investigation which is not a deliberate legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. 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 characterizing the defense as vague, got-up and motivated to evade liability.

Conflict between “AND” – “OR” in Section 8(2)(a) of the Code

Section 8(2)(a) of the Code reads that the corporate debtor in within 10 days from the date of receipt of Demand Notice from operational creditor, had to bring to the notice of operational regarding the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute. In this case, the Court has highlighted that the word ‘and’ occurring in Section 8(2)(a) must be read as ‘or’ and also highlighted that the legislative intent and the fact that it will be inconsistent if it is not read as ‘or’. Further, one may note that if the aforementioned section is read as ‘and’, then the corporate debtor could stave off the CIRP only if the dispute is already pending in a suit or arbitration proceedings and not otherwise before the demand notice is received from operational creditor. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court. This would cease the right of the corporate debtor available under the said section.

Timelines under the I&B Code – Mandatory

The Court held that the timelines fixed under the Code are intrinsic to the CIRP and are important to its effectiveness. It pointed out that the intention of the legislature is to speedy CIRP and both the NCLT and NCLAT shall be adhere to the timelines prescribed under the Code. The Court, referred to the judgment delivered in Innoventive Industries Ltd. v. ICICI Bank & Anr, wherein, it has clearly laid down that strict adherence of the timelines is of essence to both the triggering process and the insolvency resolution itself. It also stated that one of the principal reasons why the Code was enacted was because liquidation proceedings went on perpetually, thereby damaging the interests of all stakeholders and in which case the management would continue to hold on to the company without paying its debts. Therefore, Court directed both the NCLT and the NCLAT to keep in mind this principal objective sought to be achieved by the Code and to strictly adhere to the time frame within which they are to decide matters thereunder.

Considering above-mentioned points, the Court has set aside the order passed by the NCLAT and rejected the application made by the Kirusa for CIRP.

Conclusion

Since the Code become effective, there were ambiguity and the conflicting interpretation of Dispute and the Existence of Dispute. With the intervention of the Court, there is a clear instruction to the NCLT and NCLAT on the tests to be adopted while entertaining the CIRP application from the operational creditor with reference to the “existence of dispute” and it is hoped that the uncertainties and ambiguities in the Code, would get settled. However, the wide meaning that has been accorded to the term ‘dispute’ may become a shackle around the necks of operational creditors.

It is also pertinent to note that with the clear instruction of the Court in adhering to stricter timelines, it can be expected that the NCLT and NCLAT would take note of the principal objective of the Code as discussed above and completion of CIRP process would be expected within the timeline provided under the Code.

Author: Ashwin Bhat is a Senior Associate with NovoJuris Legal

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