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COLUMN: SC settles meaning of “dispute in existence” under Insolvency and Bankruptcy Code

The Supreme Court of India (“Supreme Court”) in the case of Mobilox Innovations Private Limited (“Mobilox”) v. Kirusa Software Private Limited (“Kirusa”) has settled what do we mean by “dispute in existence” under Insolvency and Bankruptcy Code, 2016 (“Code”). This judgment clears the air for operational debtors who have genuinely disputed operational debt but have not initiated legal proceedings. This is to say that the dispute has not been taken to the level of court proceedings or arbitration.

The structure of this article is an examination of the facts of the case, analysis of the provisions of Code, contentions of parties at NCLT, NCLAT, reasoning of NCLT, NCLAT and Supreme Court and finally our own take on the issue.

Facts

“Nach Baliye” is a popular Television Program on Star TV in India. In this program, the successful performer is selected on various grounds including tele-voting by viewers. Star TV awarded the contract to Mobilox to conduct tele-voting for this show. Mobilox in turn sub-contracted it to Kirusa with purchase orders between October and December, 2013. A very significant fact to this case is that a non-disclosure agreement (“NDA”) was executed between the parties on 26th December, 2014 w.e.f. 1st November, 2013.

For tele-voting for the show, Kirusa set up toll free telephone numbers across India, through which the viewers of the program could cast their votes. For this purpose, a software was customized by Kirusa, who then coordinated the results and provided them to Mobilox.

As Kirusa obtained toll free numbers from telephone operators in terms of the purchase orders, Mobilox was liable to make payment of rentals for the toll free numbers, as well as primary rate interface rental to the telecom operators. Kirusa provided the requisite services and raised monthly invoices between December, 2013 and November, 2014 – the invoices were payable within 30 days from the date on which they were received. Kirusa followed up with Mobilox for payment of pending invoices through e-mails sent between April and October, 2014.

Notice

As noted earlier, NDA was executed between parties on 26th December, 2014 w.e.f 1st November, 2013; on 30th January, 2015 Mobilox informed Kirusa that they are withholding payments against invoices raised as it(Kirusa) has breached NDA by disclosing on their webpage that they had worked for the “Nach Baliye” program run by Star TV. Series of correspondence was exchanged between the parties which finally culminated in a notice dated 12th December, 2016 sent under Section 271 of the Companies Act, 2013. With the Code in place, winding up Petitions for debts no longer comes under the Companies Act. Kirusa sent a demand notice dated 23rd December, 2016 for a total of Rs.20,08,202.55 under Section 8 of the Code. Mobilox responded to this demand notice vide email dated 27th December, 2016 that as there exists serious and bonafide dispute between parties the notice issued was a pressure tactic. It further clarified that nothing was payable inasmuch as the respondent had been told way back on 30th January, 2015 that no amount will be paid to the respondent since it had breached the NDA.

NCLT

On 30th December, 2016 Kirusa filed an application before the National Company Law Tribunal (“NCLT”) under Sections 8 and 9 of the Code. In the application it stated that operational debt of Rs.20,08,202.55 was owed. NCLT found that the Petition was hit by Section 9(5)(ii)(d) of the Act.

S.9(5)(ii)(d) provides that:

“S.9 (5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

(i)….

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or…”

In this case, admittedly notice of dispute dated 27th December, 2016 was received by Kirusa. Thus, it is hit by S.9(5)(ii)(d) of the Code. This application was dismissed by NCLT on 27th January, 2017 observing that,

“On perusal of this notice dated 27.12.2016 disputing the debt allegedly owed to the petitioner, this Bench, looking at the Corporate Debtor disputing the claim raised by the Petitioner in this CP, hereby holds that the default payment being disputed by the Corporate Debtor, for the petitioner has admitted that the notice of dispute dated 27th December 2016 has been received by the operational creditor, the claim made by the Petitioner is hit by Section (9)(5)(ii)(d) of The Insolvency and Bankruptcy Code, hence this Petition is hereby rejected.”

NCLAT

Kirusa approached National Company Law Appellate Tribunal (“NCLAT”) against order dated 27th January, 2017 passed by NCLT. In this appeal contention of Kirusa was that mere disputing a claim of default of debt cannot be a ground to reject the application under Section 9 of Code, till the corporate debtor refer any dispute pending.

Thus, Kirusa’s contention was that until and unless corporates refer dispute for adjudication it is not a dispute which will lead to rejection of application u/s 9 of the Code. The only question before NCLAT was to determine what is meant by “dispute” and “existence of dispute” for the purpose of determination of a petition under section 9 of the Code.

The NCLAT allowed the appeal of Kirusa vide order dated 24th May, 2017. It remanded matter to NCLT. The NCLAT came to the conclusion that the notice of dispute does not reveal a genuine dispute between the parties. It further observed that the claim of dispute was vague and was motivated to evade the liability. Coming to various provisions of Code, NCLAT held that it was the duty of Adjudicating Authority to ascertain that the facts raised were genuine dispute .On term ‘dispute’ NCLAT gave categorical finding that the term dispute as defined u/s 5(6) of the Code is inclusive and not exhaustive. It must be given wide meaning. Thus ‘dispute’ is not limited only to a pending suit or a pending arbitration.

Coming to the expression ‘existence of a dispute, if any’ in Section 8(2), NCLAT held that the words used are disjunctive from ‘record of proceedings of pendency of the suit or arbitration proceedings’. It applied Mithlesh Singh Vs. Union of India, (2003) 3 SCC 309 and observed that the Legislature is deemed not to waste its words or to say anything in vain. NCLAT was of the view that notice of dispute fails to raise dispute within the meaning of S.5(6) and S.8 of the Code. Relying on S. 9(3)(c) of the Code it held that the requirement was that independent operational creditor has to submit a certificate from the financial institution or Schedule Bank or public financial institution which acts as a safeguard and prevents the operational creditor to bring a non-existence or baseless claim.

Commenting on NCLT, it observed that it is required to examine before admitting or rejecting an application under Section 9 whether the ‘dispute’ raised by corporate debtor qualify as a ‘dispute’ as u/s 5(6) of the Code and whether notice of dispute given by the corporate debtor fulfills obligations u/s 8(2) of the Code. It held that in this case NCLT acted mechanically.

Supreme Court

Mobilox appealed to Supreme Court against the judgment and order passed by NCLAT.

Contentions of appellant Mobilox

The Contentions of Mobilox were:

  1. That the application should have been dismissed on the ground that the operational creditor did not furnish a copy of the certificate from a financial institution, viz. IDBI, that maintained accounts of the operational creditor, which confirmed that there is no payment of any unpaid operational debt by the corporate debtor under Section 9(3)(c) of the Code. This being so, the application ought to have been dismissed at the very threshold.
  2. That under Section 8 of the Code, the moment a corporate debtor, within 10 days of the receipt of a demand notice or copy of invoice, brings to the notice of the operational creditor the existence of a dispute between the parties, the Tribunal is obliged to dismiss the application.
  3. Relying on S.61,62, and 64 in addition to S.7 to 9 of the Code, appellant contended that the application itself must contain all the documents that are required by the statute and that the timelines indicated in the statute are mandatory.
  4. On remanding the matter back to NCLT, the appellant contended that NCLAT was wholly incorrect in remanding the matter.

Contentions of Respondent Kirusa

The contentions of Respondent Kirusa were:

  1. No plea was ever taken before the Tribunal that the IDBI certificate was not furnished. This plea was taken for the first time only in appeal, and since the Tribunal did not think it fit to dismiss the application on a technical ground, this ground does not avail the appellants.
  2. The counsel then submitted that the expression “dispute” under Section 5(6) covers only three things, namely, existence of the amount of debt, quality of goods or services or breach of a representation or warranty and since what was sought to be brought as a defense was that the NDA was breached, it would not come within the definition of “dispute” under Section 5(6).
  3. That, at best, the breach of the NDA is a claim for unliquidated damages which does not become crystallized until legal proceedings are filed, and none have been filed so far. Therefore, there is no real dispute on the facts of the present case and the Tribunal was correct in its finding that the dispute was a sham one.

Analysis of Supreme Court decision

The bench of Justice RF Nariman and Justice Sanjay Kishan Kaul aptly traced the history and intent of the code. They traced the starting point of the Code in UN resolution which provides Legislative Guide to Insolvency Laws of UN Commission on International Trade Law (UNCITRAL). Thereafter it discussed how Indian law on Insolvency evolved over the time. The Court also laid great emphasis on the notes on clauses in the IBC Bill, 2015.

Supreme Court on term ‘dispute’

Supreme Court analyzed term ‘dispute’ as in Bill and in code and gave its interpretation of the term ‘dispute’. This can be presented in tabular form as under:

In Bill 2015In IBC Code 2016SC inference of term dispute
Section 5(4) of the Bill annexed to the Bankruptcy Law Reforms Committee ReportSection 5 (6)

“dispute” includes a suit or arbitration proceedings relating to – (a) the existence or the amount of debt; (b) the quality of goods and service; or (c) the breach of a representation or warranty

Hon’ble Court in para 35 notes that

In light of the fact that the word “bona fide” has been deleted from the Code, and the fact that the word “means” has been substituted with the word “Includes”, the definition of “Dispute” was intended to be an inclusive definition.

Since in its present avatar, Section 5(6) excludes the expression “bona fide” which is of significance, it is difficult to import the expression “bona fide” into Section 8(2)(a) in order to judge whether a dispute exists or not

Supreme Court on ‘existence of dispute’

Coming to expression ‘existence of dispute’, Supreme Court referred to Oxford Dictionary for meaning of term ‘existence’. To throw light on expression ‘existence of dispute’ as in S.8(a) SC examined two foreign judgments- the Australian judgment of- Spencer Constructions Pty Ltd v. G & M Aldridge Pty Ltd, [1997] FCA 681 and UK judgment- Hayes v. Hayes, (2014) EWHC 2694 (Ch) where what is meant by the term ‘existence of dispute’ under respective insolvency laws was debated. The interpretation reached by the courts was that the existence of dispute would mean that the dispute be bona fide and truly exists in fact; and the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

Armed with the legislative guide and these foreign judgments the court reached the conclusion (para 40) that once the operational creditor has filed a complete application 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.

The court further noticed that 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.

Supreme Court on Legislative intent of s.8(2)(a) (Para 29)

“S.8 (2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) 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;”

Going on the Legislative intent, the Supreme Court held that the word “and” occurring in Section 8(2)(a) must be read as “or”, if not done so it would lead to an anomalous situation which would stave off bankruptcy proceedings. The court held that,” If read as “and”, disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. 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.”

As held by the Hon’ble Court, this could be the only plausible interpretation of s.8(2)(a), if not, then it will lead to great anomaly. If we read the provision with ‘and’ then it would mean that dispute and suit or arbitration proceedings must be in existence. Now, limitation for suit or arbitral proceedings is 3 years and in IBC time line it is 10 days! This leads to an anomalous situation and also presents operational difficulties as it will be difficult to initiate suit or arbitration proceedings within 10 days.

If we read provision with ‘or’ then it would imply either existence of a dispute or pendency of suit or arbitration; this appears to be the correct legislative intention as there will be no anomaly in such situation.

Supreme Court on Role of Adjudicatory Authority

On Adjudicating authority, the court observed that, ”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.” Adjudicatory authority is to only ascertain that a dispute exist it need not go to the extent to satisfy that the defense is likely to succeed. The adjudicating authority does not examine merits of the dispute, it has to merely ascertain that a dispute truly exist and is not spurious, hypothetical or illusory. If it is spurious, illusory or hypothetical then, the adjudicating authority has to reject the application.

The tests laid down for Adjudicating Authority, when examining an application under Section 9, it has to determine:

(i) Whether there is an “operational debt” as defined exceeding Rs.1 lakh?

(ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected. It has to follow strict timelines within which the insolvency resolution process is to be triggered.

In the facts and circumstances of the case the Supreme Court found that the notice of dispute was duly served and NCLT rightly rejected the application. Supreme Court restored the order of NCLT and reversed the order of NCLAT holding that a dispute existed between the parties.

Comment

This exhaustive judgment has interpreted the term ‘dispute’ as a broader term and laid down the law as to what is meant by the term ‘dispute’ and ‘existence of dispute’. It has given a wider meaning to the term ‘dispute’ and this would include even correspondence between the parties. This judgment has significantly cut down potential litigation, as a narrow interpretation including only suit or arbitration proceedings would have opened flood gates to plethora of unwarranted litigation and arbitration proceedings by the corporate debtors in anticipation that the corporate insolvency resolution process would be initiated against them by the operational creditors.

 

Charu Mathur is an Advocate on Record at the Supreme Court of India. Views expressed are personal of the author. The Indian Jurist does not take responsibility for the views expressed or facts stated.

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