What constitutes a “Dispute” under the IBC as per the Supreme Court?

ibc-cases-nikhil-mehta-and-sons-vs-amr-infrastructure-limited

Status as on- 11/07/2021

Case- Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd on 21 September, 2017

(Supreme Court Judgment dated 21st of September, 2017 in CIVIL APPEAL NO. 9405 OF 2017)

Brief Facts of the case

  1. Kirusa served Mobilox with a demand notice as an Operational Creditor under the Code, demanding payment of certain dues. Mobilox responded to the demand notice (“Mobilox Reply”), stating that there are certain serious and bona fide disputes between the parties and alleging Kirusa breached the terms of a non-disclosure agreement. Kirusa petitioned the National Company Law Tribunal, Mumbai (“NCLT”) for the initiation of the corporate insolvency resolution process (“CIRP”) against Mobilox under Section 9 of the Code (“Application”). The NCLT dismissed this, ruling that Mobilox had issued a valid notice of dispute under the Code’s definition of an “existing dispute.”
  2. NCLAT: Kirusa then filed an appeal against the NCLT’s order, claiming that the operational creditor’s mere disagreement with the demand notice does not constitute a valid ground for application rejection under Section 9 of the ‘I & B Code.’ The Appellate Tribunal was asked to clarify the meaning of “dispute” and “existence of dispute” for the purposes of applying under Section 9 of the Insolvency and Bankruptcy Code. Section 8 specifies the requirements that must be met prior to filing an application under Section 9 of the ‘I & B Code.’ According to Section 8 (2) of the I & B Code, once the operational creditor serves the demand notice on the corporate debtor, the corporate debtor must notify the creditor of the debt payment or dispute, if any, within 10 days of receiving the notice.
  1. Section 9 establishes the right to file an application for the initiation of a corporate insolvency resolution process after 10 days from the date of demand notice delivery.

The NCLAT granted Kirusa’s appeal on the grounds that Mobilox’s response to the Demand Notice did not fall within the purview of Sections 8(2) and 5(6) of the Insolvency and Bankruptcy Code. It stated that Mobilox’s defense was ambiguous and motivated because the debt demanded had nothing to do with the non-disclosure agreement. Furthermore, the NCLAT emphasized the interpretation of “dispute,” stating that a dispute would not be limited to only arbitration proceedings or suits, but would include any proceedings.

Held

The Hon’ble Supreme Court ruled as follows:

  1. The Supreme Court considered questions raised about the Code’s application to debts owed to operational creditors, as well as what constitutes a “dispute” that entitles the debtor company to have the Adjudicating Authority reject the application.
  2. The Supreme Court granted Mobilox’s appeal while interpreting the phrase “existence of a dispute” under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Hon’ble Supreme Court held that the breach of the NDA was sufficient to construe the existence of a dispute and invalidate the operational creditor’s CIRP application.
  3. Section 8 (2) (a) interpretation: “The word “and” in Section 8 (2) (a) should be read as “or.” According to the previous interpretation, the Code states that a dispute between an operational creditor and a corporate debtor is only valid if a suit or arbitration proceeding is filed prior to the receipt of demand notice. The Supreme Court determined that such an agreement would cause “great hardship” because the corporate debtor would be able to avoid bankruptcy if a dispute was already pending in a suit or arbitration proceedings “.. The Hon’ble Supreme Court made an important point in stating that if the “and” mentioned in Section 8(2)(a) is not read as “or,” such persons will be excluded from the ambit of Section 8 (2) and application of CIRP will be easy, which was not the legislature’s intent.
  4. Previously Existing Dispute: The Supreme Court ruled that the existence of the dispute, suit, or arbitration proceeding must be “pre-existing,” that is, it must exist prior to receipt of the Demand Notice.
  5. Plausible Contention Test: In deciding the case, the Supreme Court examined the background of the IB Code. According to the Insolvency and Bankruptcy Bill 2015, a “dispute” is defined as “a genuine suit or arbitration proceedings.” However, when the Bill was passed, the term “dispute” was removed from Section 5 (6) of the definition. The Supreme Court emphasized that previous jurisprudence regarding the definition “dispute” does not apply to the current IB code. Instead, the Supreme Court established a new “plausible contention” test to determine the “existence of dispute.”
  6. Questions for the Adjudicating Authority to consider when reviewing any application under Section 9 of the I &B Code:
    • Is there an “operational debt” of more than one lakh rupees?
    • Whether the documentary evidence submitted with the application demonstrates that the debt is due and payable and has not yet been paid?
    • Is there a dispute between the parties or any record of the pendency of a suit or arbitration proceeding filed prior to the receipt of the Demand Notice?

If any of the conditions is not met, the application must be rejected by NCLT.

  1. initiated before any tribunal, consumer court, labour court, and so on.

Impact of this case

As per Supreme Court, all that the Adjudicating Authority needs to see is whether there is a plausible contention that requires further investigation and that the “dispute” is not a patently feeble argument or an assertion of fact that is unsupported by evidence. Interestingly, the Court held that, while it is important to separate the wheat from the chaff and reject a bogus defense that is nothing more than bluster, the Adjudicating Authority does not need to go into the merits and satisfy itself that the defense is likely to succeed at this stage of the proceeding.

The Supreme Court has clarified that the object of the Code, in conjunction with the legislative intent qua operational debts, is to ensure that the amount of such debts, which is typically less than that of financial debts, does not allow operational creditors to place debtor companies in the CIRP prematurely or for extraneous reasons. As a result, the Court attempted to strike a balance between an operational creditor’s rights and the remedy available to the debtor company.

So far, there has been a surge of jurisprudence on the meaning of the term “dispute,” with different Adjudicating Authorities adopting different and sometimes contradictory interpretations ranging from the strictest to the most liberal and inclusive forms. This is the first time the Supreme Court has addressed the issue, providing much-needed clarity to debtor companies that may have a genuine dispute about the debt but have not yet initiated legal proceedings to resolve it.

Conclusion

There appears to be no doubt that the interpretation of “dispute” and “existence of a dispute” has been a source of contention since the inception of the IBC. Different benches of the NCLT have provided contradictory interpretations. However, the Supreme Court’s conclusive ruling has finally provided a settled position.

It will be interesting to see how different NCLTs interpret and apply this landmark ruling relating to the “plausible contention” test. Furthermore, the Supreme Court has been vigilant in emphasizing the strict adherence to the time lines specified in the Code. The Supreme Court clarified the code’s object while keeping legislative intent in mind. The court, through this judgement, has struck a balance between creditors’ rights and debtor companies’ remedies.

 

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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