Further to our Part II, in this Part we have dealt with the interpretation of the term “Dispute” under the Code.
The Code being a new legislation is going through several judicial tests and every test is leading to a new interpretation of the provisions of the Code resulting in inconsistency between them. Several judgements have been pronounced by National Company Law Tribunal (“NCLT”) which are inconsistent with each other and the point of focus and interpretation of these judgements has been on the term “Dispute” which is a core of remedy available to a debtor under the Code.
The term dispute has been defined under section 5(6) of the Code which speaks as follows:
“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.
Further, dispute has been provided under Section 8(2)(a) as;
“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;”
The two areas of dispute primarily are:
(1) Whether a suit or arbitration proceeding needs to be initiated to demonstrate the existence of dispute?
There have been many conflicting judgements by NCLT and National Company Law Appellate Tribunal (“NCLAT”) interpreting, whether a suit or arbitration needs to be initiated to demonstrate the existence of dispute before filing an application for Corporate Insolvency Resolution Proceeding (“CIRP”).
The Hon’ble Supreme Court on 21st September 2017 ultimately delivered a noteworthy judgement in the matter of Kirusa Software Private Limited v/s Mobilox Innovations Private Limited by giving an illustrative interpretation to the meaning of existence of dispute.
Kirusa Software Private Limited (“Kirusa”) as operational creditor, issued a demand notice on Mobilox Innovations Private Limited (“Mobilox”) as operational debtor, demanding payment of certain dues. Mobilox replied to the notice stating that there exist a serious and bona fide dispute between the parties as Kirusa has breached the Non-Disclosure Agreement with Mobilox and tried soliciting Mobilox clients. Kirusa approached NCLT and filed application for initiation of CIRP which was subsequently dismissed by NCLT on the grounds that, notice of existence of dispute has already been issued by Mobilox and application for initiation of CIRP cannot be entertained.
Kirusa, aggrieved with the order of NCLT, appealed to National Company Law Appellate Tribunal (“NCLAT”). The issues before NCLAT was whether a notice of dispute does really raises a dispute between the parties or it does not. The NCLAT held that, the reply to the notice of debt sent by Mobilox does not really raise a dispute within the meaning of Section 5(6) or 8(2) of the Code and Mobilox’s defence was vague and was made with a motive to evade the liability. The NCLAT therefore, set aside the order of NCLT, and remitted the case to NCLT for consideration of Kirusa’s application for admission.
Supreme Court Verdict:
The Hon’ble Supreme Court, in the present case, compared the current position of the code with the laws of United Kingdom and Australia to take out the actual intent of the legislature regarding the use of the term “Dispute”.
The Hon’ble Supreme Court laid down a checklist for the adjudicating authority to consider admission or rejection of application under Section 9 of the Code for initiation of the CIRP. The Court stated that if any one of the following conditions is lacking, the application would have to be rejected:
- Whether there is an “operational debt” as defined exceeding Rs.1 lakh?
- Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid?; and
- 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?”
The court cleared the conflict between “AND”- “OR” in Section 8(2)(a) which states that the Corporate Debtor within 10 days of receipt of demand notice by operational creditor shall bring the notice of operational creditor the existence of 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. The court stated that the term ‘and’ occurring in Section 8(2)(a) must be read as ‘or’ keeping in mind the legislative intent and inconsistency if not read as ‘or’. A strict interpretation of the term “and” would starve off the bankruptcy process 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.
The correspondence between the parties on 30th January 2015 clearly show that the appellant had committed breach of trust and breach of NDA as they admitted having displayed Mobilox’s confidential client information and client campaign information on a public platform. The appellant further told Kirusa that all amounts that were due to them were withheld till the time the matter is resolved. On basis of this Mobilox in response to the demand notice disputed in detail in its reply dated 27th December,2016 which set out the email of 30th January 2015. Thus, going through the aforesaid test of the “existence of 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 patently a strong legal argument or an assertion of facts unsupported by evidence. The defense raised by Mobilox is not spurious and plainly frivolous or made with an intention to cause annoyance, frustration and agony. The dispute does totally exist between the parties and the NCLAT was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.
Thus, the order of NCLAT was set aside and the appeal was allowed
(2) The next doubt which comes to our mind is: Whether a dispute can be raised after receiving the notice from the operational creditor?
According to section 8, an application can be rejected on receiving a notice of pending suit/arbitration. But, the suit filed after receiving the notice is valid or not is the question.
In the case of M/s. Essar Projects India Ltd. v. M/s. MCL Global Steel Pvt. Ltd. Essar Projects India Ltd. (“Essar”) moved the tribunal to commence a proceeding against MCL Global Steel Pvt. Ltd. (“MCL”) as MCL had not honoured the invoices raised by them. MCL responded to the demand notice stating that the petitioner had no grounds for commencing a proceeding under the Code as MCL disputed the amount of the debt in question as well the enforceability of the contract between the parties. As MCL raised the disputes only after the demand notice was served, NCLT rejected the reply of MCL from serving as a ground for cancellation of application stating, a mention made in the reply notice regarding the existence of dispute in relation to the impugned debt, is not sufficient, corporate debtor has to prove that the company already raised such dispute either in court or in arbitration before receipt of notice u/s 8 of the Code. Whereas in the present case, no such proceeding has been initiated before any court of law or in arbitration before receipt of notice supra.
Subsequently, aggrieved with the order, MCL filed an appeal against the order of NCLT. The NCLAT held that, the notice issued by Essar was disputed by MCL through a reply dated 21st November 2017, objecting quality of service and non-completion of work within time and such dispute, raised by Essar, is covered by Arbitration clause. This clearly signifies that, there is “existence of dispute”, raised through the reply filed by MCL, for which the petition u/s 9 of the Code is not maintainable.
NCLAT held that, the order passed by NCLT was primarily in violation of principles of natural justice as it was passed without issuing any notice to the corporate debtor and NCLT has drastically failed to notice the relevant facts that there was a dispute raised and relied by MCL. Thus, the impugned order was set aside along with all other orders passed in relation to moratorium, freezing of bank accounts, appointment of Interim Resolution Professional and advertisement issued notice to the persons about initiation of CIRP. Furthermore, the Board of Directors of MCL were directed to take over the possession and functions of the company with immediate effect.
With the Hon’ble Supreme Court intervening in the case of Kirusa Software Private Limited v/s Mobilox Innovations Private Limited, the uncertainties and ambiguity in respect to the term “dispute” has been removed and it is now copiously clear as to what constitutes the “existence of dispute” under the Code.
However, looking at the current instance, we are still to witness a lot of debates on bona fides of dispute, that whether a reply to the notice of an operational creditor by an operational debtor amounts to a dispute or not. It will be interesting to see the further interpretations made by Judiciary in respect to this Code.
[This is the third in a series of 3 posts that seeks to highlight certain essential aspects of the Insolvency and Bankruptcy Code, 2016.]