7 October, 2017
The Supreme Court in its judgment dated 21st September, 2017, has clarified the meaning of ‘existence of dispute’ falling under Section 8 (2) (a) and the term ‘dispute’ as defined under Section 5 (6) of the Insolvency & Bankruptcy Code, 2016 (“Code”).
Brief facts of the case:- In the present case, Mobilox Innovations Private Limited (“Appellant”) had engaged Kirusa Software Private Limited (“Respondent”) for providing certain toll free telephone numbers across the country through which viewers of a dance show had to cast votes in favor of participants on the dance show. The Appellant and the Respondent had also entered into a non- disclosure agreement in furtherance to the services provided by the Respondent. For providing the said toll free numbers, the Respondent had raised invoices upon the Appellant. However, the said invoices were withheld by the Appellant on the ground of breach of non-disclosure agreement by the Respondent.
In order to recover money under the invoices, the Respondent had issued a notice to the Appellant under Section 8 of the Code. Upon receiving the notice, the Appellant had replied citing existence of disputes between the parties since the Appellant had already informed the Respondent that no amount would be paid to them due to breach of non-disclosure agreement. Thereafter, the Respondent filed an application before the National Company Law Tribunal (“NCLT”), Mumbai Bench, for initiating corporate insolvency resolution process under Sections 8 and 9 of the Code. The NCLT rejected the application of the Respondent on the ground that there was a dispute in relation to the debt. The Respondent then moved before the National Company Law Appellate Tribunal (“NCLAT”) challenging the order passed by the NCLT. By an order dated 24th May, 2017, the NCLAT had whilst discussing the terms ‘dispute’ and ‘existence of dispute’, held that the dispute raised by the Appellant herein was vague, got up and motivated to evade liability. The NCLAT had accordingly allowed the
Appeal and remitted the matter to NCLT.
Aggrieved by the order of NCLAT, the Appellant challenged the order before the Supreme Court.
Key contentions of the lawyers of the Petitioner and Respondent:- The Appellant submitted that under Section 8 (2) (a) of the Code, “existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed…” must be read as existence of a dispute or record of the pendency of the suit or arbitration proceedings filed. Further, the definition of ‘dispute’ under Section 5 (6) of the Code is an inclusive definition.
However, the Respondent submitted that ‘dispute’ under section 5 (6) of the Code only covers three things i.e., i) existence of amount of debt; ii) quality of goods or services; iii) breach of a representation or warranty. Since, the defense raised by the Respondent was breach of non-disclosure agreement, the same would not fall within the definition of ‘dispute’ under Section 5(6) of the Code.
Judgement and Conclusion:- The Hon’ble Supreme Court considered the background and the intention of the legislature behind the Code. As per the Insolvency & Bankruptcy Bill, 2015, section 5(4) defined ‘dispute’ as “dispute” means a bona fide suit or arbitration proceeding regarding a) the existence or the amount of a debt; b) the quality of a good or service; or c) the breach of a representation or warranty”. The Supreme Court observed that the original definition of ‘dispute’ has now become an inclusive definition under the Code and the word ‘bona fide’ has been deleted. The Court further observed that while examining an application under Section 9 of the Code, the Adjudicating Authority will have to determine the following:
- Whether there in 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 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?
If any one of the aforesaid conditions is lacking, the application would have to be rejected by the Adjudicating Authority.
While coming to a conclusion regarding the word “and” appearing in Section 8 (2) (a) of the Code, the Hon’ble Court relied upon various judgments wherein the expression “and” has been read as “or” to avoid an anomalous situation. The Court held that the word “and” occurring in Section 8 (2) (a) must be read as “or” keeping in mind the legislative intent and to avoid an anomalous situation. If the word “and” is read in the section, disputes would rebut the bankruptcy process only in case of pending suit or arbitration proceeding and not otherwise and the same would lead to great hardship.
For further information, please contact:
Vineet Aneja, Partner, Clasis Law
vineet.aneja@clasislaw.com
