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What constitutes a Dispute under the IBC- Mobilox Innovations v/s Kirusa Software

Facts of the case:
The appellant (Mobilox innovations pvt. Ltd) was conducting tele-voting process for a program in Star TV which is named as NachBaliye. The appellant engaged the respondent company (Kirusa software pvt. ltd) for providing various services relating to the TV program, and both the parties executed a non-disclosure agreement.

The non-disclosure agreement stipulated certain conditions such as confidentiality obligations towards Mobilox innovations pvt. Ltd. During the time period of contract Kirusa software pvt. ltd raised necessary monthly invoices for the rendered services.

However, Mobilox innovations pvt. Ltd informed Kirusa software pvt. Ltd about the payments that were subsequently withheld due to breach of the non-disclosure agreement obligations. Due to the non-payment of the monthly invoices by Mobilox innovations pvt. Ltd, Kirusa software pvt. Ltd sent a demand notice to Mobilox innovations pvt. Ltd under Section 8 of the Insolvency and Bankruptcy Code.

Mobilox innovations pvt. Ltd’s response to the demand notice stated that there was a bona fide and serious dispute between the parties, inclusive of the breach of obligations mentioned under the non-disclosure agreement.

Kirusa subsequently filed an application before the NCLT, Mumbai under section 9 for the initiation of Corporate Insolvency Resolution process (CIRP) of Mobilox.

NCLT rejected the application on the grounds that Mobilox had issued a notice of dispute to the operational creditor.

An appeal against the order of NCLT was subsequently filed by Kirusa stating that mere dispute to the demand notice by the operational creditor does not amount to a valid ground for rejection of application under Section 9[1]  of the Insolvency & Bankruptcy Code’.

The question before the Appellate Tribunal was with respect to the clarification of meaning of dispute and existence of dispute for the purposes of application under Section 9 of the Insolvency and Bankruptcy Code.

NCLAT allowed Kirusa’s appeal on the ground that the reply to the demand notice by the Mobilox cannot be seen within the purview of Section 8(2)[2] and Section 5(6)[3] of the Insolvency and Bankruptcy Code. It stated that the defence raised by Mobilox was vague and motivated as the debt demanded was not in connection with the non-disclosure agreement.

Further NCLAT stressed upon the interpretation of dispute stating that a dispute would not be limited to only arbitration proceedings or suits but shall include any proceedings initiated before any tribunal, consumer court, labour court etc.

Mobilox filed an appeal to the Supreme Court against the order passed by NCALT.
 
Legal Analysis:
The Supreme Court allowed the appeal by Mobilox, while interpreting the expression existence of a dispute under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Supreme Court was of the opinion that the breach of non-disclosure agreement was sufficient to construe the existence of a dispute to invalidate the CIRP application filed by the operational creditor. The court looked into an Australian High Court case, Spencer Constructions Pvt Ltd. V. G & M Aldridge Pvt Ltd.[4]  in regard to interpret the expression existence of the dispute

Interpretation of Section 8 (2) (a):
The word and occurring in Section 8 (2) (a) must be read as or. The Supreme Court was of the opinion that such an understanding shall lead to great hardship as the corporate debtor would then be able to stave off the bankruptcy process provided a dispute is already pending in a suit or arbitration proceedings.

The Supreme Court also stated that, if and is mentioned under Section 8(2)(a), it is not read as or, such persons shall be excluded from the ambit of Section 8 (2) and application of CIRP shall be easily obtained which was not the intent of the legislature.

The Court relied on few cases, Semee Khan V. Bindu Khan[5], Maharshi Mahesh Yogi Vedic Vishwavidyalaya V. State of M.P[6]  while interpreting the words ‘and’ & ‘or’.

The Supreme Court held that the existence of the dispute and/or suit or arbitration proceeding necessarily be pre-existing, that is to say, it should exist prior to receipt of the Demand Notice.

The Supreme Court while deciding the matter scrutinized the background of IB Code. It observed that the Insolvency and Bankruptcy Bill 2015 defined dispute as a bona fide suit or arbitration proceedings.

However, when the Bill was passed the term dispute under Section 5 (6) was dropped from the definition. The Supreme Court stressed upon the interpretation that the previous jurisprudence with respect to the definition dispute does not apply to the current Insolvency & Bankruptcy code. Instead the Supreme Court provided a new test plausible contention to determine the existence of dispute.

The Supreme Court holds that while determining existence of a dispute, all that the NCLT is to see 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.

While opining that a spurious defence which is mere bluster should be rejected, the Supreme Court adds a word of caution – while determining whether dispute exists or not, the NCLT is not required to satisfy itself that the defence is likely to succeed or to examine the merits of the dispute. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the application of an operational creditor must be rejected by the NCLT.

Questions to be seen by the Adjudicating Authority while examining any application under Section 9 of the Insolvency & Bankruptcy Code are as follows:

  1. Whether there is an operational debt of more than One Lakh?
  2. Whether the documentary evidence provided with the application shows the debt is due and payable and has not yet been paid?
  3. Whether there is an existence of a dispute between the concerned parties or any record of pendency of suit or arbitration proceeding filed before the receipt of Demand Notice?
If any one of the conditions is not satisfied, NCLT must reject the application.

On the facts of the case, the Supreme Court holds that the correspondence between the parties showed that on 30 January 2015, Mobilox had clearly informed Kirusa that on account of breach of the NDA by it, payments were being withheld till the time the matter was resolved. This was followed by further exchange of correspondence between the parties.

Further, the Demand Notice sent by Kirusa was disputed in detail by Mobilox in its reply where it again referred to its e-mail of 30 January 2015. Going by the test of existence of a dispute, the Supreme Court held that without going into the merits of the dispute, it was clear that Mobilox had raised a plausible contention requiring further investigation which was not a patently feeble legal argument or an assertion of facts unsupported by evidence.

Mobilox’s defence was not spurious, mere bluster, plainly frivolous or vexatious but a dispute truly existed in fact between the parties, which may or may not ultimately succeed.

There appears to be no doubt that the interpretation with respect to dispute and existence of a dispute has been quite in debate since the inception of IB Code. Conflicting interpretations have been provided by different benches of NCLT. However, a conclusive ruling by the Supreme Court has finally provided a settled position.Thus the supreme court recognised that there is an existence of dispute between kirusa and mobilox as mobilox raised a plausible contention as specified by the supreme court in the judgement.
 
Economic Analysis:
In the present case, the main issues before the court is the existence of dispute between the parties of the case and what constitutes a dispute in any matter. The supreme court in its judgement referred to plausible contention according to which contention which requires further investigation and that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

The issue really was that the word and in Section 8 (2)(a) of IBC suggests that a dispute between the operational creditor and the corporate debtor will be in existence only if a suit or an arbitration proceeding on the dispute is pending before receipt of Demand Notice. The Supreme Court held that such an interpretation would lead to a great hardship and anomalous situations as the corporate debtor would then be able to stave off the bankruptcy process only if a dispute is already pending in a suit or arbitration proceedings and not otherwise.

To highlight the hardship, the Supreme Court cited an example that in case of a dispute that arises a few days before triggering of the CIRP, there would be no time to approach either an arbitral tribunal or a court even though a dispute may exist.

This judgement by the supreme court makes the functioning of the judicial sysyem of the country easier as the requirements for the existence of a dispute is well laid in mobilox v. kirusa info solutions pvt. ltd. Prior to the judgement, there is reference to the clear definition of dispute between the parties thereby creating a burden on the lower courts to interpret the laws.

The disputes between the parties clogs the movement of money as a part of payment that is supposed to be paid by the corporate debtor to the corporate creditor for the services provided by the corporate creditor. If there are such cases in a nation-wide scale, there would be a effect of late payments which will be affected by the judgement by the courts and even might lead to non-payment of the bills by the corporate debtors.

This will not only affect the corporate creditor but also the economy as a whole. The stagnation of the flow of the money will affect the small business enterprises as they may not be able to meet the running expenses of the business enterprises as a result of this stagnation. This will affect the economic status of the organisation. This also affects the GDP of the nation as a whole as the stagnation would lead to lower profits.

Lower profits necessitate lower investments in the economy which is directly relational to the aggregate demand in the nation. Thus, when investments reduce, there would be a situation of under equilibrium in the nation as there is under-utilization of resources, thereby reducing the aggregate supply in the economy which will finally reduce the GDP of the nation. Fall in GDP is not a good sign of the economic condition of the nation thereby reducing the FDI as there would be less incentive to invest money in a economy with a failing GDP.

Thus, due to the judgement by the supreme court in Mobilox Innovations Pvt. Ltd. V. Kirusa Software Pvt. Ltd has given a insight into the existence of dispute between the parties thereby reducing the time taken by the judicial process and the effects thereof. Therefore, the incidents of late payments of bills by the corporate debtor will be reduced to minimum levels as the judicial process is faster and efficient than before as there is a clear cut definition of dispute and existence of dispute making it easier for the regulating authorities to deal with such cases when raised. Thus this judgement by the supreme court not only passed the judgement in the case but also created a precedent for such cases of similar in nature.

This judgement efficient in nature as it is reducing the judicial process and also reducing the delay of payments by the corporate debtors thereby creating a positive impact on the economy and increasing the GDP of the economy. [7]

End-Notes
  1. Section 9 enshrines the right to file an application for the initiation of corporate insolvency resolution process after the expiry of 10 days from the date of delivery of demand notice.
  2. Section 8(2) emphasises that once the demand notice is served upon the corporate debtor by the operational creditor, the corporate debtor needs to inform the creditor about the payment of the debt or dispute if any, within 10 days of receiving the notice.
  3. The section states as follows, dispute includes a suit or arbitration proceedings relating to-(a) he existence of the amount of debt; (b) the quality of goods or services; or (c) the breach of a representation or warranty.
  4. Spencer Constructions Pvt Ltd. V. G & M Aldridge Pvt Ltd,  1997 FCA 681
  5. Semee Khan V. Bindu Khan , 1998 7 SCC 59 at 64
  6. Maharshi Mahesh Yogi Vedic Vishwavidyalaya V. State of M.P ,2013 15 SCC 677 at 718
  7. The economic impact of late payments, William conn el, http://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp531_en.pdf

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