On 21 September 2017, the Hon’ble Supreme Court delivered a landmark judgment regarding the interpretation of the terms “dispute” and “existence of disputes” and the extent of the authority of the National Company Law Tribunal (Adjudicating Authority) to ascertain if a dispute exists under Section 8 and 9 of the Insolvency and Bankruptcy Code 2016 (Code). The Hon’ble Supreme Court allowed the appeal of Mobilox Innovations Private Ltd. (Mobilox) against the judgment of the National Company Law Appellate Tribunal (NCLAT) dated 24 May 2017.
Proceedings before the NCLT
Kirusa Software Private Ltd. (‘Kirusa’) filed a petition under Section 9 of the Code as an operational creditor before the Adjudicating Authority against Mobilox. The claim was disputed by the corporate debtor and it was alleged that Kirusa had disclosed confidential client information and client campaign information on a public platform which constituted a breach of trust and a breach of the non-disclosure agreement between the parties. This was the reason for withholding the amounts due. Accordingly, the application for insolvency was dismissed under Section 9(5)(ii)(d) of the Code. Kirusa appealed against the decision before the NCLAT.
The issue for consideration before the NCLAT was the meaning of the terms “dispute” and “existence of dispute”.
Highlights of the NCLAT decision
The NCLAT allowed the appeal and held that the notice of dispute does not reveal a genuine dispute between the parties. It was observed that the claim of dispute was vague and motivated to evade the liability.
The following observations were made:
The Supreme Court allowed the appeal and held that a dispute existed between the parties. The following observations were made in the judgment:
Analysis of the Insolvency and Bankruptcy Bill 2015
The Court analysed the Insolvency and Bankruptcy Bill, 2015 (‘Bill’) and the notes on clauses annexed to the Bill. Three significant observations were made by the Court in this regard:
Inclusive definition of Dispute
Role of Adjudicating Authority
On the basis of the facts in the present case, the Supreme Court held that the correspondence between the parties established the existence of a dispute between them. The corporate debtor raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. It was held that a dispute truly exists in fact between the parties, which may or may not ultimately succeed.
The Court has clarified yet another aspect of the Code in this landmark judgment. The definition of the term ‘dispute’ has been expanded and is not restricted to pending suits or arbitration. It includes correspondences exchanged between the parties showing a dispute relating to payment of the debt as well. If the term ‘dispute’ had been interpreted restrictively, i.e. including only pending arbitration or suits, it would lead to initiation of unnecessary 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.
We believe it is a welcome step towards defining the newly formulated Code and is a step in the right direction.
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