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.

Background

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 Adjudicating Authority must examine whether the notice of dispute in fact raises a genuine dispute. However, the Adjudicating Authority does not have any power to verify the adequacy of the dispute.
  • The definition of ‘dispute’ under Section 5(6) of the Code is inclusive and not exhaustive. It must be given wide meaning. The ‘dispute’ is not limited only to a pending suit or a pending arbitration.
  • The expression in Section 8(2) where the words used are ‘existence of a dispute, if any,’ is disjunctive from ‘record of proceedings of pendency of the suit or arbitration proceedings’. Therefore, the interpretation of the term ‘disputes’ , applies to all kinds of disputes, in relation to debt and default. However, a dispute in a pending suit or arbitration must be relatable to the three conditions under Section 5(6), i.e. existence of the amount of debt, the quality of goods or services and the breach of representation or warranty.
  • Dispute’ includes disputes pending before every judicial authority including mediation, conciliation etc. if the disputes are as to existence of debt or default. The following would also count as disputes:
    • If the operational creditor has issued a notice under Code of Civil Procedure, 1908 which is disputed by the corporate debtor or
    • Dispute by a labourer or an employee with the state government to a notice issued under Section 59 of Sale of Goods Act, 1930
    • Dispute pending before labour court
    • If the corporate debtor raises a dispute about ‘quality’ and brings to notice of the operational creditor to take appropriate steps.

Judgment

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:

  • The words “the existence of a dispute” are used as opposed to the present Code where the words used are “existence of a dispute, if any and record of pendency of the suit or arbitration proceeding”.
  • The word “includes” has substituted the word “means” in the definition of the term ‘dispute’ used in the Bill.
  • In the Bill, Section 5(4) defined “dispute” as meaning a “bona fide suit or arbitration proceedings…”. However, Section 5(6) of the Code excludes the expression “bona fide”.

Inclusive definition of Dispute

  • The word “and” occurring in Section 8(2)(a) must be read as “or” considering the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”. If read as “and”, disputes would include only a pending suit or arbitration proceedings and not otherwise which would result is great hardship.
  • It is possible that a dispute may arise a few days before triggering of the insolvency process when there is no time to approach either an arbitral tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them.
  • This leads to an anomaly which could not have been intended by the legislature. One of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. Therefore, the threshold has been set at establishing the existence of a dispute between the parties.
  • Therefore, a dispute is said to exist when there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6) of the Code. However, Section 5(6) only deals with suits or arbitration proceedings which must “relate to” one of the three sub-clauses, either directly or indirectly.

Role of Adjudicating Authority

  • The Adjudicating Authority must determine whether there is a plausible contention which requires further investigation and that the term “dispute” is not a patently feeble legal argument or an assertion of fact not supported by evidence. However, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute.

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.

Comment

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.

  • Vanita Bhargava (Partner) and Shweta Kabra (Associate)

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