A UN legislative guide states that insolvency law “should be transparent and predictable”. In India, different interpretations of the definition of “dispute” under the Insolvency and Bankruptcy Code, 2016, had led to disputes and uncertainty. That uncertainly was put to rest by the Supreme Court in Mobilox Innovations Pvt Ltd v Kirusa Software Pvt Ltd.
Mobilox had engaged the services of Kirusa in relation to a television programme. To this end, the parties had also executed a non-disclosure agreement (NDA). Disputes arose as Kirusa claimed that Mobilox was withholding payments against its invoices and Mobilox contended that it was entitled to do so because Kirusa had breached the NDA.
Kirusa then issued a demand notice under section 8(1) of the Insolvency and Bankruptcy Code. Mobilox, in reply to that notice, disputed the liability, claiming that nothing was due to Kirusa owing to Kirusa’s breaches of the NDA and that the notice was aimed at putting pressure on Mobilox.
The National Company Law Tribunal (NCLT), Mumbai, dismissed Kirusa’s application on the ground that Mobilox had disputed the debt. The National Company Law Appellate Tribunal (NCLAT) allowed Kirusa’s appeal, ruling that Mobilox had not raised any dispute within the meaning of section 5(6) or section 8(2) of the code. According to the NCLAT the NDA did not relate to the debt or quality of service or any representation made by Kirusa; it was extraneous and the dispute raised by Mobilox was a sham.
Section 5(6) of the code defines “dispute”. The definition is inclusive and encompasses a suit or arbitration in relation to the existence of a debt or the quality of goods or service or the breach of a representation or warranty. Section 8(2) of the code requires a corporate debtor, within 10 days of receipt of a demand notice, to bring to the notice of the operational creditor the “existence of a dispute, if any, and record of the pendency of the suit or arbitration … filed before the receipt of such notice”. Several benches of the NCLT interpreted these stipulations differently and the NCLAT had held that the corporate debtor could only raise a dispute in respect of the three matters identified in section 5(6).
The Supreme Court noted that the object of the code aimed to ensure that operational creditors did not initiate insolvency proceedings against corporate debtors prematurely or to pressurize corporate debtors. The Supreme Court rejected Kirusa’s contention that a “dispute” must relate to one of the three sub-clauses in section 5(6) of the code, i.e. to: “(a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty”.
The Supreme Court held that although the “dispute” must exist prior to the issue of the demand notice it cannot be limited by the words “and record of the pendency of the suit or arbitration proceedings”, and the corporate debtor need not have instituted a suit or arbitration prior to the demand notice. The court noted that unless so interpreted it would work “great hardship” on corporate debtors “in that a dispute may arise a few days before triggering 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 Supreme Court further held that in order to determine whether a dispute existed, all that the NCLT was required to consider was whether the corporate debtor had raised a plausible contention which would require investigation and that the dispute raised by the corporate debtor was not “spurious, illusory or hypothetical”. In this context the Supreme Court noted with approval decisions of the Australian High Court and the Chancery Division in the UK. The Supreme Court also held that a stipulation that the dispute must be “bona fide” could not be read into the word “dispute” in section 5(6) of the code.
The true test, according to the Supreme Court, was whether the corporate creditor had raised a contention requiring investigation. Did the contention raise a question to be tried? If the corporate creditor raised such a contention the NCLT had to terminate the proceedings as the NCLT could not determine contested issues of fact or law. On the other hand a “patently feeble legal argument or an assertion of fact unsupported by evidence” would not constitute a “dispute”.
The Supreme Court, consistent with the UN legislative guide, has given definitional clarity and made the code more “transparent and predictable”. Operational creditors can no longer resort to the code to pressurize corporate debtors.
Sneha Jaisingh and Shreya Gupta are senior associates at Bharucha & Partners.
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