Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.
Supreme Court of India, 21 September 2017, 2 judges
An operational creditor's insolvency application under Section 9 IBC must be rejected if the corporate debtor shows a pre-existing dispute that is plausible and not spurious, hypothetical or illusory; the Adjudicating Authority does not decide its merits.
Facts
The respondent provided toll free telephone services to the appellant for a television programme and raised monthly invoices in 2013 and 2014. On 30 January 2015 the appellant withheld payment, alleging that the respondent had breached a non-disclosure agreement by publicising the work. After further correspondence the respondent served a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 for about Rs. 20.08 lakhs, and the appellant replied that serious and bona fide disputes existed. The NCLT rejected the respondent's Section 9 application as the debt was disputed. The NCLAT reversed, holding the defence vague and got up, and remanded the matter. The corporate debtor appealed.
Questions before the Court
- What is the meaning of 'existence of a dispute' under Sections 5(6), 8 and 9 of the Insolvency and Bankruptcy Code for an operational creditor's application?
- Must the corporate debtor show both a dispute and a pending suit or arbitration under Section 8(2)(a)?
- Did a dispute exist on the facts, so that the application ought to have been rejected?
What the Court held
- The definition of 'dispute' in Section 5(6) is inclusive. A dispute exists so long as there is a real dispute as to payment between the parties falling within it; a pending suit or arbitration is not required.
- The word 'and' in Section 8(2)(a) must be read as 'or'. Otherwise disputes would stave off insolvency only if already pending in a suit or arbitration, causing hardship where a dispute arises shortly before the process is triggered.
- If notice of a pre-existing dispute is received, the Adjudicating Authority must reject the application. It only checks for a plausible contention needing further investigation, not a patently feeble argument or unsupported assertion, without deciding whether the defence will succeed.
- The appellant's claim of breach of the NDA, raised in January 2015, was a plausible dispute and not spurious or mere bluster. The NCLAT's judgment was set aside. The objection that the bank's certificate was not filed in time, raised only at the appellate stage, could not alone defeat the application at the threshold.
Why it matters
The judgment sets the test for 'existence of a dispute' that bars an operational creditor's insolvency application under the Code: the Adjudicating Authority must reject the application if the corporate debtor shows a pre-existing, genuine dispute, without examining its merits. It contrasts this with financial creditors, for whom a disputed but due debt suffices, and reads 'and' as 'or' in Section 8(2)(a).
In the Court's words
Copied from the official judgment; each passage links to its page.
“Even otherwise, the word "and" occurring in Section 8(2)(a) must be read as "or" keeping in mind 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 only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise.”
“Therefore, all that the adjudicating authority is to see at this stage 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. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster.”
“However, in doing so, 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 except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”
Provisions interpreted
Case and bench
- Parties
- Mobilox Innovations Private Limited v. Kirusa Software Private Limited
- Case
- Civil Appeal No. 9405 of 2017
- Decided
- 21 September 2017
- Bench
- R.F. Nariman, Sanjay Kishan Kaul
- Opinions
- Unanimous. Judgment delivered by R.F. Nariman, J.
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