2017 (9) TMI 1270 - SC - IBC

Supreme Court sets aside insolvency proceedings finding genuine dispute under Section 5(6) IBC 2016

Mobilox Innovations Private Limited Versus Kirusa Software Private Limited

The SC allowed the appeal and set aside the Appellate Tribunal's judgment in a corporate insolvency case under the Insolvency and Bankruptcy Code, 2016. ... Initiation of Corporate insolvency procedure under the Insolvency and Bankruptcy Code, 2016 (the 'Code') for operational debts - Interpretation of 'dispute' under Section 5(6) of the Code - test of “existence of a dispute” - liability to make payment of rentals for the toll free telephone numbers, as well as primary rate interface rental to the telecom operators - expression “existence”. Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute? Held that:- On 10th February, 2015, the respondent referred to the NDA of 26th December, 2014 and denied that there was a breach of the NDA. The respondent went on to state that the appellant’s claim is unfounded and untenable, and that the appellant is trying to avoid its financial obligations, and that a sum of ₹ 19,08,202.57 should be paid within one week, failing which the respondent would be forced to explore legal options and initiate legal process for recovery of the said amount. This email was refuted by the appellant by an e-mail dated 26th February, 2015 and the appellant went on to state that it had lost business from various clients as a result of the respondent’s breaches. Curiously, after this date, the respondent remained silent, and thereafter, by an e-mail dated 20th June, 2016, the respondent wished to revive business relations and stated that it would like to follow up for payments which are long stuck up. This was followed by an e-mail dated 25th June, 2016 to finalize the time and place for a meeting. On 28th June, 2016, the appellant wrote to the respondent again to finalize the time and place. Apparently, nothing came of the aforesaid e-mails and the appellant then fired the last shot on 19th September, 2016, reiterating that no payments are due as the NDA was breached. Going by the test of “existence of a dispute”, it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability. Learned counsel for the respondent, however, argued that the breach of the NDA is a claim for unliquidated damages which does not become crystallized until legal proceedings are filed, and none have been filed so far. The period of limitation for filing such proceedings has admittedly not yet elapsed. Further, the appellant has withheld amounts that were due to the respondent under the NDA till the matter is resolved. Admittedly, the matter has never been resolved. Also, the respondent itself has not commenced any legal proceedings after the e-mail dated 30th January, 2015 except for the present insolvency application, which was filed almost 2 years after the said e-mail. All these circumstances go to show that it is right to have the matter tried out in the present case before the axe falls. We, therefore, allow the present appeal and set aside the judgment of the Appellate Tribunal. Issues Involved:1. Triggering of the Insolvency and Bankruptcy Code, 2016 for operational debts.2. Adjudicating authority's role in determining the existence of a dispute.3. Interpretation of 'dispute' under Section 5(6) of the Code.4. Procedural requirements under Sections 8 and 9 of the Code.5. The role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).Detailed Analysis:1. Triggering of the Insolvency and Bankruptcy Code, 2016 for Operational Debts:The case primarily revolves around the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (the 'Code') for operational debts. The appellant subcontracted work to the respondent and issued purchase orders. The respondent provided services and raised invoices, which were not paid by the appellant, leading to the respondent filing an application under Sections 8 and 9 of the Code.2. Adjudicating Authority's Role in Determining the Existence of a Dispute:The adjudicating authority must determine whether there is an 'operational debt' exceeding Rs. 1 lakh, whether the debt is due and payable, and whether there is a pre-existing dispute. The existence of a dispute must be brought to the notice of the operational creditor within 10 days of receipt of the demand notice. If a dispute exists, the application must be rejected.3. Interpretation of 'Dispute' under Section 5(6) of the Code:The definition of 'dispute' under Section 5(6) is inclusive and not exhaustive. It includes disputes related to the existence or amount of debt, quality of goods or services, or breach of a representation or warranty. The court emphasized that the term 'dispute' should be interpreted broadly to include any real dispute as to payment between the parties.4. Procedural Requirements under Sections 8 and 9 of the Code:An operational creditor must deliver a demand notice or copy of an invoice to the corporate debtor. The corporate debtor must respond within 10 days, either by disputing the debt or by making payment. If the debtor fails to respond, the creditor may file an application with the adjudicating authority. The application must include a copy of the invoice, an affidavit stating no dispute exists, and a certificate from a financial institution confirming non-payment.5. The Role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT):The NCLT initially dismissed the respondent's application, citing the existence of a dispute. The NCLAT, however, allowed the appeal, stating that the adjudicating authority acted mechanically and did not properly examine the existence of a dispute. The Supreme Court set aside the NCLAT's decision, emphasizing that a genuine dispute existed and the application should have been dismissed.Conclusion:The Supreme Court concluded that the appellant had raised a plausible contention requiring further investigation, and the defense was not spurious or frivolous. The existence of a genuine dispute between the parties meant that the insolvency application should have been dismissed. The appeal was allowed, and the judgment of the NCLAT was set aside.