Mobilox Innovations Private Ltd v. Kirusa Software Private Ltd [AIR 2017 SC 4532]

Laws applied

1. Insolvency and bankruptcy code, 2016
2. The companies act, 2013

Facts

The appellant was engaged in a star TV program “Nach Baliye” conducting a telephonic voting mechanism. The respondent company was engaged by the appellant to provide various services relating to the TV program and too the parties executed a non-disclosure agreement. The NDA stipulated certain conditions such as confidentiality obligations.

The respondent provided the requisite services and raised monthly invoices between December, 2013 and November, 2014 – the invoices were payable within 30 days from the date on which they were received. The respondent followed up with the appellant for payment of pending invoices through e-mails sent between April and October, 2014.

More than a month after the execution of the aforesaid agreement, the appellant, on 30th January, 2015, wrote to the respondent that they were withholding payments against invoices raised by the respondent, as the respondent had disclosed on their webpage that they had worked for the “Nach Baliye” program run by Star TV, and had thus breached the NDA.

Kirusa sent a demand notice to Mobilox under section 8 of the insolvency and bankruptcy code, due to non-payment. The respondent’s response stated that there was a bona fide and serious dispute between the parties, inclusive of the breach of obligations mentioned under the NDA.

Previous decisions

NCLT

Kirusa filed an application before the NCLT, Mumbai under section 9 for the initiation of the corporate insolvency resolution process (CIRP) of Mobilox. NCLT rejected the application on the grounds that Mobilox had issued a notice of the dispute to the operational creditor.

The Tribunal dismissed the application in the following terms:

“On perusal of this notice dated 27.12.2016 disputing the debt allegedly owed to the petitioner, this Bench, looking at the Corporate Debtor disputing the claim raised by the Petitioner in this CP, hereby holds that the default payment being disputed by the Corporate Debtor, for the petitioner has admitted that the notice of dispute dated 27th December 2016 has been received by the operational creditor, the claim made by the Petitioner is hit by Section (9)(5)(ii)(d) of The Insolvency and Bankruptcy Code, hence this Petition is hereby rejected.”

NCLAT

An appeal against the order of the tribunal was subsequently filed by Kirusa stating the grounds of rejection were invalid under section 9 of the insolvency and bankruptcy code.

The question before the appellate court was with respect to the clarification of the meaning of the words “dispute” and “the existence of dispute” for the purpose of an application filed under section 9 of the ‘I & B’ code. section 9 of the code envisages the right to file an appeal for the initiation of the corporate insolvency resolution process after the expiry of 10 days from the date of delivery of the demand notice.

This appeal was allowed in the following terms:

“39. In the present case, the adjudicating authority has acted mechanically and rejected the application under sub-section (5)(ii)(d) of Section 9 without examining and discussing the aforesaid issue. If the adjudicating authority would have noticed the provisions as discussed above and what constitutes ‘dispute’ in relation to services provided by operational creditors then it would have come to a conclusion that the condition of demand notice under sub-section (2) of Section 8 has not been fulfilled by the corporate debtor and the defense claiming dispute was not only vague, got up and motivated to evade the liability.

40. For the reasons aforesaid we set aside the impugned order dated 27.1.2017 passed by adjudicating authority in CP No.01/I &BP/NCLT/MAH/2017 and remit the case to adjudicating authority for consideration of the application of the appellant for admission if the application is otherwise complete.”

Supreme court’s observations

• The Hon’ble court allowed the appeal and set aside the judgment of the Appellate Tribunal by stating 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. All this shows that it is right to have the matter tried out in the present case before the axe falls.
• The court interpreted the word “and” as 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.

This would lead to great hardship; 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. 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 up to three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them.

Such an anomaly cannot possibly have been intended by the legislature nor has it so been intended. We have also seen that 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, do not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations.

It is for this reason that it is enough that a dispute exists between the parties. It is settled law that the expression “and” may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation.

• The court also noticed that in the first Insolvency and Bankruptcy Bill, 2015 that was annexed to the Bankruptcy Law Reforms Committee Report, Section 5(4) defined “dispute” as meaning a “bona fide suit or arbitration proceedings…”. In its present avatar, Section 5(6) excludes the expression “bona fide” which is of significance. Therefore, it is difficult to import the expression “bona fide” into Section 8(2)(a) in order to judge whether a dispute exists or not.
• As to the test of “the existence of a dispute”, the view of the apex court was, “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.”

• The court too observed that the confirmation from a financial institution that there is no payment of an unpaid operational debt by the corporate debtor is an important piece of information that needs to be placed before the adjudicating authority, under Section 9 of the Code.

Conclusion

There were no doubt various views as to the “dispute” and “existence of a dispute” since the introduction of the “I & B” bill and in such circumstances, the apex court has wisely interpreted them and settled their meaning and scope.  

This article has been submitted by Aishanya Soni, a student, at Oriental University, Indore.