Insolvency & Bankruptcy Code- SC Interprets Scope Of ‘Existence Of Dispute’ Between Operational Creditor And Corporate [Read Judgment]

The judgment of the Supreme Court in Mobilox Innovations Pvt.Ltd. v.Kirusa Software Pvt.Ltd. rendered by a bench of Justices R. F Nariman and Sanjay Kishan Kaul settles a significant issue under the Insolvency and Bankruptcy Code 2016. The issue was whether the existence of a dispute by itself without the record of initiation of any suit or arbitration proceedings in relation to it is sufficient to make an application for insolvency resolution at the instance of operational creditor unsustainable.Under the Insolvency Code, an operational creditor can file application for insolvency resolution of a corporate debtor under Section 9. A claim in respect of the provision of goods or services including employment is an operational debt(Sec.2(21), and a creditor to whom operational debt is owed is an operational creditor(Sec.2(20). The respondent before the Supreme Court, Kirusa Software Ltd., claimed that it was an operational creditor to Mobilox Innovations Ltd, the appellant. Kirusa Software had rendered software and telecommunication supports to the appellant under a sub-contract, in relation to the contract the appellant had with Star TV for conducting viewers’ poll for the program ‘Nach Baliye’.Kirusa Ltd. claimed that amounts were outstanding to it under the invoices raised to Mobilox Ltd. Kirusa raised a demand of operational debt by sending notices under Section 8(1). Mobilox responded to the notice by pointing out stating the Kirusa had breached the Non-Disclosure Agreement(NDA) by disclosing to the public that it had a sub-contract under Mobilox. According to Mobilox, the breach of NDA amounted to a ‘dispute’ within the meaning of Section 8(2)(a), and therefore the demand was not liable to be met. In this context, it may be helpful to note that the demand raised by the operational creditor under Section 8(1) has to be responded to by the corporate debtor within ten days of receipt of demand by either :- Bringing out to the notice of debtor the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;(Sec.8(2)(a)) or, Repayment of the debt with the proof of payment.Kirusa approached the NCLT by filing application for insolvency resolution process against Mobilox under Section 9. The NCLT dismissed the application under Section 9(5)(ii)(d) on the ground that notice of dispute had been received by the operational creditor . Kirusa filed appeal before the NCLAT. The NCLAT allowed the appeal and directed the NCLT to process the application. Feeling aggrieved by the order of NCLAT, Mobilox filed appeal before the Supreme Court.After tracing the background and legislative history of the IBC, the Supreme Court settled the following issues after an enlightening discussion.DISTINCTION BETWEEN FINANCIAL CREDITOR AND OPERATIONAL CREDITOR. Before delving into the heart of the issue, the Court emphasised the distinction between operational creditor and financial creditor.The operational creditors are those creditors to whom anoperational debt is owed, and an operational debt, in turn,means a claim in respect of the provision of goods or services. Financial debts are owed to financial creditors who advanced financial aid. The insolvency process initiated a financial creditor is under Section 7; whereas then insolvency process by operational creditor is under Section 9. A financial creditor need only establish default by the corporate debtor to sustain the insolvency process. Whether the debt is disputed or not is not an issue in a claim by financial creditor. However, a claim by operational creditor can be defeated showing the existence of a dispute as to the claim. The judgment referred to the earlier judgment rendered by the very same bench in Innoventive Industires v. ICICI Bank which had discussed the distinction in detail.Since the case at hand was at the instance of an operational creditor instead of a financial creditor, the existence of dispute was material in determining the claim.SECTION 8(2)(a)- ‘AND’ HAS TO BE READ AS ‘OR’Section 8(2)(a) of IBC states that the creditor debtor within ten days of receipt of demand notice by operational creditor shall point out the existence of dispute and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute. The argument by the operational creditor was that existence of dispute by itself is not sufficient, and that there should be a suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.The Court however held that such an interpretation will lead to injustice and anomalies, and hence construed ‘and’ as ‘or’ to make the phrases disjunctive. It was held as followsEven 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 ...

Insolvency & Bankruptcy Code- SC Interprets Scope Of ‘Existence Of Dispute’ Between Operational Creditor And Corporate [Read Judgment]

Manu Sebastian

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