Key Takeaways From The NCLAT Judgment In Kirusa Vs Mobilox
In the context of initiating corporate insolvency resolution by an operational creditor against a corporate debtor under section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), a corporate debtor can, at a preliminary stage, resist such initiation (within the prescribed time limit under the IBC) in one of the two ways; either,
(a) it can bring ‘to the notice of the operational creditor existence of a dispute, if any, and record of pendency of the suit or arbitration proceedings filed before the receipt of notice or invoice in relation to the dispute’; or
(b) it can repay ‘the unpaid operational debt……’.
If the operational creditor receives neither a ‘notice of dispute’ (from the corporate debtor within the time prescribed under the IBC) nor a payment (from the corporate debtor), the operational creditor is entitled to make an application before the adjudicating authority for initiating a corporate insolvency resolution process.
Once such an application from an operational creditor has been received, the adjudicating authority is required to (within the prescribed time) either
(a) admit the application, if, interalia, no payment has been made by the corporate debtor or ‘no notice of dispute has been received by the operational creditor ….’ Or
(b) reject the application, if, interalia, ‘notice of dispute has been received by the operational creditor ….’.
Under the IBC, ‘dispute’ has been defined as follows:
‘dispute includes a suit or arbitration proceedings relating 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;’
An important question before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in Kirusa Software Private Limited versus Mobilox Innovations Private Limited was, interalia, the true meaning and interpretation of the expression ‘dispute’ for the purposes of section 9 of the IBC.
While interpreting the definition of ‘dispute’ in favour of corporate debtors, some key takeaways from the above judgment of the Hon’ble NCLAT are below:
- the definition of ‘dispute’ under the IBC is an inclusive definition and not exhaustive; the expression ‘includes’ used in the definition of ‘dispute’ should be read as ‘means and includes’;
- the definition of ‘dispute’ under the IBC it cannot be limited to pending proceedings or ‘lis’ within the limited ambit of suit or arbitration proceedings;
- ‘dispute’ will embrace not just suits or arbitrations but its ambit will extend to proceedings initiated or pending before consumer courts, tribunal, labour court or mediation, conciliation etc. as well as any action taken by a corporate debtor under any act or law such as replying to a notice under section 80 of the Code of Civil Procedure, 1908, or an action under section 59 of the Sale of Goods Act, 1930 or an action regarding the quality of goods or services provided by an operation creditor;
- such actions, suits, arbitrations, proceedings before any court, tribunal, or mediations etc. must be in the context of a debt, or quality of goods or services or breach of representation or warranty;
- ‘dispute’ must be raised (by the corporate debtor) prior to the notice for insolvency resolution by an operational creditor under section 8 of the IBC;
- raising of a pending ‘dispute’ (by the corporate debtor) cannot be a malafide dispute to stall the insolvency resolution process;
while the adjudicating authority is not empowered to verify the adequacy of the ‘dispute’, a ‘dispute’ giving colour of genuine dispute or illusory dispute (raised for the first time) cannot be a tool to reject the application for initiating the corporate insolvency resolution process.
Read the Judgment here.