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Desai Diwanji wins as Supreme Court lays down interpretation of “existence of dispute”under IBC

Team SoOLEGAL 22 Sep 2017 4:21pm

Desai Diwanji wins as Supreme Court lays down interpretation of “existence of dispute”under IBC

The Supreme Court of India recently passed a judgment laying down its interpretation of the terms dispute and existence of dispute under the Insolvency and Bankruptcy Code (IBC), 2016.

The Bench of Justices Rohinton Nariman and Sanjay Kishan Kaul held that a dispute is said to exist as long is it not a spurious or hypothetical one. As long as that is the case, Section 9 (5)(ii)(d) of the IBC would be triggered.

The facts of the case are that the appellant company was engaged for conducting tele-voting for the dance programme Nach Baliye. The appellant had sub-contracted the same to the respondent, which was to provide toll-free numbers through which viewers could cast their votes in favour of contestants of their choice.

The appellant was liable to pay the respondent for rentals for the toll-free numbers, as well as primary rate interface rental to the telecom operators. The respondents had raised invoices of the same between November 2013 and December 2014. A non-disclosure agreement (NDA) was signed between the two parties on December 26, 2014.

Then, in January 2015, the appellants had informed the respondents that they were withholding payments due to them, as the latter had revealed on their website that they had worked for the Nach Baliye program, thus violating the terms of the NDA.

In response, the respondents sent a demand notice to the appellants claiming dues of over Rs. 20 lakh, under Section 8 of the IBC. After the appellants stuck to its earlier position and refused to release the payments, the respondents preferred an application before the National Company Law Tribunal (NCLT) claiming an operational debt of Rs. 20 lakh.

The application was rejected by the NCLT on the ground that it was hit by Section 9(5)(ii)(d), which states,

“(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order

(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

(d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility”

This order was appealed in the National Company Law Appellate Tribunal (NCLAT), which had remanded the case back to the NCLT with a direction to “consider the application of the Appellant (the respondents before the Supreme Court) for admission if the Application is otherwise complete.”

The appellants were represented by a team from Desai & Diwanji comprising Partner Shyam Pandya, along with Puneet Bindra, Debashree Dey and Rohan Kaushal. The firm had engaged Devansh Mohta to argue before the Supreme Court. The respondents were represented by PRA Law Offices, through a team headed by Partners R Jawahar Lal and Sanjeev Jain.

The NCLAT order was challenged on two primary aspects: firstly, that the Insolvency Application filed by the respondents was incomplete and therefore liable to be dismissed as per Section 9(5)(ii)(a) of the IBC, and secondly, that the NCLAT had overlooked the existence of dispute between the parties. If the NCLAT had done so, the appellants claimed, the application would be liable to be rejected under Section 9(5)(ii)(d) of the IBC.

The Supreme Court, after going into the history of the IBC and the evolution of the provisions therein, noted that the definition of dispute has now become an inclusive, after the phrase “bona fide” has been deleted after the phrase “suit or arbitration proceedings”. The provision reads thus:

“(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) 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.”

Further, the Bench held that the word “and” in Section 8(2) must be read as “or”, keeping in mind the legislative intent. The judgment states,

“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 of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court…

…given the fact that long limitation periods are allowed, where disputes may arise and do not reach an arbitral tribunal or a court for upto 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.”

Coming to its interpretation of the term “existence of dispute”, the Court held that once the same has been brought to the notice of the operational creditor,

“…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…

…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.”

Applying this to the facts of the present case, the Court agreed with Mohta’s argument that a dispute between the parties clearly exists, and that the application ought to have been dismissed by the NCLAT.

“…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.”

Thus, the Court allowed the appeal and set aside the ruling of the NCLAT.

Read the judgment here:


Source: barandbench


Tagged: Desai Diwanji   Supreme Court   Justice Rohinton Nariman   justice Sanjay Kishan Kaul  
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