Insolvency Code: How Kirusa verdict curtails power of operational creditors, provides relief to debtors

The Supreme Court has come out with another important verdict in the Kirusa Software Private Limited v. Mobilox Innovations Private Limited case, after its landmark decision in the case of Innoventive Industries. This judgement has clarified the meaning of the phrase ‘existence of dispute’ found under Section 8 (2) of the Insolvency and Bankruptcy Code, 2016 (IBC). This may look seemingly a small clarification, but it has long-term ramifications. To understand the effect of the judgement, it is pertinent to understand the scheme of insolvency process under IBC first.

The IBC was enacted with the purpose of resolving the position of financially sick companies by either rescuing them or liquidating them. Liquidation means selling off the assets of the company and distributing the money so realised amongst the creditors, i.e. the people to whom the sick company owed money.

The IBC hence, is a law which governs the relationship between the sick company, i.e. the debtor and the people or institutions (like banks) which have lent money to that company, i.e. the creditor. The creditors can of course be more than one.


Since the inception of the new regime of Insolvency under IBC, Section 9 of the Code has been subject to a lot of debate. Under Section 9, the insolvency process can be initiated by an operational creditor on ‘default of payment’ by the debtor. Operational creditor simply means a creditor who is a creditor by the virtue of the usual course of business, for example due to a contract. In a contract, the party which has to pay money becomes the debtor and the other becomes the creditor.

Reuters

Reuters

The effect of this section, hence is that now it is not necessary for an adjudicatory body to go into the financial health of a company to order initiation of the insolvency process. It can simply be started, if a company for some reason has defaulted even on a single instalment of payment. This means that the debtor may not be sick at all and even then, insolvency proceedings can be initiated against it.

There is also an inherent check under the IBC on the power enshrined under Section 9. This check is in the form of Section 8. This section provides for a requirement of a ‘demand notice’. This means that the creditor before initiating the insolvency process under Section 9 has to give notice to the debtor about it. Through this notice the creditor asks for the payment which is due. The debtor now has two options under clause 2 of Section 8. One option is obviously to repay the debt. The other option is, to bring to notice to the creditor the ‘existence of a dispute and the record of the pendency of a suit or arbitration proceeding filed before the receipt of’ the demand notice.

The phrase above was the subject of adjudication before the Supreme Court. This case concerns the famous TV show ‘Nach Baliye’. It involves a contract between the parties regarding televoting for the show. Mobilox had engaged Kirusa for providing toll free numbers through which TV viewers could have voted for their favourite participant in the show.

Mobilox refused payment to Kirusa because there was a Non-Disclosure Agreement (NDA) between the parties and Kirusa had violated it by advertising on its website the information that they had conducted televoting for Nach Baliye, which they couldn’t have done because of the virtue of NDA.

Kirusa sent a demand notice to Mobilox under Section 8. To this Mobilox replied that there was a bonafide dispute existing in the form of violation of the NDA. The National Company Law Appellate Tribunal (NCLAT) had ruled in favour of Kirusa. It had refused to acknowledge the violation of NDA as a dispute under Section 8 (2). As per the wordings of the provision, it is essential that a suite, or an arbitration proceeding be instituted in pursuance of it, before a demand notice is given. The pre-existence of the dispute is essential in this situation. The provision uses the word ‘and’ as has been highlighted above. This means that the existence of the dispute must be acknowledged in the form of some sort of litigation be it a suite or an arbitration proceeding.


The Supreme Court effectively amended the wordings of Section 8(2) by the operation of this judgement. The Court held that the word ‘and’ in the section should be read as ‘or’. The result of this will be that there can be a dispute between the parties which may or may not be a part of any form of litigation, which can now be used to stop the initiation of insolvency proceedings.

The judgement is welcome in the light of such clarification. It has rightly held that each and every dispute in a business is not always subjected to litigation, especially in India, where litigation and even arbitration proceedings also involve a considerable amount of time. Therefore, it is essential that even if such a dispute exists which is not a part of a litigation, insolvency application should be dismissed by the authorities.

It also brings us to the larger question that whether IBC can be used by corporates as deterrent tool to demand fulfilment of contractual obligations. There has been almost 70 percent of applications from Operational Creditors under the IBC as of now. Strictly speaking this should not be the case. IBC has been enacted with a certain purpose which is not debt recovery, but streamlining the insolvency law.

This judgement of the apex court has curtailed the power of operational creditors in this regard and has provided much-needed relief from the pressure exerted by huge number of applications filed by operational creditors.

(The writer is Research Fellow with the Department of Humanities and Social Sciences, IIT Bombay, Mumbai. He can be reached at raghav10089@gmail.com, Twitter: @raghavwrong)


Published Date: Oct 11, 2017 03:53 pm | Updated Date: Oct 11, 2017 03:53 pm



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