# MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA SOFTWARE PRIVATE LIMITED

- **Citation:** [2017] 10 S.C.R. 1006
- **Court:** Supreme Court of India
- **Decided:** 2017-09-21
- **Case number:** Civil Appeal No. 9405 of2017
- **Bench:** R. F. Nariman, Sanjay Kishan Kaul
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mobilox-innovations-private-limited-v-kirusa-software-private-limited-31411
- **Pages:** 67

## Headnote

Insolvency Laws - Legislative history of legislation relating
to indebtedness - Discussed.
C
Insolvency and Bankruptcy Code, 2016:
D
E
Purpose of enactment - Discussed.
s.9 - Application for initiation of Corporate Insolvency
Resolution Process (CIRP) - The adjudicating authority, when
examining an application under s.9 of the Act has to determine
whether there is an "operational debt" as defined exceeding Rs. I
lakh; whether the documentary evidence furnished with the
application shows that the aforesaid debt is due and payable and
has not yet been paid; and whether there. is existence of a dispute
between the parties or the record of the pendency of a suit or
arbitration proceeding filed before the receipt of the demand notice
of the unpaid operational debt in relation to such dispute - If any
one of these conditions is lacking, the application has to be
rejected - Apart from that the adjudicating authority must follow
the mandate of s.9 and in particular the mandate of s.9(5) of the
Act, and admit or reject the application, as the case may be,
F
depending upon the factors mentioned in s.9(5) of the Act - Jn the
instant case, correspondence between the parties showed that the
respondent had breached the terms of agreement and, therefore,
appellant withheld the payment against the invoices raised by the
respondent - This shows that the appellant had raised the plausible
G contention regarding further investigation and a dispute existed
between them - Application under s.9 is, therefore, liable to be
dismissed - Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016 - Insolvency and Bankruptcy Board of India
(l11Solvency Resolution Process for Corporate Persons) Regulations,
2016 - Regn 7.
H
1006
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1007
SOFI'WARE PRIVATE LIMITED
s.8(2)(i:1) - Word "and" - Connotation of -Held: The word
A
"and" occurring in s.8(2)(a) must be 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 of the insolvency process, in
B
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 upto three years,
such persons would be outside the purview of s.8(2) leading to
bankruptcy proceedings commencing against therii - Such an · C
anomaly cannot possibly have been intended by the legislature nor
has it so been intended.
Companies Act, 2013:
s.271 - A company being unable to pay its debts is no longer
a ground for winding up a company - Old law contained in D
Madhusudan case no longer valid.
· Allowing the appeal, the Court
HELD: 1.1 The legislative history of legislation relating to
indebtedness goes back to the year 1964 when the 24'h Law E
Commission recommended amendments to the Provincial
Insolvency Act of 1920. This was followed by the Tiwari
Committee of 1981, which introduced the Sick Industrial
Companies Act, 1985. Following economic liberalization in the
1990s, two Narsimham Committee reports led to the Recovery
of Debts and Bankruptcy Act, 1993 and the SARFAESI Act, 2002.
F
Meanwhile, the Goswami Committee Report, submitted in 1993,
condemned the liquidation procedure prescribed by the
Companies Act, 1956 as unworkable and being beset with delays
at all levels - delaying tactics employed by· the management,
delays at the' level of the Courts, delays in making auction sales . G
etc. This then led to the Eradi Committee Report of 1999, which
proposed amendments to. the Companies Act and proposed the
repeal of. SICA. ·This Committee echoed the findings of the.
Goswami Committee and recommended an overhaul of the
liquidation procedure under the Companies Act. It was for the ·
first

## Text

_Characters 0–39,830 of 140,541. This is a partial read: ask again with offset=39830 for what follows._

A
B
[2017] 10 S.C.R. 1006
MOBILOX INNOVATIONS PRIVATE LIMITED
v.
KIRUSA SOFTWARE PRIVATE LIMITED
(Civil Appeal No. 9405 of2017)
SEPTEMBER 21, 2017
[R. F. NARIMAN AND SANJAY KISHAN KAUL, JJ.]
Insolvency Laws - Legislative history of legislation relating
to indebtedness - Discussed.
C
Insolvency and Bankruptcy Code, 2016:
D
E
Purpose of enactment - Discussed.
s.9 - Application for initiation of Corporate Insolvency
Resolution Process (CIRP) - The adjudicating authority, when
examining an application under s.9 of the Act has to determine
whether there is an "operational debt" as defined exceeding Rs. I
lakh; whether the documentary evidence furnished with the
application shows that the aforesaid debt is due and payable and
has not yet been paid; and whether there. is existence of a dispute
between the parties or the record of the pendency of a suit or
arbitration proceeding filed before the receipt of the demand notice
of the unpaid operational debt in relation to such dispute - If any
one of these conditions is lacking, the application has to be
rejected - Apart from that the adjudicating authority must follow
the mandate of s.9 and in particular the mandate of s.9(5) of the
Act, and admit or reject the application, as the case may be,
F
depending upon the factors mentioned in s.9(5) of the Act - Jn the
instant case, correspondence between the parties showed that the
respondent had breached the terms of agreement and, therefore,
appellant withheld the payment against the invoices raised by the
respondent - This shows that the appellant had raised the plausible
G contention regarding further investigation and a dispute existed
between them - Application under s.9 is, therefore, liable to be
dismissed - Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016 - Insolvency and Bankruptcy Board of India
(l11Solvency Resolution Process for Corporate Persons) Regulations,
2016 - Regn 7.
H
1006
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1007
SOFI'WARE PRIVATE LIMITED
s.8(2)(i:1) - Word "and" - Connotation of -Held: The word
A
"and" occurring in s.8(2)(a) must be 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 of the insolvency process, in
B
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 upto three years,
such persons would be outside the purview of s.8(2) leading to
bankruptcy proceedings commencing against therii - Such an · C
anomaly cannot possibly have been intended by the legislature nor
has it so been intended.
Companies Act, 2013:
s.271 - A company being unable to pay its debts is no longer
a ground for winding up a company - Old law contained in D
Madhusudan case no longer valid.
· Allowing the appeal, the Court
HELD: 1.1 The legislative history of legislation relating to
indebtedness goes back to the year 1964 when the 24'h Law E
Commission recommended amendments to the Provincial
Insolvency Act of 1920. This was followed by the Tiwari
Committee of 1981, which introduced the Sick Industrial
Companies Act, 1985. Following economic liberalization in the
1990s, two Narsimham Committee reports led to the Recovery
of Debts and Bankruptcy Act, 1993 and the SARFAESI Act, 2002.
F
Meanwhile, the Goswami Committee Report, submitted in 1993,
condemned the liquidation procedure prescribed by the
Companies Act, 1956 as unworkable and being beset with delays
at all levels - delaying tactics employed by· the management,
delays at the' level of the Courts, delays in making auction sales . G
etc. This then led to the Eradi Committee Report of 1999, which
proposed amendments to. the Companies Act and proposed the
repeal of. SICA. ·This Committee echoed the findings of the.
Goswami Committee and recommended an overhaul of the
liquidation procedure under the Companies Act. It was for the ·
first time, in 2001, that the L.N. Mitra Committee of the RBI H
1008
SUPREME COURT REPORTS
[2017] IO S.C.R.
A proposed a comprehensive Bankruptcy Code. This was followed
by the Irani Committee Report, also of the RBI in 2005, which
noted that the liquidation procedure in India is costly, inordinately
lengthy and results in almost complete erosion of asset value.
The Committee also noted that the insolvency framework did
B
c
not balance stakeholders' interests adequately. It proposed a
number of changes including changes for increased protection of
creditors' rights, maximization of asset value and better
management of the company in liquidation. In 2008, the Raghuram
Rajan Committee of the Planning Commission proposed
improvement to the credit infrastructure in the country, and finally
a Committee of Financial Sector Legislative Reforms in 2013
submitted a draft Indian Financial Code, which included a
"resolution corporation" for resolving distressed financial firms.
All this then led to the Bankruptcy Law Reforms Committee, set
up by the Department of Economic Affairs, Ministry of Finance,
D under the Chairmanship of Shri T.K. Viswanathan. This
Committee submitted an interim report in February 2015 and a
final report in November of the same year. It was, as a result of
the deliberations of this Committee, that the present Insolvency
and Bankruptcy Code of 2016 was finally born. [Paras 11-13]
[1024-F-G; 1025-A-F]
E
Madhusudan Gordhandas v. Madhu Woollen Industries
Pvt. Ltd. [1972] 2 SCR 201 - referred to.
1.2 In the passage of the Bills which ultimately became the
Code, various important changes have taken place. The original
definition of "dispute" has now become an inclusive definition,
F
the word "bona fide" before "suit or arbitration proceedings"
being deleted. In Section 8(1), the words "through an information
utility, wherever applicable, or by registered post or courier or
by any electronic communication" have been deleted. Likewise,
in Section 8(2), the period of "at least 60 days ... through an
G information utility or by registered post or courier or by any
electronic communication" has also been deleted. In Section
9(5), the absence Of a proviso similar to the proviso occurring in
Section 7(5) was also rectified. Further, the time periods of 2
and 3 days were uniformly substituted by 7 days, so that a
sufficiently long period is given to do the needful. [Para 23] [1055H
E-G]
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
.!009
SOFTWARE .PRIVATE LIMITED
·2.1 Under the scheme under Sections 8 and 9 of the Code, A
an operational creditor, as defined, may, on the occurrence of a
default (i.e., on non-payment of a debt, any part whereof has
become due and payable and has not been repaid), deliver a
demand notice of such unpaid operational debt or deliver the
copy of an invoice demanding payment of such_ amount to the B
corporate debtor in a prescribed form. Within a period of 10
days of such receipt, the corporate debtor must bring to the notice
of the operational creditor the existence of a dispute and/or the
. record of the pendency of a suit or arbitration proceeding filed
before the receipt of such notice or invoice in ·relation to such
dispute (Section 8(2)(a). It is only if, after the expiry of the period
of. the said 10 days, the operational creditor does not either·
receive payment from the corporate debfor or notice of dispute,
that the operational creditor may trigger· the insolvency process
c
by filing an application before the adjudicating authority under
Sections 9(1) and 9(2). Under Section 9(3), alongwith the D
application, the statutory requirement is to furnish a copy of the
invoice or demand notice, an affidavit to the effect that there is
no notice given by the corporate debtor relating to a dispute of
the unpaid operational- debt and a copy of the certificate from the
financial institution maintaining accounts of the operational
creditor confirming that there is no payment of an unpaid · E
operational debt by the corporate debtor. If the adjudicating
authority finds that either there is no repayment of the unpaid
operational debt after the invoice (Section 9(5)(i)(b)) or the invoice
or· notice of payment to the corporate debtor has been delivered
by the operational creditor (Section 9(5)(i)(c)), or that no notice
of dispute has been received by the operational creditor from
the corporate debtor or that there is no record of such dispute in
F
the information utility. (Section 9(5)(i)(d)), or .that· there is no
disciplinary proceeding pending against any resolution
professional proposed by the operational creditor (Section
9(5)(i)(e)), it shall admit the application within 14 days of the
G
receipt of the application, after which the corporate insolvency .
.
r resolution process gets -triggered. [Para 25l [1055-H; 1056-A-·
C, E, F~H; 1057-A-C] ..
2.2 Another thing of importance is the timelines within
which the insolvency resolution process is to be triggered. The H
1010
A
B
c
SUPREME COURT REPORTS
[2017) 10 S.C.R.
corporate debtor is given 10 days from the date of receipt of
demand notice or copy of invoice to either point out that a dispute
exists between the parties or that he has since repaid the unpaid
operational debt. If neither exists, then an application once filed
has to be disposed of by the adjudicating authority within 14 days
of its receipt, either by admitting it or rejecting it. An appeal can
then be filed to the Appellate Tribunal. Section 64 of the Code
mandates that where these timelines are not adhered to, either
by the Tribunal or by the Appellate Tribunal, they shall record
reasons for not doing so within the period so specified and extend
the period so specified for another period not exceeding 10 days.
[Paras 26, 27) [1058-C-D, E-F]
3.1 In the notes on clauses annexed to the Insolvency and
Bankruptcy Bill of 2015, "the existence of a dispute" alone is
mentioned. Even otherwise, the word "and" occurring in Section
8(2)(a) must be read as "or" keeping in mind the legislative intent
D and the fact that an anomalous situation would arise if it is not
read as "or". 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 upto three years, such persons would be
outside the purview of Section 8(2) leading to bankruptcy
E
proceedings commencing against them. Such an anomaly cannot
possibly have been intended by the legislature nor has it so been
intended. [Para 29] [1060-C-E]
lmwventive Industries Ltd. l'. ICICI Bank & Anr. [2018]
1 sec 407 - relied on.
F
3.2 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. Section 255 read with the Eleventh
Schedule of the Code has amended Section 271 of the Companies
Act, 2013 so that a company being unable to pay its debts is no
longer a ground for winding up a company. The old law contained
G in Madhusudan has, therefore, disappeared with the
disappearance of this ground in Section 271 of the Companies
Act. 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
H arbitration proceedings ••. ". In its present avatar, Section 5(6)
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1011
SOFTWARE PRIVATE LIMITED
excludes the expression "bona fide" which is of significance. A
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.
[Paras 30, 33, 34, 35] [1060-G; 1062-G-H; 1063-A-B]
Samee Khan v. Bindu Khan (1998) 7 SCC 59.: [1998]
1 Suppl. SCR 244; Gujarat U1ja Vikas Nigam Ltd. v.
B
Essar Power Ltd. (2008) 4 SCC 755 : [2008] 4 SCR
822; Maharishi Maliesh Yogi Vedic Vishwavidyalaya 1•.
State of M.P. (2013) 15 SCC 677 : [2013] 13 SCR 464
- relied on.
Spencer Constructions Pty Ltd v. G & M Aldridge Pty
C
Ltd. [1997] FCA 681; Hayes v. Hayes (2014) EWHC
2694 (Ch); In Re: Portman Provincial Cinemas Ltd.
(1999) 1 WLR 157 - referred to.
3.3 Once the operational creditor has filed an application,
which is otherwise complete, the adjudicating authority must reject D ·
the application under Section 9(5)(2)(d) if notice of dispute has
been received by the operational creditor or there is a record of
dispute in the information utility. It is clear that such notice must
bring to the notice of the operational creditor the "existence" of
a dispute or the fact that a suit or arbitration proceeding relating
to a dispute is pending between the parties. Therefore, all that E
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 C.ourt docs not
at this stage examine the merits of the dispute except to the
F
extent indicated above. So long as a dispute truly exists in fact
and is not spurious, hypothetical or illusory, the adjudicating
authority has to reject the application. On the facts of this case,
it is clear that the argument for appellant that the requisite
certificate by IDBI was not given in time will have to be rejected,
inasmuch as neither the appellant nor the Tribunal raised any G
objection to the application on this score. 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, but given· the fact that the H
1012
SUPREME COURT REPORTS
(2017] 10 S.C.R.
A adjudicating authority has not dismissed the application on this
ground and that the appellant has raised this ground only at the
appellate stage, the application cannot be dismissed at the
threshold for want of this certificate alone. [Paras 40, 41] [1069B-G]
B
c
4.1 The definition of "dispute" is an inclusive one, and the .
word "includes" substituted the word "means" which occurred
in the first Insolvency and Bankruptcy Bill. Secondly, the present
is not a case of a suit or arbitration proceeding filed before receipt
of notice - Section 5(6) only deals with suits or arbitration
proceedings which must "relate to" one of the three sub-clauses,
either directly or indirectly. A "dispute" is said to exist, so long
as there is a real dispute as to payment between the parties that
would fall within the inclusive definition contained in Section 5(6).
The correspondence between the parties would show that on 30'h
January, 2015, the appellant clearly informed the respondent that
D they had displayed the appellant's confidential client information
and client campaign information on a public platform which
constituted a breach of trust.and a breach of the NDA between
the partie·s. They were further told that all amounts that were
due to th1~m were withheld till the time the matter is resolved.
E On lO'h February, 2015, the respondent referred to the NDA of
261h December, 2014 and denied that there was a breach of the
NDA. The respondent went on to state that the appellant is trying
to avoid its financial obligations, and that a sum of Rs.19,08,202.57
should be paid within one week, failing which the respondent
would be forced to explore legal options and initiate legal process
F
for recovery of the said amount. This e-mail was refuted by the
appellant and the appellant went on to state that it had lost
business from various clients as a result of the respondent's
breaches. Curiously, after this date, the respondent remained
silent, and thereafter, by an e-mail the respondent wished to revive
business relations and stated that it would like to follow up for
G payments which are long stuck up. This was followed by another
e-mail to finalize the time and place for a meeting. The appellant
wrote to the respondent again to finalize the time and place.
Apparently, nothing came of the aforesaid e-mails and the
appellant then fired the last shot on 191h September, 2016,
H reiterating that no payments are due as the NDA was breached.
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1013
SOFTWARE PRIVATE LIMITED
· The demand notice sent by the respondent was disputed in detail
A
by the appellant. [Paras 43, 44] [1070-B-H; 1071-A]
4.2 Going by the test of "existence of a dispute", 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 B
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 inay not ultimately
succeed, and the Appellate Tribunal was wholly incorrect in
characterizing the defense as vague, got-up and motivated to
evade liability. Admittedly, the matter has never been resolved.
C
Also, the respondent itself has not commenced any legal
proceedings after the e-mail dated 301h January, 2015 except for
the present insolvency application, which was filed almost 2 years
after the said e-mail. All these circumstances go to show that it is
right to have the matter tried out in the present case before the
D
axe falls. [Paras 45, 46] [1071-G-H; 1072-A-B, C-D]
[1972] 2 SCR 201
,
Case Law Reference
referred to
Para 14
[2018] 1 SCC 407
relied on
Para 28
T1998] .1 Suppl. SCR 244
relied on
Para 30
[2008] 4 SCR 822
relied on
· Para 31
[20i3] 13 SCR 464
relied on
Para 32
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 9405
of2017.
From the impugned Judgment and final Order dated 24.05.2017
passed by the National Company Law Appellate Tribunal, New Delhi in
Company Appeal (AT)(Insolvency) No.6 of2017.
E
F
Devansh Mohta, Puneet Singh Bindra, Shyam Pandya, Aslam
Ahmed, Rohan Kaushal, Advs. for the Appellant
G
R. Jawahar Lal, Sanjeev Jain, Ms. Apoorva Agarwal, Ashwani
Kumar, Advs. for the Respondents
The Judgment of the Court was delivered by
R. F. NARIMAN, J. 1. The present appeal raises questions as
to the triggering of the Insolvency and Bankruptcy Code, 2016 when it H
1014
SUPREME COURT REPORTS
[2017] 10 S.C.R.
A comes to operational debts owed to operational creditors. The appellant
was engaged by Star TV for conducting tele-voting forthe "Nach Bali ye"
program on Star TV. The appellant in turn sub-contracted the work to
the respondent and issued purchase orders between October and
December, 2013 in favour of the respondent. In the "Nach Baliye"
B
c
program, the successful dancer was to be selected on various bases,
including viewers' votes. For this purpose, the respondent was to provide
toll free telephone numbers across India, through which the viewers of
the program could cast their votes in favour of one or more participants.
For this purpose, a software was customized by the respondent, who
then coordinated the results and provided them to the appellant. Since
the respondent obtained toll free numbers from telephone operators in
terms of the purchase orders, the appellant was liable to make payment
of rentals for the toll free numbers, as well as primary rate interface
rental to the telecom operators. The respondent provided the requisite
services and raised monthly invoices between December, 2013 and
D 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. It is also important to note that a nondisclosure agreement (hereinafter referred to as the NDA) was executed
between the parties on 261h December, 2014 with effect from I''
E November, 2013.
2. More than a month after execution of the aforesaid agreement,
the appellant, on 30'h 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
F for the "Nach Bali ye" program run by Star TV, and had thus breached
the NDA. The correspondence between the parties finally culminated
in a notice dated 12•h December, 2016 sent under Section 271 of the
Companies Act, 2013. Presumably because winding up on the ground
of being unable to pay one's debts was no longer a ground to wind up a
company under the said Act, a demand notice dated 23'd December,
G 2016 was sent for a total of Rs.20,08,202.55 under Section 8 of the new
Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the
Code). By an e-mail dated 27'h December, 2016, the appellant responded
to the aforesaid notice stating that there exists serious and bona fide
disputes between the parties, that the notice issued was a pressure tactic,
H and that nothing was payable inasmuch as the respondent had been told
-
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1015
SOFTWARE PRIVATE LIMITED [R. F. NARIMAN, J.]
way back on 30'h January, 2015 that no amount will be paid to the A
respondent since it had breached the NDA.
3. An application was then filed on 30'h December, 2016 before
the National Company Law Tribunal under Sections 8 and 9 of the new
Code stating that an operational debt of Rs.20,-08,202.55 was owed to
the respondent.
B
4. On I 9'h January, 2017, the respondent was orally intimated to
remove a defect in the application, in that it did not contain the appellant's
notice of dispute. This was rectified by an affidavit in compliance dated
241h January, 2017, by which various other documents were also supplied
by the respondent to the Tribunal. On 27'h January, 2017, the Tribunal c
dismissed the aforesaid 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
D
the Corporate Debtor, for the petitioner has admitted that the
notice of dispute dated 271h 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."
5. An appeal was then filed before the National Company Law
Appellate Tribunal which was decided on 24'h May, 2017. This appeal ·
was allowed in the following terms:
E
"39. In the present case the adjudicating authority has acted
mechanically and rejected the application under sub-section
F
(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 condition of demand notice
under sub-section (2) of Section 8 has not been fulfilled by the G
corporate debtor and the defence 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 H
1016
SUPREME COURT REPORTS
[2017] 10 S.C.R.
A
authority for consideration of the application of the appellant for
admission if the application is otherwise complete.
B
c
41. The appeal is allowed with the aforesaid observations.
However, in the facts and circumstances there shall be no order
as to cost."
6. Shri Mohta, learned counsel on behalf of the appellant, raised
various contentions before us. According to learned counsel, the
application should have been dismissed on the ground that the operational
creditor did not furnish a copy of the certificate from a financial institution,
viz. IDBI in the present case, that maintained accounts of the operational
creditor, which confirmed that there is no payment of any unpaid
operational debt by the corporate debtor under Section 9(3)(c) of the
Code. This being so, the application ought to have been dismissed at the
very threshold. Apart from this, the learned counsel took us through
various committee reports and the provisions of the Code and argued
that under Section 8 of the Code, the moment a corporate debtor, within
D
IO days of the receipt of a demand notice or copy of invoice, brings to
the notice of the operational creditor the existence of a dispute between
the parties, the Tribunal is obliged to dismiss the application. According
to him, under Section (8)(2)(a), the expression "existence of a dispute, if
E
F
~ G
H
any, and record of the pendency of the suit or arbitration proceedings
filed ... " must be read as existence of a dispute "or" record of the .
pendency of the suit or arbitration proceedings filed, i.e. disjunctively.
According to the learned counsel, the definition of"dispute" under Section
5(6) of the Code is an inclusive one and the original draft bill not only had
the word "means" instead of the word "includes", but also the word
"bona fide" before the words "suit or arbitral proceedings", which is
missing in the present Code. Therefore, learned counsel argu~d that the
moment there is existence of a dispute, meaning thereby that there is a
real dispute to be tried, and not a sham, frivolous or vexatious dispute,
the Tribunal is bound to dismiss the application. Learned counsel went
on to argue that there is a fundamental difference between applications
filed by financial creditors and operational creditors. A financial creditor's
application is dealt with under Section 7 of the Code, in which the .
adjudicating authority has to ascertain the existence of a default on the
basis of the records of an information utility or other evidence furnished
by the financial creditor. In contrast to this scheme, all that a corporate
debtor needs to do is to file a reply within a period of l 0 days of the
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
SOFTWARE PRIVATE LIMITED [R. F. NARIMAN, J.]
. 1017
receipt of demand notice or copy of invoice from an operational creditor,_ A
showing the existence of a dispute, which-then does not need to be
"ascertained" by the adjudicating authority. He was at pains to point out
that the application itself must contain all the documents that are required
by the statute and that the timelines indicated in the statute are mandatory.
For this purpose, he referred us to Sections 61, 64 and 64 in addition to
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Sections 7 to 9 of the Code. Finally, on facts, according to learned
counsel, the Tribunal was wholly incorrect in remanding the matter on
both counts - first, to find out whether the application is otherwise
complete and, second, because the Tribunal found that the dispute in the
present case was vague, got up and motivated to evade the liability,
which, according to learned counsel, was a perverse conclusion reached
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on the facts of this case.
7. Shri Jawaharlal, learned cou-nsel appearing on behalf of the
respondent, has argued in reply that the only notice given to rectify the
defects by the Tribunal was an oral notice of 191h January, 2017 and that
too only to supply the notice of dispute by the appellant. This was done D
within time and the Tribunal, therefore, dismissed the application only on
·non-fulfillment of the conditions laid down in Section 9. No plea was
ever taken before the Tribunal that the IDBI certificate was riot furnished.
This plea was taken for the first time only in appeal, and since the Tribunal
did not think it fit to dismiss the application on a technical ground, this
ground does not avail the appellants. The counstil then submitted that
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the expression "dispute" under Section 5(6) covers only three things, .
namely, existence of the amount of debt, quality of goods or services or
breach of a representation or warranty and since what was sought to be
brought as a defense was that the NOA was breached, it would not
come within the definition of "dispute" under Section 5(6). He further
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went on to state that, at best, the breach of the NOA is a claim for
unliquidated damages which does not become crystallized until legal
proceedings are filed, and none have been filed so far. Therefore, there
is no real dispute on the facts of the present case and the Tribunal ~as
correct in its finding that the dispute was a sham one.
. 8. Before going into the contentions of fact and law argued by
both counsel, it is a little important to trace the background of this pathbreaking legislation viz. the Insolvency and Bankruptcy Code, 2016. The.
starting point is a Resolution of the UN General Assembly, Resolution
No.59140, passed on 2"d December, 2004, by which it was stated:
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"Legislative Guide on Insolvency Law of the United
Nations Commission on International Trade Law
The General Assembly,
Recognizing the importance to all countries of strong,
effective and efficient insolvency regimes as a means of
encouraging economic development and investment,
Noting the growing realization that reorganization regimes
are critical to corporate and economic recovery, the development
of entrepreneurial activity, the preservation of employment and
the availability of finance in the capital market,
Noting also the importance of social policy issues to the
design of an insolvency regime,
Noting with satisfaction the completion and adoption of
the Legislative Guide on Insolvency Law of the United Nations
Commission on International Trade Law by the Commission at
its thirty-seventh session, on 25 June 2004,
Believing that the Legislative Guide, which includes the
text of the Model Law on Cross-Border Insolvency and Guide
to Enactment recommended by the General Assembly in its
resolution 52/158of15 December 1997, contributes significantly
to the establishment of a harmonized legal framework for
insolvency and will be useful both to States that do not have an
effective and efficient insolvency regime and to States that are
undertaking a process of review and modernization of their
insolvency regimes,
Recognizing the need for cooperation and coordination
between international organizations active in the field of
insolvency law reform to ensure consistency and alignment of
that work and to facilitate the development of international
standards,
Noting that the preparation of the Legislative Guide was
the subject of due deliberations and extensive consultations with
Governments and international intergovernmental and nongovernmental organizations active in the field of insolvency law
reform,
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1019
SOFfWARE PRIVATE LIMITED [R. F. NARIMAN, J.]
1. Expresses its appreciation to the United Nations. A
Commission on International Trade Law for the completion and
adoption of its Legislative Guide on Insolvency Law;
2. Requests the Secretary-General to publish the Legislative
Guide and to make all efforts to ensure that it becomes generally
known and available;
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3. Recommends that all States give due consideration to
the Legislative Guide when assessing the economic efficiency .
of their insolvency regimes and when revising or adopting ·
legislation relevant to insolvency;
4. Recommends also that all States continue to consider C
implementation of the Model Law on Cross-Border Insolvency
of the United Nations Commission on International Trade Law."
9. The purpose of the Legislative Guide for various nations was
stated as follows:
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"The purpose of the Legislative Guide on Insolvency Law is
to assist the establishment of an efficient and effective legal
framework to address the financial difficulty of debtors. It is
intended to be used as a reference by national authorities and
legislative bodies when preparing new laws and regulations or
reviewing the adequacy of existing laws and regulations .. The
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advice provided in the Guide aims at achieving a balance between
the need to address the debtor's financial difficulty as quickly
and efficiently as possible and tile interest~ of the various parties
directly concerned with that financi~l difficulty, principally creditors
and other parties with a stake in the debtor's business, as well as
with public policy concerns. The Guide dis9usses issues central
to the design of an effective and efficient insolvency law, which,
despite numerous differences in policy and legislative treatment,
are recognized in many legal systems. It focuses on insolvency·
proceedings commenced under the insolvency law and conducted
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in accordance with that law, with an emphasis on reorganiiation,
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against a debtor, whether a legal or natural person, thatis engaged
in economic activity. Issues specific to the insolvency of
individuals not so engaged, such as consumers, are not
addressed."
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A In stating some of the key objectives of effective and efficient insolvency
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law, the Legislative Guide goes on to state:
"When a debtor is unable to pay its debts and other liabilities as
they become due, most legal systems provide a legal mechanism
to a~dress the collective satisfaction of the outstanding claims
from assets (whether tangible or intangible) of the debtor. A range
of interests needs to be accommodated by that legal mechanism:
those of the parties affected by the proceedings including the
debtor, the owners and management of the debtor, the creditors
who may be secured to varying degrees (including tax agencies
and other government creditors), employees, guarantors of debt
and suppliers of goods and services, as well as the legal,
commercial and social institutions and practices that are relevant
to the design of the insolvency law and required for its operation.
Generally, the mechanism must str.ike a balance not only between
the different interests of these stakeholders, but also between
these interests and the relevant social, political and other policy
· considerations that have an impact on the economic and legal
goals of insolvency proceedings.
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An insolvency law should be transparent and predictable. This
will enable potential lenders and creditors to understand how
insolvency proceedings operate and to assess the risk associated
with their position as a creditor in the event of insolvency. This
will promote stability in commercial relations and foster lending
and investment at lower risk premiums. Transparency and
predictability will also enable creditors to clarify priorities, prevent
disputes by providing a backdrop against which relative rights
and risks can be assessed and help define the limits of any
discretion. Unpredictable application of the insolvency law has
the potential to undermine not only the confidence of all
participants in insolvency proceedings, but also their willingness
to make credit and other investment decisions prior to insolvency.
As far as possible, an insolvency law should clearly indicate all
· provisions of otheF laws that may affect the conduct of the
insolvency proceedings (e.g. labour law; commercial and contract
law; tax law; laws affecting foreign exchange, netting and set-
MOBILOX INNOVATIONS PRIVATE LIMITED v. KIRUSA
1021
SOFfWARE PRIVATE LIMITED [R. F. NARIMAN, J.]
off and debt for equity swaps; and even, family and matrimonial
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law).
An insolvency law should ensure that adequate information is
available in respect of the debtor's situation, providing incentives
to encourage the debtor to reveal its positions and, where
appropriate, sanctions for failure to do so. The availability of this
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information will enable those responsible for administering and
supervising' insolvency proceedings (courts or administrative
agencies, the insolvency representative) and creditors to assess
the financial situation of the debtor and determine the most
appropriate solution."
While referring to the commencement of insolvency proceedings,
the Legislative Guide states:
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"The standard to be met for commencement of insolvency
proceedings is central to the design of an insolvency law. As the
basis upon which insolvency proceedings can be commenced, D
this standard is instrumental to identifying the debtors that can
be bro~ght within the protective and disciplinary mechanisms of
the insolvency law and determining who may make an application
for commencement, whether the debtor, creditors or other parties. ,
As a general principle it is desirable that the commencement E
standard be transparent and certain, facilitating access to
insolvency proceedings conveniently, cost-effectively and quickly
to encourage financially distressed or insolvent businesses to
voluntarily commence proceedings. It is also desirable that access
be flexible in terms of the types of insolvency proceedings
available (reorganization and liquidation), and the ease with which
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the proceedings most relevant to a particular debtor can be
accessed, and that conversion. between the different types of
proceeding can be achieved. Restrietive access can deter both
debtors and creditors from commt:n~~ng proceedings, while the
effecfs of delay can be harmful to the value of assets and the
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. successful completion of insolvency proceedings, in particular in
cases of reorganization. Ease of access needs to be palanced
with proper and adequate safeguards to prevent improper USf< of
proceedings. Examples of improper use may include application
by a debtor that is not in financial difficulty in order to take
advantage of the protections provided by the insolvency law, H
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such as the automatic stay, or to avoid or delay payment to
creditors and application by creditors who are competitors of
the debtor, where the purpose of the application is to take
advantage of insolvency proceedings to· disrupt the debtor's
business and thus gain a competitive edge."
10. On the fixation of time limits and denial of an application to
commence proceedings, the Legislative Guide states:
"Where a court is required to make a decision as to
commencement, it is desirable that that decision be made in a
timely manner to ensure both certainty and predictability of the
decision-making and the efficient conduct of the proceedings
without delay. This will be particularly important in the case of
reorganization to avoid further diminution of the value of assets
and to improve the chances of a successful reorganization. Some
insolvency laws prescribe set time periods after the application
within which the decision to commence must be made. These
laws often distinguish between applications by debtors and by
creditors, with applications by debtors tending to be determined
more quickly. Any additional period for creditor applications is
·designed to allow prompt notice to be given to the debtor and
provide the debtor with an opportunity to respond to the
application.
Although the approach of fixing time limits may serve the
objectives of providing certainty and transparency for both the
debtor and creditors, the achievement of those objectives may
· need to be balanced against possible disadvantages. For example,
a fixed time period may be insufficiently flexible to take account
of the circumstances of the particular case. More generally, such
time periods may be set without regard to the resources available
to the body responsible for supervising insolvency proceedings
orofthe local priorities of that body (especially where insolvency
is only one of the matters for which it has responsibility)'.