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NCLAT gives impetus to the Insolvency & Bankruptcy Code – disallows debtors to frustrate insolvency proceedings by a mere correspondence disputing debt Download as PDF

01-06-2017

Background

Under the Insolvency and Bankruptcy Code, 2016 (‘Insolvency Code’), the existence and notice of a ‘dispute’ entitles a debtor to seek abatement of insolvency proceedings. The National Company Law Tribunal (“NCLAT”), in its landmark judgment dated May 24, 20171, has decided on the meaning of ‘dispute’ and ‘existence of dispute’ under Section 9 of the Insolvency Code.

In the present case, Kirusa Software Private Limited (Kirusa) had extended operational credit to Mobilox Innovations Private Limited (Mobilox). Kirusa issued a demand notice on Mobilox demanding payment of the dues of this operational credit. Mobilox issued a reply to demand notice stating there existed a serious and bona fide dispute between the parties. In this respect, the Mumbai National Company Law Tribunal (NCLT) rejected Kirusa’s petition on the ground that Mobilox had served this ‘notice of dispute’ upon Kirusa.

Kirusa, filed an appeal before the NCLAT claiming that this mere dispute to the claim of debt cannot be made a ground for rejecting the application under section 9 of the Insolvency Code. The arguments for Kirusa in the matter were led by Mr. Amar Gupta, Partner at J. Sagar Associates.

Decision

The NCLAT allowed Kirusa’s appeal and held that ‘dispute’ must be read to mean and include suits, arbitration proceedings or proceedings initiated or pending before consumer courts, tribunals, labour courts, mediation, conciliation, etc. And further that before admitting or rejecting an application under Section 9, the NCLT must examine whether the ‘dispute’ raised by the corporate debtor qualifies as a ‘dispute’ (as defined under sub-section (6) of Section (5), and whether the notice of dispute given by the corporate debtor fulfils the conditions stipulated in the Insolvency Code. The Insolvency Code provides that a dispute may be raised by a corporate debtor by issuing notice in either of the two ways below:

  • by bringing to the notice of the operational creditor, ‘existence of a dispute’ including as to existence of debt or default, and
  • by bringing to notice of operational creditor, a record of pendency legal proceedings, relating to matters covered in Section 5(6) of the Insolvency Code

Thus, the NCLAT observed that an illusory dispute or one giving a colour of genuine dispute, raised for the first time while replying to the notice cannot be a tool to reject an application  under Section 9 if the operational creditor satisfies the adjudicating authority that there is a debt or a default on the part of the corporate debtor. Therefore, the NCLAT allowed Kirusa’s appeal and remitted the petition to the Mumbai NCLT for admission.

Analysis

With its judgment in the matter, NCLAT has put to rest the conflicting decisions given by the various NCLTs on the question of interpretation of Section 9 of the Insolvency Code. The judgment has also given impetus to the Insolvency Code by holding that debtors may no longer frustrate the insolvency proceedings by a mere correspondence disputing the debt.

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1Kirusa Software Private Limited v. Mobilox Innovations Private Limited; Company Appeal (AT) (Insolvency) 6 of 2017


Last Updated on 25th January 2019

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