Operational Debt
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This article is written by Sneha Inampudi, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.com. Here she discusses “Meaning of Dispute Concerning an Operational Debt – Case Law Analysis”.

 

Introduction

The Insolvency Bankruptcy Code, 2016 has classified the creditors into two categories one is the financial creditor (FC), and the other is the operational creditor (OC). A financial creditor is a person to whom the cooperate debtor owes a financial debt arisen out of financial obligation such as loans, advances, and debt security. While operational creditors are those whose liability emerges from the transactions of the operations of the corporate debtor. 

The concept of the dispute is only applicable to the operational creditor for filing corporate insolvency resolution applications (CIRP) before the Adjudicating Authority. The Hon’ble supreme court has stated  that the concept of dispute and the existence of the dispute did not apply to the section 7 application

The reason behind incorporating the concept of the dispute to operational creditors for initiating CIRP would be that there is a possibility of disputing the operational debt is higher as compared to financial debt. Further, the operational debts are smaller when compared to the financial debts and are generally recurring in nature; therefore, they may not be accurately recorded in information utilities. 

Operational Creditor and Operational Debt 

Firstly, an ‘Operational Creditor’ means “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.” 

The term ‘operational debt’ means “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.’’

From the definition, it is inferred that the following persons will come under the ambit of the operational creditors. 

  1. The goods and service providers of the corporate debtor, 
  2. Employees of the corporate debtor,
  3. The dues owed by the corporate debtor to the government. 

Corporate Insolvency Resolution Process (CIRP) by Operational Creditor 

The operational debtor can initiate CIRP on the occurrence of a ‘payment default’ by filing an application under Section 9 of IBC before the Adjudicating Authority (National Company Law Tribunal) having jurisdiction. The creditor much show the record of the liability and evidence of the default. 

Default, as defined in the code, means non-payment of the debt whole or any part or installment of the debt

The Prerequisites for the operational creditor to initiate the CIRP is to issue the demand notice, demanding the payment of a defaulted amount  to the corporate debtor The corporate debtor within ten days from the receipt shall bring to the notice of the creditor that 

  1. Make the Payment of the unpaid amount
  2. The amount demanded has already paid by sending an attested copy of the record of payment. 
  3. There is an existing dispute between the operational creditor and debtor

The said process is to facilitate the informational discussion between the corporate debtor and operational debtor and to prevent the small operational creditors from pushing the debtor into the clutches of the CIRP. 

The Adjudicating Authority must reject the application U/s. 9. When the notice of the dispute has been received from the corporate debtor, or there is a record of dispute in the informational utility.

Therefore, the term dispute plays a vital role in determining the initiation of CIRP. As such, from the inception of the code, the term dispute is in dispute and came up for the judicial interpretations before NCLT and NCALT, and finally, the Hon’ble Supreme Court interpreted the term dispute and role of the Adjudicating Authority in ascertaining is a dispute exists under section 8 and 9 of the code. 

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Meaning of the term “Dispute” 

The code defined the term dispute in section 5(6) as ‘dispute’ Includes a suit or arbitration proceedings relating to :

 

  • The existence of the amount of debt 
  • The quality of the goods and services (or)
  • The breach of a representation or warranty. 

Mobilox Innovative Private Limited V. Kirusa Software Private Limited-A landmark judgment interpretation the term dispute

Facts 

The Mobilox (Corporate Debtor) engaged Kirusa (operational Creditor) for conducting the televoting for a TV Program and executed a Non-Disclosure Agreement (NDA). Kirusa has raised an invoice on the Mobilox. However, Mobilox informed Kirusa that the payment against the invoice had withheld due to a breach of the terms of NDA. 

Later, the operational debtor, i.e., Kirusahas sent the demand notice under section 8(1) of the IBC for which operational creditor has replied that there exists a bonafide dispute between them. 

NCLT

After the issuance of the notice, the operational creditor had initiated CIRP of Mobilox by filing an application under section 9 before the NCLT, Mumbai which dismissed the Kirusa’s application by stating that the debtor has issued the notice of the dispute.

NCALT

Aggrieved by the decision of the NCLT the operational creditor has preferred an appeal to the  NCLAT, which allowed the appeal on the ground that the Mobilox’s reply to the demand notice doesn’t come under the purview of dispute within the meaning of section 5(6)  or section 8(2), and held that the dispute has to be related to the 

Supreme Court

The Hon’ble supreme court by allowing the appeal of Mobilox stated that there was a dispute which is sufficient to defeat the CIRP application filed by the operational creditor and gave wider meaning to the term dispute and thereby held that need not necessarily be related to the grounds mentioned in section 8(6) 

The key points determined by the Supreme Court while interpreting the word dispute

Legislative Intent

The Supreme Court has looked into the intention of the legislature behind enacting the provision. Section 5(4) of the bill defines dispute” means a bona fide suit or arbitration proceedings relating to – 

(a) the existence or the amount of debt;

(b) the quality of goods and service; or

(c) the breach of a representation or warranty

While enacting the IBC code, the legislature has replaced the word Means with the term includes and further the term ‘bonafide’ has been excluded. 

Therefore, the dispute was indented to an inclusive definition. The dispute is said to exist when there is a real dispute between the operational creditor and corporate debtor pertaining to the operational debt that would fall within the inclusive definition of the dispute

From the above it is pertinent that the dispute need not necessarily relate to the existence of the amount of the debt, quality of good or service or breach of a representation or warranty as Understanding the dispute under the Insolvency and Bankruptcy Code, 2016 enumerated in sub-clause (a) or (b) or (c) of clause (6) of Section 5. 

The word ‘and’ occurring in sec 8(2)(a) should be read dis conjunctively 

The word and mentioned in section 8(2)(a) suggest that a dispute between the operational creditor and corporate debtor will be in existence if the dispute between them culminates into a suit or arbitral proceedings. The Supreme Court held that reading them and in a literal sense would lead to great hardship, and the debtor may stave off the CIRP only if the dispute is already pending in the form of suit or arbitration. 

Consideration of the fact that law permits a long limitation period the court held that the word ‘and’ in section 8(2)(a) of the IBC to be read as ‘or’. Further, noted that “it has been accepted to carry out the intention of the legislature it is occasionally found necessary to read the conjunctions “or” and “and” one for another.

Role of the Adjudicating Authority in determining the ‘Dispute’

The Supreme court held that while determining the admissibility of application of CIRP under section 9, The Adjudicating Authority must consider the following 

  1. Whether there is an “operational debt”, as defined under the Code, which exceeds INR 100,000
  2. Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid; and
  3. Whether there is the 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;

Plausible Contention Test

The supreme court rejected the bona fine test as used in the erstwhile legislature. The court observed that sec 5(4) of the bill used the term bona fide while determining the dispute, but the present code has excluded the term bonafide while defining the term dispute U/s. 5(6). Therefore, the court held that it is difficult to import the term bona fide into sec 8(2)(a) in order to determine whether there exists a dispute or not. 

The Supreme Court has evolved a new principal, i.e. Plausible Contention for determining the existence of a dispute. The Adjudicating Authority must look into the facts and determine whether there exists a plausible contention that requires further investigation. However, the tribunal need not go into the merits of the case and satisfy that the defense is likely to succeed. 

Conclusion 

The Supreme court in the said landmark judgment has enlarged the scope of the dispute and made it an inclusive definition. Therefore, while interpreting the dispute, the principles of the ejusdem generis should be applied. 

The court even held that dispute U/s. 5(6) is not restricted to pending suit or arbitration proceedings. It even includes the correspondence between the parties showing that there is a dispute relating to the operational debt could be considered as a dispute. 

The above judgment does not enable the operational creditor to put the corporate debtor into CIRP prematurely. Thus, the court has attempted the balance between the rights of the operational creditor and the remedies available to the debtor.  

References

  1. Innovative Industries Limited v. ICICI Bank and Anothers (2018) 1 SCC 407
  2. Initiation of the corporate insolvency resolution process by the financial creditor
  3. Sec 5(20) of Insolvency Bankruptcy Code
  4. Sec 5(21) of Insolvency Bankruptcy Code
  5. Section 3(12) of the Insolvency and Bankruptcy Code
  6. Section 8(1) of the Insolvency and Bankruptcy Code 
  7. Section 8(2) of the Insolvency Bankruptcy Code
  8.  Section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code
  9. http://supremecourtofindia.nic.in/supremecourt/2017/20386/20386_2017_Judgement_21-Sep-2017.pdf
  10. Bankruptcy Law Reforms Committee Report
  11. Maxwell on Interpretation of status, 11th Edition

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1 COMMENT

  1. Even tough I’m CA final student , I was so honoured to read that insolvency and bankruptcy code para written by sneha inampudi , all the best to her

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