2017 (9) TMI 1270 - SC - Insolvency and Bankruptcy

Corporate insolvency procedure - Insolvency and Bankruptcy Code, 2016 - Held that - 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 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. Learned counsel for the respondent, however, argued that the breach of the NDA is a claim for unliquidated damages which does not become crystallized until legal proceedings are filed, and none have been filed so far. The period of limitation for filing such proceedings has admittedly not yet elapsed. Further, the appellant has withheld amounts that were due to the respondent under the NDA till the matter is resolved. Admittedly, the matter has never been resolved. Also, the respondent itself has not commenced any legal proceedings after the e-mail dated 30th 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 axe falls. We, therefore, allow the present appeal and set aside the judgment of the Appellate Tribunal.

Summary

Issues Involved:
1. Triggering of the Insolvency and Bankruptcy Code, 2016 for operational debts.
2. Adjudicating authority's role in determining the existence of a dispute.
3. Interpretation of "dispute" under Section 5(6) of the Code.
4. Procedural requirements under Sections 8 and 9 of the Code.
5. The role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT).

Detailed Analysis:

1. Triggering of the Insolvency and Bankruptcy Code, 2016 for Operational Debts:
The case primarily revolves around the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (the "Code") for operational debts. The appellant subcontracted work to the respondent and issued purchase orders. The respondent provided services and raised invoices, which were not paid by the appellant, leading to the respondent filing an application under Sections 8 and 9 of the Code.

2. Adjudicating Authority's Role in Determining the Existence of a Dispute:
The adjudicating authority must determine whether there is an "operational debt" exceeding ?1 lakh, whether the debt is due and payable, and whether there is a pre-existing dispute. The existence of a dispute must be brought to the notice of the operational creditor within 10 days of receipt of the demand notice. If a dispute exists, the application must be rejected.

3. Interpretation of "Dispute" under Section 5(6) of the Code:
The definition of "dispute" under Section 5(6) is inclusive and not exhaustive. It includes disputes related to the existence or amount of debt, quality of goods or services, or breach of a representation or warranty. The court emphasized that the term "dispute" should be interpreted broadly to include any real dispute as to payment between the parties.

4. Procedural Requirements under Sections 8 and 9 of the Code:
An operational creditor must deliver a demand notice or copy of an invoice to the corporate debtor. The corporate debtor must respond within 10 days, either by disputing the debt or by making payment. If the debtor fails to respond, the creditor may file an application with the adjudicating authority. The application must include a copy of the invoice, an affidavit stating no dispute exists, and a certificate from a financial institution confirming non-payment.

5. The Role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT):
The NCLT initially dismissed the respondent's application, citing the existence of a dispute. The NCLAT, however, allowed the appeal, stating that the adjudicating authority acted mechanically and did not properly examine the existence of a dispute. The Supreme Court set aside the NCLAT's decision, emphasizing that a genuine dispute existed and the application should have been dismissed.

Conclusion:
The Supreme Court concluded that the appellant had raised a plausible contention requiring further investigation, and the defense was not spurious or frivolous. The existence of a genuine dispute between the parties meant that the insolvency application should have been dismissed. The appeal was allowed, and the judgment of the NCLAT was set aside.