The Uncertain Categorization for triggering the Corporate Insolvency Resolution Process under the IBC and its resolution through the Mobilox Case

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The Uncertain Categorization for triggering the Corporate Insolvency Resolution Process under the IBC and its resolution through the Mobilox Case

Author: Arjun Kamath,
3rd Year BBA LLB (Hons.),
 School of Law Christ (Deemed to be University),
 Bangalore.
·       Research Questions
1.     Whether there is a separate process for triggering the CIRP Process under the IBC for different types of creditors
2.     Whether the separate method of triggering such CIRP process is discriminatory towards the operational creditors
3.     What comes under the ambit of a ‘Dispute’ in regards to the Operational creditors as per Sec. 9
·       Statement of Problem
The initial position of law in regards to the same held that there were 2 separate methods of triggering the CIRP process based upon the categorization of what type of a creditor one would fall under. In regards to the same the NCLT’s had an unambiguous position of law which could be seen as it seemed discriminatory towards the Operational creditors. However the Supreme Court throguh the case of Mobilux has decided upon this unsettled position of law.
·       Objectives/ statement of purpose
The research pertaining to the categorization of the Creditors was unclear and the various precedents give out different view in furtherance of the same. So therefore, the main research objective is to determine position and liability of guarantors during the moratorium period and whether separate proceedings can be initiated or continued against the guarantors during the CIRP.
The analysis on the topic would establish the differences between the position of the creditors under the Insolvency and the Bankruptcy Code, the paper would also showcase various judicial pronouncements to support in answering the research question and main thrust of the paper is establish thoroughly the categories and guidelines for different categories of Creditors, during the CIRP.
·       Limitation of the study
i)      The scope of the research limits to the country of India and its jurisdiction.
ii)    The paper also limits to using only the primary sources for references of the research.


Research Paper
The Insolvency and Bankruptcy Code, 2016 brought in a completely new regime of ensuring corporate liquidation and in order to ensure a revival of a Corporation/entity. In the 4 years of its inception over a thousand proceedings have been instituted under the NCLT, but it’s greatest strategic achievement can be seen in the set-up of 4 adjudicating institutions in regards to corporate matters of such nature of insolvency. The 4 institutions being:
  1. NCLT (National Company Law Tribunal)
  2. IBBI (Insolvency and Bankruptcy Board of India)[1]
  3. Information & Utility services Authority
  4. Institute of Insolvency Resolution Professionals (IRPA)
In this background, the essence of the Corporate Insolvency Resolution Process and how it culminates into Liquidation is essential to understand. There exist 4 major players who relate and operate the entire scheme of insolvency as such. These 4 players are as following:
  1. Financial creditors[2]
  2. Operational creditors[3]
  3. Corporate debtors[4]
  4. Insolvency Resolution Professionals[5]
The Act was brought out in the form of an Ordinance which was then passed into an Act. However, it was evident that there existed a certain set of deficiencies within the Act which were prima facie evident upon the functioning of the same. One of the most major issues which plagues the system is the ambiguity which exists amongst the categorization of creditors and the rights therefore accrued to them and the variance in regard to the same. Apart from this the Act was criticized for the complete exclusion of certain entities/persons who were not covered under the scope of the Act.
The existence of such deficiencies was seen in several cases such as the Amrapali group case as well as the landmark case of homebuyers in the case of Chitra Sharma. The Act has thus taken into its ambit newer categories of Creditors; as long as these creditors are considered within a commercial aspect. Regarding understanding the entire scheme of the corporate insolvency resolution process along with liquidation, it is essential that we understand the meaning of a few terms as it was intended to be.
●      Financial creditor- A Financial Creditor is one to whom a person, company or corporate entity owes a certain sum of money.
Eg: When a corporate debtor owes any sum of money to a certain institution, t
hat institution would be regarded as a financial creditor
●      Operational Creditor: An Operational Creditor refers to certain companies or corporate entities which might not finance but provides services, goods and essential commodities and ate entitled to be paid for the same as they help the debtor in the operation of the business
●      Corporate debtor: A Corporate Debtor refers to a legal entity/corporate who owes money and has to repay such money but isn’t in a position to service such debts, loans and payments.
●      Insolvency Professionals: Acts as a means of communication between the Corporate Debtor, Committee of Creditors and the Adjudicating Authority[6]  (NCLT for purposes of Insolvency).
There exists an IBC Board and an Authority for IRP’s (Insolvency Resolution Professional Agency) and every person who is an IRP has to be registered under the same as they are assigned an enormous set of duties which start from the moment the resolution plan is admitted till the plan comes into being, the irp is responsible for all the functions regarding to the company.
The first role being the irp collects all the info available to him including the institution creat
ed under the act I’m the form of information utilities and to create a compilation of information in Regards to the particular health of a corporate debtor.this into also consists of how many financial creditors and operational creditors are before the adjudicating authority .
Following this a committee is constituted knows as the CoC which consists of both fc as well as oc.thereafter this CoC is the regulating authority In regards to Any decision made . and the CoC is represented by the irp
The committee now has the discretion of either going with the same interim for the complete resolution process[7]or rather can chose to appoint a new IRP for the process of liquidation or revival of the company. Such an IR professional however needs to be approved by the IBBI and the IRPA
The Corporate Insolvency Resolution Process is triggered when it is set up by either of the 3 following entities
  1. Financial Creditors (Under Sec. 7)
If the Financial Creditor ever feels that the Corporate Debtor is not in a position to pay the dues owed to them, the Financial Creditor can make an application under the prescribed proforma to the Adjudicating Authority in order to trigger insolvency. Such application should contain 3 vital elements:
    1. The amount due to the Financial Creditor
    2. Evidence regarding the existent of the debt by Corporate Debtor
    3. Proposal of the name of an interim resolution professional
Upon such filing, within 14 days the NCLT must primarily find out whether the company is a debtor in regard to the same and upon coming to such finding of the existence of a debt the NCLT can institute proceedings against such Corporate Debtor.
  1. Operational Creditors (Under Sec. 8 & 9)
If the Operational Creditor feels that such recovery against the due goods and services supplied is not been paid by the Corporate Debtor, the Operational Creditor would Primarily send a demand notice in regards to the same giving notice which is a statutory requirement. Within ten days the Corporate Debtor has to reply to the same notice. Upon dispute[8]of such notice, the Operational Creditor is allowed to file an application for triggering the Insolvency Resolution Process against such company
If the Adjudicating Authority is satisfied with such an application, it is then allowed to issue notice and hear both parties on the basis of the existence of a dispute.
  1. Corporate Debtors (Under Sec. 10)
If the Corporate Debtor himself feels that he is not in the position to financially pay off the dues which are owed by his/her entity then he/she by themselves can also trigger the process of insolvency against the entity in order to ensure the beginning of the CIRP process
Regarding the same it can be clearly seen how there exists a difference in regard to the way the insolvency resolution process is triggered in reference to Operational and Financial creditors.
Financial creditors and operational creditors both have to undergo a separate method to trigger the CIRP process wherein it is easier for a financial creditor to recover his dues through the CIRP process by directly triggering the process whereas in regards to operational creditors there exists the existence of a demand notice which provides for the adjudicating authorities right to hear parties on whether there is an existent dispute
The judicial precedents regarding the same had begun with the case of Mobilox[9] wherein Justice Nariman spoke about the difference existent between the Financial Creditors and Operational Creditors and said that investigation in regard to this lacuna was to be done. Considering the same the case helps to showcase the existent shade of grey within the code which creates such an ambiguity amongst the Financial and Operational Creditor.
     ❖     Mobilox Innovations v Kirusa Software
Facts:
In the given case, the Appellant, namely; (Mobilox Innovations Pvt.. Ltd) were conducting the televised-voting procedure for a Popular Dance Reality Show, on the Platform of the channel “Star TV”, which was titled “Nach Baliye”. The Appellant was conducting business with the respondent company, namely; (Kirusa Software Pvt.. Ltd) as they would provide for a various range of services and requirements relating to the TV program, and in lieu of the same; both the parties had entered into a non-disclosure agreement in pursuance thereof. The non-disclosure agreement was worded very strictly and it mandated the existence of an obligation of Confidentiality towards the Appellant, Mobilox Innovations Pvt. Ltd. by the Respondent, Kirusa software Pvt. Ltd. 
During the period of existence of a valid contract, Kirusa software would raise monthly invoices for the services that had been rendered. However, the Appellant Mobilox Innovations informed the Respondent, Kirusa software as to the withholding of payments. The payments that were subsequently withheld were due to the breach of the non-disclosure agreement between the given parties. As a result of the non-payment of the monthly invoices by the Appellant, Mobilox Innovations Pvt. Ltd, Respondents, Kirusa Software Pvt. Ltd sent a demand notice to Mobilox Innovations Pvt. Ltd under Section 8 of the Insolvency and Bankruptcy Code.
Mobilox Innovations Pvt. Ltd.’s responded to the said demand notice by stating that there existed a bona-fide and egregious dispute between the parties, which include the breach of the Non Disclosure Agreement mentioned. The Respondents, Kirusa subsequently filed an Application before the National Company Law Tribunal (NCLT), Mumbai under Section 9 for the initiation of Corporate Insolvency Resolution process (CIRP) of Mobilox Innovations Pvt. Ltd. The NCLT however rejected the said application on the grounds that Mobilox had issued a Notice of an existent dispute to the Operational Creditor therefore creating a cause of a hearing to ascertain the existence of the dispute if any.
The Respondents, Kirusa Pvt. Ltd, filed an appeal against the order of at the National Company Law Appellate Tribunal (NCLAT) stating that the mere dispute to the demand notice by the Operational Creditor would not amount to a valid ground for the rejection of an application under Section 9 (1) of the Insolvency & Bankruptcy Code. The question arising therefore before the NCLAT was with respect to the clarification of the meaning of the term “dispute” and the term “existence of dispute” for the purposes of filing an Application under Section 9 of the Insolvency and Bankruptcy Code.
The NCLAT allowed the appeal on the grounds that the reply to the demand notice by the Mobilox Innovations Pvt. Ltd, could not be seen within the purview of Section 8(2)[2] and Section 5(6)[3] of the Insolvency and Bankruptcy Code. It had stated that the argument raised by the Counsel for Mobilox Innovations Pvt. Ltd, was vague and moti
vated as the debt demanded was not in connection with the non-disclosure agreement but rather in regard to the services and goods which had been provided therein. Further stressed was laid upon the interpretation of “dispute” stating that a dispute could not be limited only towards arbitration proceedings and suits but should include any proceedings initiated before any tribunal, consumer court, labor court etc.
In response to the same, Mobilox Innovations Pvt. Ltd, filed an appeal to the Supreme Court against the order passed by NCLAT.
Analysis:
The Apex Court allowed the same appeal by Mobilox Innovations Pvt. Ltd, and while interpreting the expression “existence of a dispute” under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Apex Court believed that the breach of the non-disclosure agreement was sufficient to construe the existence of a dispute in order to invalidate the CIRP application which had been filed by the Operational Creditor. In regards to the same, the court looked into the Australian High Court case of SpencerConstructions Pvt. Ltd. V. G & M Aldridge Pvt. Ltd[10], in order to interpret the expression existence of the dispute
Interpretation of Section 8 (2) (a):
The Apex Court opined that the word “and” occurring in Section 8 (2) (a) must be read as “or”. The Supreme Court was of the opinion that such an understanding shall lead to a great hardship as the corporate debtor would then be able to stave off the bankruptcy process provided as a dispute is already pending in a suit or arbitration proceeding before a judicial body.
The Supreme Court also stated that, “if”and “is” mentioned under Section 8(2)(a), is not read as or, such persons shall be excluded from the ambit of Section 8 (2) and application of CIRP shall be easily obtained which was not the intent of the legislature.

The Court relied on the cases of, Semee Khan V. Bindu Khan[11],                                                                                                                    and

·       Maharshi Mahesh Yogi Vedic Vishwavidyalaya V. State of M.P[12] 
while interpreting the words ‘and’ & ‘or’.
The Supreme Court held that the existence of the dispute and/or suit or arbitration proceeding necessarily be pre-existing, that is to say, it should exist prior to receipt of the Demand Notice.
The Supreme Court while deciding the matter scrutinized the background of Insolvency and Bankruptcy Code and observed that the Insolvency and Bankruptcy Bill 2015 defined “dispute”as a bona fide suit or arbitration proceedings. However, when the Bill was passed the term dispute under Section 5 (6) was dropped from the definition. The Supreme Court stressed upon the interpretation that the previous jurisprudence with respect to the definition dispute does not apply to the current Insolvency & Bankruptcy code. Instead the Supreme Court provided a new test plausible contention to determine the existence of dispute.
The Supreme Court holds that while determining existence of a dispute, all that the NCLT is to see 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.

●      Questions to be seen by the Adjudicating Authority while examining any application under Section 9 of the Insolvency & Bankruptcy Code are as follows:

1.     Whether there is an operational debt of more than One Lakh?

2.     Whether the documentary evidence provided with the application shows the debt is due and payable and has not yet been paid?

3.     Whether there is an existence of a dispute between the concerned parties or any record of pendency of suit or arbitration proceeding filed before the receipt of Demand Notice?

If any one of the conditions is not satisfied, NCLT must reject the application.
On the facts of the case, the Supreme Court held that the correspondence between the parties showed that, Mobilox had clearly informed Kirusa that on account of breach of the Non-Disclosure Agreement by it, payments were being withheld till the time the matter was resolved. This was followed by further exchange of correspondence between the parties.
Further, the Demand Notice sent by Kirusa was disputed in detail by Mobilox in its reply. Going by the test of existence of a dispute, the Supreme Court held that without going into the merits of the dispute, it was clear that Mobilox had raised a plausible contention requiring further investigation which was not a patently feeble legal argument or an assertion of facts unsupported by evidence.
There appears to be no doubt that the interpretation with respect to dispute and existence of a dispute has been quite in debate since the inception of IB Code. Conflicting interpretations have been provided by different benches of NCLT. However, a conclusive ruling by the Supreme Court has finally provided a settled position. Thus, the Supreme Court recognized that there is an existence of dispute between kirusa and mobilox as mobilox raised a plausible contention as specified by the supreme court in the judgement.
The given judgement has acted as a clearing bright light which has helped in clearing the difference of disputes and how they would only apply to operational creditors in certain given situations which are relevant to its given situation based on the guidelines as issued by the supreme court in the aforementioned case.
This thus helps in clarifying and bringing to an end the actual existence of the dispute and as to the dispute; the difference as reasoned by Justice Nariman is that the existence of a dispute in the view of an operational creditor was separate as such goods
were in regards to the daily operation and survival of the given entity and the manner in which it should be adjudged is to be separate as they stand in a position wherein they have a say in the running of the entity.


[1] Sec. 3 (1), Insolvency and Bankruptcy Code, 2016.

[2] Sec. 5 (7), Insolvency and Bankruptcy Code, 2016.
[3] Sec. 5 (20), Insolvency and Bankruptcy Code, 2016.
[4] Sec. 3 (8), Insolvency and Bankruptcy Code, 2016.
[5] Sec. 3 (19), Insolvency and Bankruptcy Code, 2016.
[6] Sec. 5 (1), Insolvency and Bankruptcy Code, 2016.
[7] Sec. 5 (26), Insolvency and Bankruptcy Code, 2016.
[8] Sec. 5 (6), Insolvency and Bankruptcy Code, 2016.
[9] 2017 AIR SC 4532
[10] Spencer Constructions Pvt Ltd. V. G & M Aldridge Pvt Ltd, 1997 FCA 681.
[11] Semee Khan V. Bindu Khan , 1998 7 SCC 59 at 64.
[12] Maharshi Mahesh Yogi Vedic Vishwavidyalaya V. State of M.P ,2013 15 SCC         677 at 718

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