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Section 9 of IBC laid down the provision regarding the application filed by the operational creditor to initiate the insolvency proceeding against the corporate debtor. One of the clauses of section 8 states that where any dispute between the operational creditor and corporate debtor is in existence at the time of filing of the application for insolvency proceedings then in such case, the application will be considered as void. The term “dispute” is defined under Section 5(6) of the Code. As per section 5(6) the term dispute can be defined as:
“dispute includes a suit or arbitration proceedings related to:
- The existence of the amount of debt
- The quality of the goods or services, or,
- The breach of a representation or warranty.”
Section 8(2) laid down the following provision:
“The corporate debtor shall within the period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub section (1) bring to the notice of the operational creditor –
- Existence of dispute, if any or record of the pendency of suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.
- The payment of unpaid operational debt-
(i)by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor.
(ii)by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.
Explanation: for the purpose of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.
The appellant in the present case is the corporate debtor and the respondent is the operational creditor.
In present case, the appellant came into contract with the respondent with regard to conduct tele voting for the show “Nach Baliye” of Star TV. For the purpose of executing the provisions of the contract, the respondent has to provide toll free numbers across India with the help of which, the viewers of the show can cast their vote towards his favourite jodi. The appellant has also issued the purchase orders in favour of the respondent. For this, the respondent customized the software which will coordinate the result with the respondent. The respondent for this purchased the toll-free numbers, the rent for which was to be paid by the appellant.
The respondent rendered his services and thereby issued the invoices between December 2013 and November 2014, the same has to be paid within 30 days of the issuance of the invoice. The respondent followed up with the appellant regarding the payment, these follow ups were made by the way of email between the month of April and October 2014. The Non-Disclosure Agreement (NDA) was executed between the parties which will come into effect from 1st November 2013. On 30th January 2015, the appellant sent a notice to the respondent that they are withholding their payment as they have breached the NDA by publishing the details of work on their website.
The respondent then sent a demand notice to the appellant demanding the payment due to him, this notice was sent under Section 8 of the Insolvency and Bankruptcy Code 2016. The appellant responded to this notice by stating the fact that a bona fide and fair dispute is already in existence between the respondent and the appellant, the appellant further stated that the respondent has already breached the Non -Disclosure Agreement by publishing the details of working with Nach Baliye show on Star TV and hence the appellant is not liable to pay the amount to the respondent. The respondent filed the application under Section 8 and 9 of the Code.
The NCLT rejected the application filed by the respondent on the following ground:
“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 the Corporate Debtor, for the petitioner has admitted that the notice of dispute dated 27th 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.”
The appeal was filed in NCLAT against the order passed by the NCLT. The appeal was allowed by on the following grounds:
“39. In the present case the adjudicating authority has acted mechanically and rejected the application under sub-section (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 corporate debtor and the defence claiming dispute was not only vague, got up and motivated to evade the liability.”
The appeal filed before the Supreme Court raised the following two issues:
- Whether there is an operational debt as defined exceeding Rs. 1 lakh or not?
- Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid?
- Whether there is existence of a dispute between the parties or the record of pendency of a suit or arbitration proceeding filed before the receipt of demand notice of the unpaid operational debt in relation to such dispute?
Decision and Judgement by the Court
The Hon’ble Supreme Court in the present case allowed the appeal and set aside the order passed by the appellate tribunal. It was held that the adjudicating authority must comply with the provisions laid down under Section 9 of the code and only then will reject or admit the application.
The rejection of the application will depend upon the factors as laid down under Section 9(5) of the Code. Another point on which the court took note that the corporate debtor should within ten days of receipt of the demand notice or the invoice should clarify that the dispute is in existence between the parties or that the amount due has been paid by him or he has cleared the operational debt owed to him. The timeline in which the suit has been filed should be acknowledged by the court. Further, the code clarifies that if the timelines are not adhered by the tribunal the reason for the delay of the same has to be given in writing by the tribunal. The timelines given under the code are considered as the triggering point of filing of the application under the code.
As per the provision of the code, the adjudicating authority is bound to reject the application if the conditions given under section 9 is not complied. In other words, if there is an existence of the dispute between the operational creditor and the corporate debtor then in that case the application filed under Section 9 of the Code shall be rejected by the adjudicating authority.
The court further analysed the facts and came to the conclusion that, the appellant has raised the contention regarding further investigation in the matter of existence of dispute. It was held that the appellate adjudicating authority was incorrect in giving order that the contention raised by the appellant was vague and inappropriate in nature. Here, there was an actual existence of dispute between the parties which the appropriate authority failed to recognise.
As per the contention raised by the respondent, the breach of NDA was only for the unliquidated damages which will not become valid until the legal effect for the same will be there.
The Hon’ble Supreme Court further held that one of the main objectives of enactment of the code was to finish the legal proceedings in a time bound manner. Hence holding this objective, the court held that if there is any delay in the filing of the appeal or filing of the application under the provisions of the code, then in that case the adjudicating authority shall not accept the application and reject the same. However, in the present case the application and the appeal filed by the respective parties are within the prescribed time period.
Discussing upon the other issues raised in the present case, the Hon’ble Supreme Court held that the Non – Disclosure Agreement which is one of the main reasons of non-payment of the dues to the appellant. This case was never been resolved between the parties till the filing of the application.
The Hon’ble court further stated that as far as the amount due to the respondent is concerned, the respondent himself has not taken any initiative regarding the follow up of the recovering of the due amount to him. Hence, it was observed by the court that the respondent has not taken any initiative for the commencement of any case against the appellant when he received the email by the appellant on 30th January 2015.
The email stated that due to the breach of the Non – Disclosure Agreement established between the appellant and respondent; the appellant will not be liable to pay any kind of amount to the respondent. As alleged by the appellant in the email that the respondent has published on his website that he has worked with the “Nach Baliye” show that has been telecasted on Star TV, the respondent has breached the clauses of the contract and hence any payments due to him will not be taken into consideration after such breach of agreement. Hence, the court held that the insolvency application filed by the respondent was after two years since he received the email for the declaration of the non -payment of the due amount.
Hence, it can be construed that the respondent had filed the application for the recovery of the amount due to him only when the Insolvency and Bankruptcy Code came into effect in the year 2016. There was two-year gap in filing of the application and receiving of the email by the appellant regarding the refusal in payment of the amount due to him. The court further emphasised on the point that the proceedings under the code should take place in the time bound manner.
It further laid down the guidelines that should be followed by the adjudicating as well as appellate authority as appointed under the Act, the rules which are stated by the court in this regard are the authorities has the duty to check if there is an existence of dispute or not at the time of filing of the application for the initiation of the insolvency proceedings against the corporate debtor. If there is an existence of dispute then the application will not be admitted in the court, the same will stand rejected with the immediate effect. The definition of the term existence of dispute is given under Section 5 of the code itself.
When there is any pending suit going on with regard to the amount or the quality of the goods or services rendered by one person to another, and one of such party files the application for the initiation of insolvency proceeding of the other, the in such cases the application filed will be rejected under the grounds mentioned in Section 9 of the Code. The operational creditor could initiate the proceeding against the corporate debtor if the amount included is minimum one lakh rupees.
 Section 5(6) of IBC 2016