A Look at the Recently Redefined Scope of Section 9 of the IBC

[Jagrati Maru and Vaishnavi Srivastava are 5^th year B.A. LL.B. (Hons.) students at Gujarat National Law University in Gandhinagar]

Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) empowers an operational creditor to file an application to initiate the corporate insolvency resolution process (CIRP) against a corporate debtor. The section further lists out certain requirements which need to be fulfilled before such initiation can take place.

In Kay Bouvet Engineering Ltd v. Overseas Infrastructure Alliance (India) Pvt. Ltd., the Supreme Court redefined the scope of this very section by deciding that the existence of a dispute is in fact a ground to reject such CIRP application.  The Court allowed for the appeal against the National Company Law Appellate Tribunal (NCLAT) order which had overruled the National Company Law Tribunal (NCLT) order which rejected the application by Overseas seeking the initiation of CIRP against Kay Bouvet under section 9 of the IBC. The NCLAT had decided to allow this appeal and remit the matter back to NCLT directing it to admit the petition after providing a limited notice to Kay Bovet to enable it to settle the claim.

Key Contentions

Before the Supreme Court, Kay Bouvet argued that the material which was on record, especially the demand notice and the replies to it, showed a clear ‘existence of dispute’, and therefore the NCLT had correctly dismissed the petition. Meanwhile, Overseas contended that Kay Bouvet had admitted the receipt of the amount which was paid by it, and that such admission would fall within the purview of ‘operational debt’ in terms of section 5(21) of the IBC, and that this further permits the party to whom such admission was made to be classified as an operational creditor and eligible to file proceedings under section 9 of the IBC.

Ruling of the Court

The Court relied on the judgment of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. wherein the terms ‘existence’, ‘genuine dispute’, ‘genuine claim’, and other similar terms had been interpreted. The Court stated that the object of operational debt under the IBC was to ensure that debts smaller than financial debts do not put the corporate debtor into insolvency or enable initiation of CIRP for extraneous considerations. Thus, the ‘existence of a dispute’ is enough. In the case under discussion, the Court further found that the contention of Kay Bouvet upon this issue can be said to be ‘spurious’, ‘illusionary’ or ‘not supported by evidence’.

The Court therefore decided that the NCLT had correctly rejected the application of Overseas regarding the existence of a dispute and, therefore, section 9 of IBC would not apply. The Court further stated that there had been a misinterpretation by the NCLAT about the factual and legal position and that the appellate tribunal had erred in overruling the NCLT order and directing an admission of the petition in the first place.

Analysis

The term ‘dispute’ remains one of the most significant aspects for an application under section 9 of the IBC to be maintainable. In Mobilox, the Court defined three pre-requisites to be examined to understand ‘existence of a dispute’. They are:

• The monetary amount of operational debt;
• The validity of claim made by the operational creditor; and
• The examination of a dispute between the parties and whether there is any suit or arbitration pending.

Further, the Court in this case also defined a ‘genuine dispute’ as bona fide and truly existing, and that the grounds of its existence must be real.

Section 5(6) of the IBC defines a dispute, and the term was amended in 2018. This term is deemed to be equally important as ‘default’ in the IBC due to the necessity of its presence in order for one to trigger the proceedings under the IBC. Section 8(2)(a) of the IBC specifies that the corporate debtor bring any existence of a dispute to the notice of the creditor. Such a dispute should be pre-existent and raised within 10 days from the receipt of demand notice. This provision offers a safety net to the debtor from any misuse of the IBC by the creditor.

Section 9(3)(b) of the IBC empowers the operational creditor to file an application for CIRP after 10 days from when they send a demand notice where an affidavit is filed by the creditor stating that no notice has been given by the corporate debtor acknowledging any dispute related to default or unpaid debt. After the filing of this application, the adjudicating authority has to admit or reject it within 14 days of receipt. If there is any notice of record of dispute, then the application is liable to be rejected under section 9(5)(ii)(d) of the IBC. Going into the merits of such dispute is not significant; the mere determination of a genuine dispute will suffice. Section 76 of the IBC even provides for imprisonment of at least a year extendable to five years with fine from rupees one lakh to one crore for the operational debtor if a dispute is concealed in their application.

In K. Kishan v. Vijay Nirman Company Pvt. Ltd, the Supreme Court held that an arbitration award along with the challenge that the applicant made under section 34 of the Arbitration and Conciliation Act,1996 clearly recognizes the existence of a dispute, that a CIRP would serve no purpose in such a case and that an attempt should be made to resolve this dispute instead.

In Indus BioTech (P.) Ltd. v. Kotak India Venture (Offshore) Fund, the applicability of section 8 of the Arbitration Act was questioned and it was contended that any application under section 7 of the IBC cannot be referred to arbitration despite the existence of an arbitration clause. The Court relied on Vidya Drolia v. Durga Trading Corporation in which four tests were specified to determine the arbitrability of a subject matter, and wherein it was held that actions that are in rem are non-arbitrable, which covers insolvency matters.

Conclusion

The Supreme Court has interpreted the term ‘dispute’ and clarified the meaning through a series of judgments and has held the IBC to be prevalent over the Arbitration Act. However, courts have attempted to provide resolution to disputes raised by corporate debtors by reference to arbitration, subject to the existence of an arbitration agreement between the parties. This approach portrays a drastic stance with regard to dealing with disputes raised by corporate debtors. However, there are strong contrasts in this approach upon comparing Indus Biotech with K Kishan as, in one case the apex court held insolvency matters to be non-arbitrable, whereas in the other the dispute was referred to arbitration.

The courts have the duty to ensure that the IBC is not misused by either of the parties and that the very essence of it is upheld, this essence being the objective to bring the corporate debtors back on their feet and further enhancing and facilitating the business atmosphere in the economy as a whole. Even in Kay Bouvet, it can be said that the stance of the Supreme Court in upholding the NCLT order is appropriate, to the extent it observed that the adjudicating authority is not mandated to be satisfied as to whether the defence would succeed or not, and is not required to go into the merits of a dispute; its existence in fact is sufficient.

– Jagrati Maru & Vaishnavi Srivastava