Can an Unpaid Vendor Use the IBC to Recover Dues?

Kirusa Software supplied toll-free telephone numbers and customised software for Star TV's “Nach Baliye” tele-voting. Mobilox Innovations managed the voting and issued purchase orders to Kirusa between October and December 2013. Kirusa performed the work and sent monthly invoices from December 2013 to November 2014.

On 26 December 2014 the two companies executed a non-disclosure agreement with effect from 1 November 2013. On 30 January 2015, Mobilox told Kirusa that it was withholding payment because Kirusa had displayed Mobilox's confidential client and campaign information on a public platform, which Mobilox said breached the agreement. Kirusa denied the breach on 10 February 2015 and demanded Rs 19,08,202.57 within one week. Mobilox replied on 26 February 2015 that it had lost business because of Kirusa's conduct.

The correspondence then became quiet. Kirusa sent e-mails on 20 June 2016 and 25 June 2016 trying to revive business relations and arrange a meeting. Mobilox replied on 28 June 2016. Nothing came of those exchanges, and on 19 September 2016 Mobilox reiterated that no payments were due because of the alleged breach.

Kirusa issued a demand notice under Section 8 of the Code on 23 December 2016 for Rs 20,08,202.55. Mobilox responded on 27 December 2016 that a serious and bona fide dispute existed. Kirusa filed its Section 9 application on 30 December 2016. On 19 January 2017, the NCLT orally told Kirusa to remove a defect in the application because it did not contain Mobilox's notice of dispute. Kirusa rectified this by an affidavit in compliance dated 24 January 2017, supplying various other documents too. The NCLT rejected the application on 27 January 2017, holding that the admitted receipt of Mobilox's dispute notice brought the claim within Section 9(5)(ii)(d). Kirusa's appeal to the NCLAT was allowed on 24 May 2017, with the NCLAT calling the defence vague, got-up and motivated to evade liability. The Supreme Court set aside that judgment.

Section 8 requires an operational creditor to deliver a demand notice or copy of an invoice. The corporate debtor then has 10 days to repay the debt or bring a dispute to the creditor's notice. If neither happens, the creditor may file a Section 9 application. If a notice of dispute has been received, Section 9(5)(ii)(d) requires the NCLT to reject the application.

The textual problem was the word “and” in Section 8(2)(a). Read literally, it seemed to require both a dispute and a pending suit or arbitration. The Supreme Court rejected that construction and held that “and” must be read as “or.” Otherwise, a dispute arising shortly before the demand notice could leave no time to file a suit, and a company could be dragged into bankruptcy over a contested invoice. The difference between CIRP and liquidation matters here: this judgment concerns only the trigger for a Corporate Insolvency Resolution Process, not liquidation.

The Court traced the evolution of the definition of “dispute.” In the earlier Bill, the definition used “means” and described a “bona fide suit or arbitration proceeding.” In the Code, “includes” replaced “means,” and the word “bona fide” before “suit or arbitration proceedings” was deleted. Because “includes” is expansive, the NCLT could not confine a dispute to the three illustrative matters listed in Section 5(6).

The Court then set out the standard for rejecting a Section 9 application:

Two points closed the loopholes:

• The NCLT cannot insist that a dispute already be pending in a court or arbitral tribunal. A genuine dispute existing before the demand notice is enough.
• The NCLT only checks whether the defence is plausible and not patently feeble or unsupported by evidence. It does not weigh the merits or predict whether the debtor will ultimately win.

The Court also rejected Mobilox's late argument that Kirusa's application should have been thrown out for want of a bank certificate. That objection was never raised before the NCLT, so it could not be used for the first time at the Supreme Court stage.

• If you are the creditor, keep the contract, purchase orders, invoices and correspondence showing delivery or performance. Send the demand notice in Form 3 or Form 4 and keep proof of service. File the Section 9 application in Form 5 before the NCLT with the invoice or demand notice, an affidavit that no dispute notice was received and a certificate from your bank confirming that no payment was made.
• If you are the debtor, use the 10-day window wisely. Send a detailed dispute notice identifying the real dispute and the material supporting it. A purely bare denial risks failing the Court's plausibility check.
• The NCLT must decide the application within 14 days. An appeal to the NCLAT lies within 30 days, extendable by 15 days. An appeal from the NCLAT to the Supreme Court lies within 45 days, with a further grace period not exceeding 15 days.
• Do not raise a missing document for the first time on appeal. In Mobilox, the NCLT never dismissed the application for want of the IDBI certificate, so the Supreme Court refused to entertain that objection at a later stage.