Mobilox Judgment appears to be a gross error (per incuriam) By CS Akash Sharma (LEGAL ACCESS-Layman's Law)

We must admit that we are disappointed by the Hon'ble Supreme Court Judgment in Mobilox Innovations Private Limited under IBC.

Our contentions are as follows:-

The Hon'ble NCLAT stated (referred in para 5 of the Order of the Hon'ble SC) "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.”

We agree with this. Why? Kindly read below.

It's imperative to trace the reasons of Hon'ble SC arriving at the erroneous conclusion setting aside the Order of the Hon'ble NCLAT.

At para 10 it acknowledges under '(d) Denial of an application to commence proceedings' under Legislative guide the following,

"...where the debt is subject to a legitimate dispute or off-set in an amount equal to or greater than the amount of the debt;"
"...In the case of a creditor application, it might include those cases where a creditor uses insolvency as an inappropriate substitute for debt enforcement procedures (which may not be well developed); to attempt to force a viable business out of the market place; or to attempt to obtain preferential payments by coercing the debtor (where such preferential payments have been made and the debtor is insolvent, investigation would be key function of insolvency proceedings).”

At para 14 it referred with profit the Hon'ble SC judgment in Madhusudan Gordhandas v. Madhu Woolen Industries Pvt. Ltd (1972) 2 SCR 201, by which a petition presented under the Companies Act on the ground that the company is "unable to pay its debts" can only be dismissed if the debt is bona fide disputed, i.e., that the defence of the debtor is genuine, substantial and is likely to succeed on a point of law.

It further refers at para 18 the definition of 'dispute' which means a bona fide suit or arbitration proceeding regarding (a) the existence or the amount of a debt; (b) the quality of good or service; or (c) the breach of a representation or warranty.

At para 19 it further acknowledges under "Notes on Clauses" the following,

Clause 6 provides that where a corporate debtor has defaulted in paying a debt that has become due and payable but not repaid, the corporate insolvency resolution process under Part II may be initiated in respect of such corporate debtor by a financial creditor, an operational creditor or the corporate debtor itself.

Clause 8 lays down the procedure for the initiation of the corporate insolvency resolution process by an operational creditor. This procedure differs from the procedure applicable to financial creditors as operational debts (such as trade debts, salary or wage claims) tend to be small amounts (in comparison to financial debts) or are recurring in nature and may not be accurately reflected on the records of information utilities at all times. The possibility of disputed debts in relation to operational creditors is also higher in comparison to financial creditors such as banks and financial institutions. Accordingly, the process for initiation of the insolvency resolution process differs for an operational creditor.”

It then deals with the meaning of the word “and “. Para 30 reads as follows,

“30. It is settled law that the expression “and” may be read as “or” in order to further the object of the statute and/or to avoid an anomalous situation. Thus, in Samee Khan v. Bindu Khan (1998) 7 SCC 59 at 64, this Court held:

“14. Since the word “also” can have meanings such as “as well” or “likewise”, cannot those meanings be used for understanding the scope of the trio words “and may also”? Those words cannot altogether be detached from the other words in the sub-rule. Here again the word “and” need not necessarily be understood as denoting a conjunctive sense. In Stroud’s Judicial Dictionary, it is stated that the word “and” has generally a cumulative sense, but sometimes it is by force of a context read as “or”. Maxwell on Interpretation of Statutes has recognised the above use to carry out the interpretation of the legislature. This has been approved by this Court in Ishwar Singh Bindra v. State of U.P. [AIR 1968 SC 1450 : 1969 Cri LJ 19]. The principle of noscitur a sociis can profitably be used to construct the words “and may also” in the sub-rule.”

Then it formulates the following point of law at para 33,

“33. This being the case, is it not open to the adjudicating authority to then go into whether a dispute does or does not exist?”

Then comes the blunder at para 34. It reads,

“34. It is important to notice that Section 255 read with the Eleventh Schedule of the Code has amended Section 271 of the Companies Act, 2013 so that a company being unable to pay its debts is no longer a ground for winding up a company.

The old law contained in Madhusudan (supra) has, therefore, disappeared with the disappearance of this ground in Section 271 of the Companies Act.”

If this is correct then section 9 of the IBC code itself gets obliterated. A proceeding under section 7 or 9 gets initiated only with the presumption of inability to pay as the provisions of IBC from sections 7 to 31 can’t be triggered without this assumption and then an inquiry as contemplated under the Code within the four corners of summary proceeding as envisaged under law before the NCLT.

The Hon’ble SC then proceeds to examine the meaning of “existence of a dispute” contained in Section 8(2)(a) which fortunately remain within the ambit of the following,

“…………that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates.”

Then finally the Hon’ble SC refers an English judgment in Hayes v. Hayes (2014) which was quoted with approval of their interpretation in the final para of its Judgment.

Let’s read Para 38 of the Judgment to appreciate.

“38. To similar effect is the judgment of the Chancery Division in Hayes v. Hayes (2014) EWHC 2694 (Ch) under the U.K. Insolvency Rules. The Chancery Division held:

“I do not think it necessary, for the purposes of this appeal, to embark on a survey of the authorities as to precisely what is involved in a genuine and substantial cross-claim. It is clear that on the one hand, the court does not need to be satisfied that there is a good claim or even that it is a claim which is prima facie likely to succeed. In Re Bayoil SA [1999] 1 WLR 147 itself, Nourse LJ referred, at p 153, to what Harman LJ had said in In Re: LHF Wools Ltd [1970] Ch 27, 36 where Harman LJ, having referred to a previous case, said:

“The majority decided in that case that, shadowy as the cross-claim was and improbable as the events said to support it seemed to be, there was just enough to make the principle work, namely, that it was right to have the matter tried out before the axe fell.” On the other hand, the court should be alert to detect wholly spurious claims merely being put forward by an unwilling debtor to raise what has been called “a cloud of objections” as I referred to earlier.”

It’s difficult to understand how this concept of “cross-claim” is applicable under IBC? Curiously enough the Hon’ble SC went on tracing the meaning of this word “cross-claim” completely non-existent in IBC and probably that actually vitiated the final outcome of the issue in appeal.

A Non-disclosure Agreement (NDA) in the impugned case by which the operational creditor agreed not to disclose that they rendered services for a program titled “Nach Baliye”.

Now coming to what went wrong. The Hon’ble SC brought into discussion the words dispute or set-off, the replacement of word “inclusive” in place of “means “ in the definition of dispute under Section 5(6) of the Code, cross-claim unfortunately introduced without referring the meaning of cross-claim in the English Act and contrasting the same with the definition of dispute under our Indian Code.

Now, the following questions arise out of the reading the aforesaid Judgment,

(a) Whether the word “dispute” in the definition under section 5(6) of the Code also includes ‘set-off’?
(b) Whether the said definition also includes ‘cross-claim’?
(c) Whether the legislative intent to replace the word “means” with the word “include” in the definition was to include words like ‘set-off’ or ‘cross-claim’?
(d) Whether NDA could be covered under the expression “breach of representation” appearing in the definition?

Without any iota of doubt one can conclude that all these questions have not been answered by the Hon’ble SC before arriving on its final conclusion.

The Code contemplates only the existence of dispute of the “debt” which is admitted. This correct and trite interpretation changes the entire course of the proceeding before the Hon’ble Supreme Court. Whether the said NDA as a counter to “dispute” or “cross-claim” or under breach of representation or any other expressions referred to by the Hon’ble SC in its Judgment impugned was an “admitted debt”?

The Code further envisages dispute in relation to quality of goods or services and breach of representation or warranty and not more and as such the interpretation of the Hon’ble SC in the Order impugned went beyond the scope of contemplation under law. What it grossly erred is the fact that in a summary proceeding only and ‘admitted debt’ is accepted by the NCLT or even before the Hon’ble High Court under the previous Act. An NDA can at best be an “unliquidated counter claim” not contemplated by law or the proceeding specified therein and as such the same could not have been a defence of an ‘admitted debt’ under IBC.

Fortunately for us the Order impugned can’t be taken as a judicial precedent for the reasons given by the Order itself at para 46 which reads as follows,

“46. 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.”

Obviously then, this Order has been passed by the implied admission of the operational creditor than on merit.

With due regard to the Hon’ble SC this is our interpretation of the Order. LEGAL ACCESS feel that this requires a review in all fairness by the Hon’ble SC.


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