Corporate Insolvency- CIA 3

-Aditya Agrawal 1750404

-Jennifer Mary Cherian 1750451
-Arjun Kamath 1750411

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

 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.

 Literature review

1.Creditors under Bankruptcy Code: the curious case of confusing precedents Sahil
Kanuga and Arjun Gupta

The article focuses and emphasizes on the aspect of the creditors wherein they form the
bedrock of loans and also provide the requisite guarantees to the borrower. The article
also seeks to focus upon the interplay between the lender, guarantor and the debtor
through the role of various precedents. The article also states that the Code envisages a
brand-new regime for consolidating the laws pertaining to the reorganisation and
insolvency resolution of corporate entities and partnership firms, as well as individuals, in
a time-bound manner, with a view to maximising value and balancing the interests of all
stakeholders. The article also deals with other variety of cases along the same line and
also lays down the differences of opinion in the various quoted judgments. In the latter
part of the article, the author also states that the purpose of the guarantee agreements is
for the recovery of the loans and the code is designed more or less for the creditors and
the objective is such that to maximize the recovery for creditor without being unfair to or
trampling on the rights of the debtor.

2. After the Guarantor Pays: The Uncertain Equitable Doctrines Of Reimbursement,

Contribution, And Subrogation Brian D. Hulse

The Article addresses the equitable doctrines of reimbursement, contribution, and

subrogation as they apply to guarantors. Specifically, it explores in detail guarantors’
rights after they make payment under the guaranty and then seek to recover some or the
entire amount paid from the borrower, other guarantors, or the collateral for the primary
obligation. The article also discusses the inconsistencies in the case law on these subjects,
which can create unpredictable results. The Article also elucidates upon the case of
Honey v. Davis, the most famous American case wherein the Washington Supreme Court
was not able to determine and give a clear about the context of Personal guarantor as
there were about three different opinions but the majority of the judges stated that the
landlord was not a surety and did not have a right of reimbursement. The dissenting
opinion, joined by three justices, argued that the landlord was a surety and entitled to
reimbursement. The latter part of the paper concludes that, when multiple parties are
liable on a common debt, in whatever capacity, they should enter into appropriate
reimbursement and contribution agreements at the outset of the transaction to avoid
litigation and unpredictable outcomes. The article also states that Guarantors and other
sureties that pay have well-recognized equitable rights of reimbursement against the
principal obligor, contribution from other co-sureties, and subrogation to the rights of the
creditor.

3. Corporate Insolvency: Its Operations and Emerging Problems - Navin K. Pahwa

One of the major operational problems the article elucidates upon is the fixation of the
liability of the guarantors. Although the Code is facing such challenges, the author is of
the view that with correct judicial and legislative interference, it may grow into a mature
and effective piece of legislation and improve the ease of doing business as well as the
economic scenario in India. The author also deals with the NCLAT in its recent judgment
in SBI v. V. Ramakrishnan (‘SBI’) held that the moratorium will apply both to the
property of the Corporate Debtor and the personal guarantor. This ratio raises issues on
deviation from well-settled concept of coextensive liability of the guarantor and the
principal debtor as contemplated under Sec. 128 of the Contract Act, 1872. SBI is
contemplating challenging this decision of the NCL AT. The author also suggests some
of the new suggestions that has to be incorporated in the code with relation to the
property of the corporate debtor wherein the author recommends that it should also
provide for protection of the properties of the personal guarantor during the moratorium
period. The liability of the guarantor cannot be completely de-linked with the liability of
the principal debtor. In the concluding part of the article states that the IB Code, a
conglomerate of various legislations, has brought sea changes in the concept of
bankruptcy and insolvency and also is refurbishing the confidence of creditors such that
their rights are protected through the same processes.

4. Liability of Personal Guarantors vis a vis their Rights under the IBC: A Legal
Conundrum - Pinak Parikh
The Article begins with the introduction of the case of Essar Steel wherein Section 31(1)
of IBC clears the smoke stating that the liability of personal guarantors stands
extinguished upon approval of the resolution plan under IBC since the resolution plan is
binding on the personal guarantors. However the same view is not been recognized and is
untenable in law, wherein in the case of State Bank of India v. V. Ramakrishnan,
observed that liability of the personal guarantors is not extinguished upon approval of the
resolution plan. The author also states that The IBC is silent on the liability of personal
guarantors to pay off the debts of corporate debtor following the approval of resolution
plan. Such a situation is problematic because: (1) the resolution plan for the corporate
debtor, which is a contract, discharges the principal debtor and, consequently, the
guarantor (section 128 of the Contract Act); and (2) even though the guarantor is not
discharged and is allowed to exercise the right of subrogation (section 140 of the Contract
Act), it will bring the corporate debtor back to where it was prior to passing of a
resolution plan, which was clearly not the intention of the legislature. The article also
emphasizes on the aspect of liability of the guarantor under the scope of the Indian
Contract Act, 1872. The author also provides with exploring the ambit of Sections 128,
135, 139 etc. and in the concluding part the author states that the time is ripe for the
Supreme Court to conclusively determine liability of the personal guarantors as well as
rights of the personal guarantors in respect of the corporate debtor following the approval
of the resolution plan.

5. Liability of Personal Guarantors of a Corporate Debtor during the Corporate

Insolvency Resolution Process - Param Pandya
The author gives the case analysis of Sanjeev Shriya v. State Bank of India, wherein the
court has decided the question pertaining to the question of the liability of personal
guarantors of a company where moratorium under Section 14 of the Insolvency and
Bankruptcy Code, 2016 (“IBC“) is in force. The Allahabad High Court has answered the
above question in the negative stating that a personal guarantor of an insolvent company
is not liable to pay the debt. The author seeks to protect the rights and the interest of the
creditor by stating that, liquidation of the principal debtor does not by itself affect the
creditor’s rights against the guarantors. The creditor may prove in liquidation the full
balance due to it under the principal debt and may at the same time proceed against the
guarantors for any sums due under the guarantee, obtain judgment against the guarantor
for any sum outstanding at the date of the judgment, and then proceed to enforce its
judgment until it is paid in full, from all sources. The creditor is entitled to prove in the
liquidation of the principal debtor, irrespective of its ability to recover against the
guarantor. The author in the latter part seeks to make IBC as a creditor-friendly law.
 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 creditors2
2. Operational creditors3
3. Corporate debtors4
4. Insolvency Resolution Professionals5

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

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.
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 Authority6 (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
created 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

6 Sec. 5 (1), Insolvency and Bankruptcy Code, 2016.

 The committee now has the discretion of either going with the same interim for the
complete resolution process7 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:
a. The amount due to the Financial Creditor
b. Evidence regarding the existent of the debt by Corporate Debtor
c. 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.

2. 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
dispute8 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.

3. 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

7 Sec. 5 (26), Insolvency and Bankruptcy Code, 2016.

8 Sec. 5 (6), Insolvency and Bankruptcy Code, 2016.
 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 Mobilox9 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 (Mobilox Innovations Pvt. Ltd) was conducting the televised-
voting process for a program on the channel namely “Star TV” known popularly as “Nach Baliye”.
The appellant has conducted business with the respondent company (Kirusa software pvt. ltd) in
order to provide for various services relating to the TV program, and both the parties executed a
non-disclosure agreement in pursuance thereof.
The non-disclosure agreement had stipulated certain conditions one of which was the existence of
a confidentiality obligations towards Mobilox innovations Pvt. Ltd. as held by the Respondent
Kirusa software Pvt. Ltd. During the time period of contract Kirusa software raised monthly
invoices for the rendered services. However, Mobilox innovations informed Kirusa software about
the payments that were subsequently withheld due to breach of the non-disclosure agreement
obligations. Due to the non-payment of the monthly invoices by Mobilox innovations Pvt. Ltd,
Kirusa software Pvt. Ltd sent a demand notice to Mobilox innovations Pvt. Ltd under Section 8 of
the Insolvency and Bankruptcy Code.

9 2017 AIR SC 4532

Mobilox innovations Pvt. Ltd’s response to the demand notice stated that there was a bona fide
and serious dispute between the parties, inclusive of the breach of obligations mentioned under the
non-disclosure agreement. Kirusa subsequently filed an application before the NCLT, Mumbai
under Section 9 for the initiation of Corporate Insolvency Resolution process (CIRP) of Mobilox.
The NCLT however rejected the application on the grounds that Mobilox had issued a notice of
dispute to the operational creditor thus calling for a cause of a hearing to ascertain the existence of
any dispute.

An appeal against the order of NCLT was subsequently filed by Kirusa at the NCLAT stating that
mere dispute to the demand notice by the operational creditor does not amount to a valid ground
for rejection of application under Section 9 (1) of the Insolvency & Bankruptcy Code. The question
before the Appellate Tribunal was with respect to the clarification of the meaning of dispute and
existence of dispute for the purposes of application under Section 9 of the Insolvency and
Bankruptcy Code.

NCLAT allowed Kirusa’s appeal on the grounds that the reply to the demand notice by the Mobilox
cannot be seen within the purview of Section 8(2)[2] and Section 5(6)[3] of the Insolvency and
Bankruptcy Code. It stated that the argument which was raised by Mobilox was vague and
motivated as the debt demanded was not in connection with the non-disclosure agreement but
rather in regard to the services and goods which were provided therein.
It further stressed upon the interpretation of dispute stating that a dispute would not be limited to
only arbitration proceedings or suits but shall include any proceedings initiated before any tribunal,
consumer court, labor court etc.

In response to the same, Mobilox filed an appeal to the Supreme Court against the order passed by
NCALT.

Legal Analysis:

The Supreme Court allowed the appeal by Mobilox, while interpreting the expression “existence
of a dispute” under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Supreme Court
believed the breach of non-disclosure agreement was sufficient to construe the existence of a
dispute to invalidate the CIRP application filed by the operational creditor. The court looked into
an Australian High Court case10, Spencer Constructions Pvt Ltd. V. G & M Aldridge Pvt Ltd.
regarding interpret the expression existence of the dispute

Interpretation of Section 8 (2) (a):

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 great hardship as the corporate debtor would then
be able to stave off the bankruptcy process provided a dispute is already pending in a suit or
arbitration proceedings.

The Supreme Court also stated that, if and is mentioned under Section 8(2)(a), it 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 a few cases, Semee Khan V. Bindu Khan11, Maharshi Mahesh Yogi Vedic
Vishwavidyalaya V. State of M.P12 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. It 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:

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
 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.