Introduction

The case of Greymatter Entertainment Pvt. Ltd. v. Pro Sportify Pvt. Ltd. adjudicated by the National Company Law Appellate Tribunal (NCLAT) on February 9, 2023, marks a significant development in the interpretation of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'The Code'). The dispute arose between Greymatter Entertainment Pvt. Ltd. ('Operational Creditor') and Pro Sportify Pvt. Ltd. ('Corporate Debtor') over unpaid dues related to Live TV Production Services for the Pro Wrestling League (PWL) Seasons 1, 2, and 3.

The core issue revolved around the applicability and enforcement of Section 9 of The Code, which deals with the initiation of the corporate insolvency resolution process (CIRP) by an operational creditor in case of default by the corporate debtor.

Summary of the Judgment

The NCLAT examined whether Greymatter Entertainment Pvt. Ltd. had adequately demonstrated the existence of an operational debt owed by Pro Sportify Pvt. Ltd. The Operational Creditor contended that despite providing services for three seasons of PWL, only a portion of the agreed remuneration was paid, leading to an outstanding amount of ₹65,41,590/- along with interest.

Pro Sportify Pvt. Ltd. rebutted these claims by asserting that it had fulfilled its financial obligations, including a full and final settlement for Season 3, and had issued a cheque for ₹34,46,000/- which was subsequently stopped. The Adjudicating Authority dismissed the Section 9 application, holding the petitioner (Operational Creditor) responsible for failing to sufficiently prove the debt and liability.

Upon appeal, the NCLAT examined the procedural and substantive aspects of the case, particularly focusing on whether the Operational Creditor met its burden of proof under Section 9 and whether the Adjudicating Authority erred in dismissing the application.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to substantiate its ruling:

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018): This case was pivotal in elucidating the obligations of both operational creditors and corporate debtors under Sections 8 and 9 of The Code. It clarified that the absence of a response to a Section 8 notice does not preclude the corporate debtor from raising disputes in subsequent proceedings.
• Veerasekhara Varmarayar v. Amirthavalliammal: This Madras High Court judgment underscored that the failure of an applicant to file a rejoinder does not equate to an admission of the corporate debtor's allegations.
• Neeraj Jain v. Cloudwalker Streaming Technologies Private Limited (2019): This tribunal decision reiterated that operational creditors retain the right to demonstrate the existence of disputes irrespective of the debtor’s lack of response to demand notices.
• M/s. Brandy Realty Services Ltd. v. M/s. Sir John Bakeries India Pvt. Ltd.: Reinforced the principle that the existence of genuine disputes warrants the rejection of Section 9 applications.

These precedents collectively reinforced the tribunal's stance on the procedural nuances and burden of proof required from operational creditors under The Code.

Legal Reasoning

The tribunal meticulously dissected the provisions of Sections 8 and 9 of The Code:

• Section 8: Mandates that an operational creditor must issue a demand notice, and the corporate debtor has ten days to respond by either paying the debt or raising a dispute.
• Section 9: Allows the operational creditor to initiate CIRP if, after ten days post-notice, no payment is received or no dispute is raised.

The central legal question was whether the Operational Creditor had satisfactorily proven the existence and conclusiveness of the debt without having challenged the corporate debtor's defenses through a rejoinder. The tribunal held that without a robust demonstration of the debt, the application under Section 9 cannot advance.

Moreover, the tribunal highlighted that the Operational Creditor failed to provide sufficient evidence of the disputed amounts, especially concerning Season 3, where the Corporate Debtor claimed to have made a full and final settlement—a claim the Operational Creditor did not effectively counter.

Impact

This judgment has profound implications for future insolvency proceedings, particularly concerning the procedural responsibilities of operational creditors:

• Enhanced Burden of Proof: Operational creditors must ensure comprehensive documentation and evidence to substantiate their claims when initiating Section 9 applications.
• Finality in Settlements: The case underscores the importance of clear and unequivocal agreements regarding full and final settlements to prevent protracted disputes.
• Strategic Rejoinders: The necessity for operational creditors to actively engage with and rebut corporate debtors' defenses is emphasized, as passive failure to respond can prejudice their cases.
• Judicial Scrutiny: Tribunals will likely adopt a more stringent approach in evaluating the completeness and authenticity of claims under The Code.

Overall, the decision reinforces the procedural rigors operational creditors must adhere to, ensuring that only well-substantiated applications proceed to CIRP, thereby promoting fairness and accountability in insolvency resolutions.

Complex Concepts Simplified

Section 8 and Section 9 of the Insolvency and Bankruptcy Code

Section 8: This section outlines the process an operational creditor (a party who is owed money for goods or services provided) must follow to notify a corporate debtor (a company that owes money) about an outstanding debt. The creditor sends a demand notice, and the debtor has ten days to either pay the debt or contest it by raising a dispute.

Section 9: If, after ten days from the demand notice under Section 8, the debtor neither pays the debt nor raises a dispute, the creditor can initiate insolvency proceedings against the debtor under this section. This process can lead to the resolution of the company's insolvency, potentially resulting in the liquidation or restructuring of the company to satisfy debts.

Demand Notice

A formal communication from a creditor to a debtor specifying the amount owed, the basis for the debt, and a deadline for repayment or dispute resolution.

Corporate Insolvency Resolution Process (CIRP)

A structured process under The Code aimed at resolving insolvency by either restructuring the company's debts or liquidating its assets to pay off creditors.

Conclusion

The decision in Greymatter Entertainment Pvt. Ltd. v. Pro Sportify Pvt. Ltd. serves as a crucial reminder of the procedural and evidentiary standards operational creditors must uphold under the Insolvency and Bankruptcy Code, 2016. The tribunal's emphasis on the burden of proof and the necessity for operational creditors to actively challenge disputes underscores the Code's intent to foster transparent and fair insolvency proceedings.

For practitioners and entities navigating insolvency landscapes, this judgment highlights the imperative of meticulous documentation, proactive engagement in legal proceedings, and the strategic presentation of evidence. As insolvency laws continue to evolve, such landmark judgments play a pivotal role in shaping the contours of corporate financial accountability and the efficacy of The Code in addressing defaults and disputes.

In the broader legal context, the ruling reinforces the judiciary's commitment to ensuring that insolvency mechanisms are not misused and that only legitimate and well-substantiated claims advance, thereby maintaining the integrity of the corporate insolvency framework.