The Supreme Court clarified the code’s object while keeping legislative intent in mind. The court, through this judgement, has struck a balance between creditors’ rights and debtor companies’ remedies.

1. CASE ANALYSIS- 11
What constitutes a “Dispute” under the IBC as per the Supreme
Court?
Status as on- 11/07/2021
Brief Facts of the case
1. Kirusa served Mobilox with a demand notice as an Operational Creditor under the
Code, demanding payment of certain dues. Mobilox responded to the demand notice
(“Mobilox Reply”), stating that there are certain serious and bona fide disputes
between the parties and alleging Kirusa breached the terms of a non-disclosure
agreement. Kirusa petitioned the National Company Law Tribunal, Mumbai
(“NCLT”) for the initiation of the corporate insolvency resolution process
(“CIRP”) against Mobilox under Section 9 of the Code (“Application”). The NCLT
dismissed this, ruling that Mobilox had issued a valid notice of dispute under the
Code's definition of an "existing dispute."
2. NCLAT: Kirusa then filed an appeal against the NCLT's order, claiming that the
operational creditor's mere disagreement with the demand notice does not constitute a
valid ground for application rejection under Section 9 of the 'I & B Code.' The
Appellate Tribunal was asked to clarify the meaning of "dispute" and "existence of
dispute" for the purposes of applying under Section 9 of the Insolvency and
Bankruptcy Code. Section 8 specifies the requirements that must be met prior to filing
an application under Section 9 of the 'I & B Code.' According to Section 8 (2) of the I
& B Code, once the operational creditor serves the demand notice on the corporate
debtor, the corporate debtor must notify the creditor of the debt payment or dispute, if
any, within 10 days of receiving the notice.

2. 3. Section 9 establishes the right to file an application for the initiation of a corporate
insolvency resolution process after 10 days from the date of demand notice delivery.
The NCLAT granted Kirusa's appeal on the grounds that Mobilox's response to the Demand
Notice did not fall within the purview of Sections 8(2) and 5(6) of the Insolvency and
Bankruptcy Code. It stated that Mobilox's defense was ambiguous and motivated because the
debt demanded had nothing to do with the non-disclosure agreement. Furthermore, the
NCLAT emphasized the interpretation of "dispute," stating that a dispute would not be
limited to only arbitration proceedings or suits, but would include any proceedings.
Held
The Hon’ble Supreme Court ruled as follows:
1. The Supreme Court considered questions raised about the Code's application to debts
owed to operational creditors, as well as what constitutes a "dispute" that entitles the
debtor company to have the Adjudicating Authority reject the application.
2. The Supreme Court granted Mobilox's appeal while interpreting the phrase "existence
of a dispute" under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The
Hon'ble Supreme Court held that the breach of the NDA was sufficient to construe the
existence of a dispute and invalidate the operational creditor's CIRP application.
3. Section 8 (2) (a) interpretation: "The word "and" in Section 8 (2) (a) should be read as
"or." According to the previous interpretation, the Code states that a dispute between
an operational creditor and a corporate debtor is only valid if a suit or arbitration
proceeding is filed prior to the receipt of demand notice. The Supreme Court
determined that such an agreement would cause "great hardship" because the
corporate debtor would be able to avoid bankruptcy if a dispute was already pending
in a suit or arbitration proceedings ".. The Hon'ble Supreme Court made an important
point in stating that if the "and" mentioned in Section 8(2)(a) is not read as "or," such
persons will be excluded from the ambit of Section 8 (2) and application of CIRP will
be easy, which was not the legislature's intent.
4. Previously Existing Dispute: The Supreme Court ruled that the existence of the
dispute, suit, or arbitration proceeding must be "pre-existing," that is, it must exist
prior to receipt of the Demand Notice.
5. Plausible Contention Test: In deciding the case, the Supreme Court examined the
background of the IB Code. According to the Insolvency and Bankruptcy Bill 2015, a
"dispute" is defined as "a genuine suit or arbitration proceedings." However, when the
Bill was passed, the term "dispute" was removed from Section 5 (6) of the definition.
The Supreme Court emphasized that previous jurisprudence regarding the definition
"dispute" does not apply to the current IB code. Instead, the Supreme Court
established a new "plausible contention" test to determine the "existence of dispute."
6. Questions for the Adjudicating Authority to consider when reviewing any application
under Section 9 of the I &B Code:
o Is there an "operational debt" of more than one lakh rupees?
o Whether the documentary evidence submitted with the application
demonstrates that the debt is due and payable and has not yet been paid?
o Is there a dispute between the parties or any record of the pendency of a suit or
arbitration proceeding filed prior to the receipt of the Demand Notice?
If any of the conditions is not met, the application must be rejected by NCLT.

3. 4. initiated before any tribunal, consumer court, labour court, and so on.
Impact of this case
As per Supreme Court, all that the Adjudicating Authority needs to see is whether there is a
plausible contention that requires further investigation and that the "dispute" is not a patently
feeble argument or an assertion of fact that is unsupported by evidence. Interestingly, the
Court held that, while it is important to separate the wheat from the chaff and reject a bogus
defense that is nothing more than bluster, the Adjudicating Authority does not need to go into
the merits and satisfy itself that the defense is likely to succeed at this stage of the
proceeding.
The Supreme Court has clarified that the object of the Code, in conjunction with the
legislative intent qua operational debts, is to ensure that the amount of such debts, which is
typically less than that of financial debts, does not allow operational creditors to place debtor
companies in the CIRP prematurely or for extraneous reasons. As a result, the Court
attempted to strike a balance between an operational creditor's rights and the remedy
available to the debtor company.
So far, there has been a surge of jurisprudence on the meaning of the term "dispute," with
different Adjudicating Authorities adopting different and sometimes contradictory
interpretations ranging from the strictest to the most liberal and inclusive forms. This is the
first time the Supreme Court has addressed the issue, providing much-needed clarity to debtor
companies that may have a genuine dispute about the debt but have not yet initiated legal
proceedings to resolve it.
Conclusion
There appears to be no doubt that the interpretation of "dispute" and "existence of a dispute"
has been a source of contention since the inception of the IBC. Different benches of the
NCLT have provided contradictory interpretations. However, the Supreme Court's conclusive
ruling has finally provided a settled position.
It will be interesting to see how different NCLTs interpret and apply this landmark ruling
relating to the "plausible contention" test. Furthermore, the Supreme Court has been vigilant
in emphasizing the strict adherence to the time lines specified in the Code. The Supreme
Court clarified the code's object while keeping legislative intent in mind. The court, through
this judgement, has struck a balance between creditors' rights and debtor companies'
remedies.
Source- Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd on 21 September,
2017
(Supreme Court Judgment dated 21st
of September, 2017 in CIVIL APPEAL NO. 9405 OF
2017)
Disclaimer– The above article is based on the interpretation of related laws which may differ
from person to person. The readers are expected to take legal advice before placing reliance
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