“Dispute” and “existence of dispute” under Insolvency and Bankruptcy Code, 2016 by the Supreme Court

Case Law

Mobilox Innovations Private Limited Vs Kirusa Software Private Limited (Respondent – Operational Creditor), SC

Fact of Case 

OC filed an application u/s 9, claim was disputed by the corporate debtor (CD) and it was alleged that OC has violated the Non-disclosure agreement entered between them as OC disclosed the client information and client campaign information on its web page and no amount was paid due to this breach of agreement.

NCLT dismissed the application of OC on a ground of existence of dispute. However, on further appeal by OC in NCLAT, the application was accepted on a ground that condition of demand notice under sub-section (2) of Section 8 has not been fulfilled by the CD and the defence claiming dispute was not only vague but got up and motivated to evade the liability. It is pertinent to note that there was no suit or arbitration was pending /filed before the receipt of demand notice.

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Provision in the law

Section 5 (6) “dispute” includes a suit or arbitration proceeding relating to-

1. The existence of the amount of debt
2. The quality of goods or services; or
3. The breach of a representation or warranty;

Section 8 (2) (a) existence of a dispute, if any and record of pendency of the suit or arbitration proceedings….

Supreme Court Judgment

SC accepted the appeal filed by CD and held existence of dispute between parties and following observation were made

• The definition of “dispute” has now become an inclusive definition, the word “bona fide” before “suit or arbitration proceedings” has been deleted in the Code which was there in the bill.
• The word “and” occurring in Section 8(2)(a) must be read as “or” keeping in mind the legislative intent.
• Earlier, due to the use of the word ‘and’, dispute was eligible for acceptance only in the case of it is supported by pending suit or arbitration proceeding. This was leading to a great hardship; e.g. If a dispute arises few days before triggering of the insolvency process, there will be no time to approach either to Arbitral tribunal or a Court.
• “Dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6). So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

Decision by: Supreme Court of India