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Insolvency & Bankruptcy Code- SC Interprets Scope Of ‘Existence Of Dispute’ Between Operational Creditor And Corporate

 The judgment of the Supreme Court in Mobilox Innovations Pvt.Ltd. v.Kirusa Software Pvt.Ltd. rendered by a bench of Justices R. F Nariman and Sanjay Kishan Kaul settles a significant issue under the Insolvency and Bankruptcy Code 2016. The issue was whether the existence of a dispute by itself without the record of initiation of any suit or arbitration proceedings in relation to it is sufficient to make an application for insolvency resolution at the instance of operational creditor unsustainable.

The Supreme Court looked at the details of the Code and held that operational creditors are those creditors to whom an operational debt is owed, and an operational debt, in turn, means a claim in respect of the provision of goods or services. Further a claim by operational creditor can be defeated  as per Section 8(2)(a)  by bringing out to the notice of debtor the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice
or invoice in relation to such dispute.

The argument by the operational creditor was that existence of dispute by itself is not sufficient, and that there should be a suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.

The Court in a significant judgment deviated from the literal explanation of the statue and held that such an interpretation will lead to injustice and anomalies, and hence construed ‘and’ as ‘or’ to make the phrases disjunctive. It was held that the word “and” occurring in Section 8(2)(a) must be read as “or” keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is
not read as “or”.

The Court then proceeded to examine the width and ambit of the phrase ‘existence of dispute’. Referring to various foreign authorities, it was held that the adjudicating authority need to satisfy itself that a plausible dispute existence, without needing to examine whether the dispute is likely to succeed or not. It held that all that the adjudicating authority is to see at this stage 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. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious,  hypothetical or illusory, the adjudicating authority has to reject the application.

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