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[Section 8 IBC] 'Dispute' Must Truly Exist In The Facts And Should Not Be Spurious, Hypothetical And Illusory, Reiterates SC [Read Order]

23 July 2020 4:20 PM GMT
[Section 8 IBC]

The Supreme Court has reiterated that 'dispute' for the purpose of Section 8 of the Insolvency and Bankruptcy Code must truly exist in the facts and should not be spurious, hypothetical and illusory.

In an order passed recently, the bench comprising of Justices UU Lalit and Vineet Saran reiterated the law laid down in Mobilox Innovations Private Ltd. v. Kirusa Software Private Ltd., (2018) 1 SCC 353.

The bench was considering an appeal under Section 62 of the Insolvency and Bankruptcy Code against an order passed by National Company Law Appellate Tribunal, New Delhi upholding an order by NCLT which admitted a petition under Section 9 IBC.

While considering various factual contentions raised by the parties, the court observed thus:

"In our view, in keeping with the law laid down by this Court in Mobilox Innovations Private Ltd. v. Kirusa Software Private Ltd., (2018) 1 SCC 353, a dispute must truly exist in the facts and should not be spurious, hypothetical and illusory."

The Court then proceeded to dismiss the appeal.

It may be noted that Section 5(6) of the IBC defines the 'dispute' as "dispute includes a suit or arbitration proceedings relating to: (a) the existence of the amount of debt; (b) quality of goods or service; or (c) the breach of a representation or warranty". A Corporate Insolvency Resolution Process (CIRP) of a corporate debtor can be initiated by its operational creditor on occurrence of a 'payment default' (of operational debt), by filing an application before the relevant National Company Law Tribunal (NCLT) under Section 9 of the IBC. Before making the application, the operational creditor must first issue a demand notice or copy of invoice (demanding payment of operational debt) to the corporate debtor under Section 8 (1) of the IBC (Demand Notice). The corporate debtor has 10 (ten) days to either pay or bring to the notice of the operational creditor the "existence of a dispute and the record of the pendency of a suit or arbitration proceeding filed before the receipt of" such Demand Notice (Section 8 (2) of IBC) (Notice of Dispute). In case the corporate debtor has issued a Notice of Dispute, the CIRP application of the operational creditor is required to be rejected by the NCLT.

In Mobilox, the Supreme Court held that the word "and" occurring in Section 8(2)(a) of the IBC must be read as "or". The court, interpreting the definition of 'dispute', had further observed thus: "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. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. 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."

Case no.: CIVIL APPEAL NO.2730 OF 2020
Coram: Justices UU Lalit and Vineet Saran
Appearance: Senior Advocates P. Chidambaram,Mukul Rohatgi and Vikram Nankani

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