After many conflicting decisions, the Supreme Court in Mobilox v Kirusa finally settled the issue regarding the interpretation of the term ‘dispute in existence’ under the Code. This provided much-needed relief and clarity to corporate debtors who may have a genuine dispute regarding the debt under consideration, but may not have yet initiated legal proceedings. The Court acknowledged the fact that situations may exist where a debtor company may have a dispute qua an operational creditor, which it may have chosen not to escalate to a court/arbitral tribunal. The essential elements of a dispute have been crystallized as below: The term “dispute” must be interpreted in a wide an inclusive manner to mean any proceeding which had been initiated by the debtor before any competent court of law or authority;
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The dispute should be in respect of
(a) existence of the amount of debt
(b) quality of goods and services
(c) breach of representation and warranty
(d)The dispute should be raised prior to the issuance of a demand notice by the Operational Creditor (e)The debtor would have to particularize and prove the dispute in respect of the existence of the “debt” and the “default”
(f) The dispute cannot be a mala fide, moonshine defense raised to defeat the insolvency proceedings.
Therefore, the NCLT would have to prima facie verify the existence of the pending dispute and not judge the adequacy of the same.
A recent amendment in law has incorporated this position of the Supreme Court. The Ordinance lays down that the corporate debtor shall bring to the notice of the operational creditor, existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings, i.e. the word “and” has been replaced by “or”.21 The amendment liberalizes the interpretation of the word “dispute”. Hence, the existence of dispute need not be in the form of pendency of suit or arbitration proceedings only.
