Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017)

Innoventive tells you that a pre-existing dispute throws the operational creditor out of the Code. Mobilox tells you what a dispute is. Without it, s. 8 would be unworkable in either direction: a debtor could stop every application by asserting some grievance, or a tribunal could try the grievance on the merits and turn an insolvency process into a civil suit. The test in this case is the line between those two errors, and it is the most quotable paragraph in the whole of the operational-creditor material.

An operational creditor delivered a demand notice for an unpaid operational debt. The corporate debtor responded asserting that a dispute existed between the parties. The question for the Court was what the Adjudicating Authority must do with such a response: satisfy itself that the dispute is genuine, or decide whether the dispute is a good one.

The test of the existence of a dispute is:

(a) whether the corporate debtor has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence; (b) whether the defence is not spurious, mere bluster, plainly frivolous or vexatious; and (c) whether a dispute truly exists in fact between the parties, which may or may not ultimately succeed.

Applying that test, so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the Adjudicating Authority has to reject the application. The Court also emphasised that strict adherence to the timelines of the Code is of essence.

The three limbs are best read as a single filter with a deliberately low threshold for the debtor and a deliberately low ceiling for the tribunal. The debtor must show something a court could sensibly investigate — a plausible contention, supported by something more than assertion. The tribunal must go no further than asking whether that threshold is crossed. The closing words of the test carry the weight: the dispute "may or may not ultimately succeed", which means the merits are expressly reserved for the forum that will try them.

The reason for drawing the line there follows from the object of the Code. Insolvency resolution is a collective, time-bound proceeding aimed at rescuing a business, not a mechanism for recovering a contested sum. If a tribunal were to adjudicate quality and performance disputes on affidavits, it would convert a fourteen-day admission enquiry into a trial and defeat the timelines. If it were to ignore genuine disputes, it would let a creditor use the threat of insolvency as leverage in an ordinary commercial disagreement.

1. Set out the three limbs verbatim. Examiners look for the plausible-contention formula and the spurious-bluster-frivolous-vexatious formula together.
2. Apply, do not adjudicate. Say explicitly that the Authority is not deciding who is right; it is deciding whether there is something to decide.
3. Pair it with Innoventive. Innoventive supplies the rule (a pre-existing dispute defeats s. 9); Mobilox supplies the standard.
4. Note the limits. The dispute must be pre-existing, that is, raised before the demand notice; a defence manufactured in response to the notice does not satisfy the test. The case also says nothing about applications by financial creditors under s. 7, where the existence of a dispute about the debt is not a bar in the same way.
5. Mention the timeline point where a question raises delay: the Court treated the statutory periods as of the essence.

Section 9(5) now carries a further proviso requiring the Adjudicating Authority, where it has not passed an order within fourteen days of receipt of the application, to record the reasons for the delay in writing. The Mobilox test itself is untouched.