The Concept of ‘Dispute’ Under IBC, 2016

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a paradigm shift in India’s approach to corporate insolvency and debt recovery. Among its various provisions, the interpretation of what constitutes a ‘dispute’ has emerged as one of the most contentious and frequently litigated aspects. This concept serves as a critical threshold test that determines whether an operational creditor can successfully initiate corporate insolvency resolution proceedings against a corporate debtor. The legislative intent behind incorporating the dispute mechanism was to prevent the misuse of insolvency proceedings for debt recovery purposes and to ensure that genuine commercial disputes are resolved through appropriate forums rather than through the insolvency framework. The significance of correctly understanding and applying the concept of ‘Dispute’ Under IBC cannot be overstated, as it directly impacts the rights of both creditors and debtors. A narrow interpretation could potentially allow creditors to bypass legitimate disputes and force solvent companies into insolvency proceedings, while an overly broad interpretation might enable unscrupulous debtors to abuse the provision and delay legitimate claims. The judiciary has therefore been tasked with striking a delicate balance between these competing interests while remaining faithful to the objectives of the IBC.

Legislative Framework and Statutory Definition of  ‘Dispute’ Under IBC

The Insolvency and Bankruptcy Code, 2016 provides a statutory definition of ‘dispute’ under Section 5(6), which states: “Dispute includes a suit or arbitration proceedings relating to the existence of the amount of debt, the quality of goods or service, or the breach of a representation or warranty.” This definition is deliberately inclusive rather than exhaustive, as evidenced by the use of the word “includes” rather than “means.” The legislative choice of an inclusive definition suggests that Parliament intended to cast a wide net that would encompass various forms of disputes beyond those explicitly mentioned in the provision.

The three specific categories mentioned in Section 5(6) provide important guidance on the types of disputes contemplated by the legislature. First, disputes relating to the existence of the amount of debt cover situations where parties disagree on whether any debt exists at all or contest the quantum of the alleged debt. Second, disputes concerning the quality of goods or services address situations where the debtor contends that the creditor failed to deliver goods or services of the agreed quality or specification. Third, disputes involving breach of representation or warranty encompass situations where parties disagree on whether certain representations were made or warranties were honored during the course of their commercial relationship.

Section 8 of the IBC establishes the procedural framework that operational creditors must follow before initiating insolvency proceedings. This section mandates that an operational creditor must first deliver a demand notice to the corporate debtor demanding payment of the operational debt. The corporate debtor then has ten days from receipt of this notice to either repay the debt or bring to the notice of the operational creditor the existence of a dispute between the parties or record of pendency of a suit or arbitration proceeding filed before receipt of such notice in relation to such dispute. This procedural requirement serves as an important safeguard against premature initiation of insolvency proceedings.

Section 9 of the IBC deals with the application for initiating corporate insolvency resolution process by operational creditors. This section specifically provides that the adjudicating authority shall reject an application if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. The interplay between Sections 5(6), 8, and 9 creates a comprehensive framework for determining when disputes should prevent the admission of insolvency applications.

The Mobilox Innovations Judgment: A Watershed Moment

The interpretation of ‘dispute’ under the IBC underwent significant clarification when the Supreme Court delivered its landmark judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited on September 21, 2017. [1] This case arose from a commercial relationship where Mobilox Innovations engaged Kirusa Software to provide tele-voting services for a television program. After Kirusa rendered the services and raised invoices, Mobilox withheld payments alleging breach of a non-disclosure agreement that had been executed between the parties.

When Kirusa issued a demand notice under Section 8 of the IBC, Mobilox responded by asserting the existence of serious and bona fide disputes between the parties. Despite this assertion, the National Company Law Tribunal initially dismissed the application, and the matter was subsequently appealed to the National Company Law Appellate Tribunal, which remitted the case back to the adjudicating authority. The matter eventually reached the Supreme Court, which used this opportunity to provide comprehensive guidance on interpreting the concept of ‘dispute’ under the IBC.

The Supreme Court engaged in a detailed analysis of the legislative history of the IBC by examining the Insolvency and Bankruptcy Bill, 2015 and comparing it with the enacted legislation. The Court noted three significant changes between the Bill and the final Act. First, the Bill had used the phrase “the existence of a dispute” while the enacted Code uses “existence of a dispute, if any and record of pendency of the suit or arbitration proceeding.” Second, the word “includes” replaced the word “means” in the definition of dispute, thereby changing the nature of the definition from restrictive to inclusive. Third, the Bill’s definition of dispute as meaning a “bona fide suit or arbitration proceedings” was modified in the enacted Code by removing the expression “bona fide” from Section 5(6).

These textual changes carried significant interpretive implications. The Supreme Court held that the word “and” appearing in Section 8(2)(a) between the phrases “existence of a dispute” and “record of pendency of suit or arbitration proceeding” must be read as “or” to give effect to legislative intent and avoid anomalous situations. The Court reasoned that if the word “and” were given its literal conjunctive meaning, disputes would only encompass pending suits or arbitration proceedings, thereby excluding situations where disputes arose shortly before the insolvency process was triggered or where parties had not yet approached a court or arbitral tribunal despite the existence of a genuine dispute. Such a narrow interpretation would create significant hardships and defeat the legislative purpose of preventing premature initiation of insolvency proceedings against debtors involved in legitimate commercial disputes.

The Supreme Court also examined various foreign judgments to understand how similar provisions had been interpreted in other jurisdictions. Drawing from this comparative analysis, the Court emphasized the concept of “genuine dispute,” which it described as a dispute that is bona fide and truly exists in fact. The Court clarified that the grounds for alleging the existence of a dispute must be real and not spurious, hypothetical, illusory, or misconceived. This formulation sought to prevent both the abuse of insolvency proceedings by creditors seeking to bypass genuine disputes and the misuse of the dispute defense by debtors attempting to evade legitimate debts.

Most significantly, the Supreme Court articulated what has come to be known as the “plausible contention test.” Under this test, the adjudicating authority must determine whether there exists a plausible contention that requires further investigation and whether the dispute raised is not a patently feeble legal argument or an assertion of fact unsupported by evidence. The Court emphasized that the adjudicating authority should not examine the merits of the dispute in detail but should merely satisfy itself that a genuine dispute exists that warrants resolution through appropriate judicial or quasi-judicial forums rather than through the insolvency process. The role of the adjudicating authority is to separate the grain from the chaff and reject spurious defenses that amount to mere bluster.

The Supreme Court concluded that so long as a dispute truly exists in fact and is not spurious, hypothetical, or illusory, the adjudicating authority must reject the insolvency application. The Court also held that the dispute need not have culminated in formal legal proceedings prior to receipt of the demand notice, as requiring such formality would create unreasonable barriers and defeat the purpose of protecting debtors from premature insolvency proceedings.

Judicial Interpretation and Evolution

The principle established in Mobilox received further judicial validation and refinement in subsequent cases. In Samee Khan v. Bindu Khan, the courts reiterated the principle that the word “and” may be read as “or” to further the object of a statute and avoid anomalous situations. [2] This interpretive principle, which has deep roots in statutory interpretation jurisprudence, supports a purposive reading of Section 8(2)(a) that gives effect to the legislative intent of protecting debtors involved in genuine disputes.

However, different benches of the National Company Law Tribunal initially adopted divergent approaches to interpreting the concept of dispute under IBC, leading to some uncertainty in the application of the law. In the matter of Shivam Construction Company v. Ambience Private Limited, the Delhi Bench of the NCLT adopted a broad interpretation of the term dispute. The Tribunal held that it is not mandatory for a debtor to have initiated a suit or arbitration proceeding prior to receiving a demand notice to assert the existence of a dispute. According to this view, a mere response to the demand notice showcasing the existence of a bona fide dispute would suffice to establish the existence of a dispute for purposes of Section 9(5)(ii)(d) of the IBC. The Delhi Bench emphasized that the definition of dispute is inclusive rather than exhaustive, and therefore disputes could be established through means other than formal legal proceedings.

In contrast, the Mumbai Bench of the NCLT in DF Deutsche Forfait AG and Another v. Uttam Galva Steel Limited adopted a more restrictive interpretation. [3] This Tribunal held that the existence of a dispute means that a suit or arbitration proceeding must be pending before an operational creditor serves a demand notice. According to this interpretation, merely raising a dispute in reply to a demand notice does not amount to notice of an existing dispute, nor does filing a suit or initiating arbitration proceedings subsequent to receipt of the demand notice constitute an existing dispute. This narrower interpretation placed greater emphasis on the requirement of pre-existing formal proceedings.

The divergence between these interpretations created practical difficulties and uncertainty for both creditors and debtors. However, the Supreme Court’s decision in Mobilox and subsequent appellate decisions have largely resolved these conflicts in favor of a broader interpretation that does not require formal legal proceedings to establish the existence of a dispute under IBC, provided that the dispute is genuine and not spurious.

The Ahluwalia Contracts Case: Clarifying Pre-Existence

The concept of pre-existing dispute under IBC received important clarification in the case of Ahluwalia Contracts (India) Limited v. Raheja Developers Limited. [4] In this case, Ahluwalia Contracts had entered into agreements with Raheja Developers for construction and plumbing works. After completing the works, Ahluwalia served a demand notice under Section 8 of the IBC for unpaid invoices amounting to approximately Rs. 3.37 crores. Raheja Developers did not respond within the stipulated ten-day period but instead issued a notice invoking arbitration almost one month after receiving the demand notice. Meanwhile, Ahluwalia had already filed an application under Section 9 of the IBC before the National Company Law Tribunal.

The NCLT initially held that the dispute existed prior to issuance of the demand notice and therefore rejected the insolvency application. However, on appeal, a three-judge bench of the National Company Law Appellate Tribunal took a different view. The NCLAT emphasized that the dispute must be pre-existing, meaning it must have existed before the demand notice was issued. The Appellate Tribunal noted that on the date of issuance of the demand notice, no arbitration proceeding had been initiated or was pending, and the arbitration notice was filed only after receipt of the demand notice under Section 8 of the IBC. Therefore, the corporate debtor could not rely on the arbitration notice to suggest a pre-existing dispute.

The NCLAT observed that apart from the notice invoking arbitration, there was nothing on record to suggest that the corporate debtor had raised any pre-existing dispute. In the absence of evidence demonstrating that a dispute was raised prior to issuance of the demand notice, the dispute could not be held to be pre-existing merely by showing an arbitration notice issued after the demand notice. This decision established an important principle that while formal legal proceedings are not always necessary to establish a dispute, there must be some evidence of the dispute existing before the demand notice was issued. A debtor cannot create a dispute for the first time in response to a demand notice if no dispute existed beforehand.

Parameters for Determining Existence of  ‘Dispute’ Under IBC

Based on the evolving jurisprudence, certain clear parameters have emerged for determining whether a dispute exists that would preclude admission of an insolvency application. First, the dispute must be prima facie bona fide and must exist naturally in the given factual matrix. This means that the dispute cannot be artificially created or manufactured for the purpose of avoiding insolvency proceedings. The dispute must flow naturally from the commercial relationship and transactions between the parties.

Second, the grounds for alleging the existence of a dispute should not be spurious, hypothetical, illusory, or misconceived. The adjudicating authority must examine whether the contentions raised by the corporate debtor have some basis in fact and law or whether they are merely frivolous assertions designed to delay or avoid payment of legitimate debts. This examination does not involve a detailed adjudication of the merits but rather a prima facie assessment of whether the dispute has substance.

Third, the existence of a dispute need not be proved with the same rigor as would be required in a civil trial. The corporate debtor is not required to establish beyond doubt that it will succeed in defending the claim. Rather, it must merely show that there exists a plausible contention that requires further investigation through appropriate legal proceedings. This lower threshold recognizes that the insolvency process is not meant to be a substitute for dispute resolution mechanisms.

Fourth, the dispute should be natural and not artificially constructed to appear as a dispute. There must be genuine disagreement between the parties on substantive issues relating to the debt. Mere assertions without any supporting evidence or merely raising technical objections without substance would not constitute a genuine dispute. The adjudicating authority must look beyond the form to the substance of the contentions raised.

Procedural Requirements and Timing Considerations

The procedural framework established by the IBC places specific timing requirements on both creditors and debtors. When an operational creditor seeks to initiate insolvency proceedings, it must first comply with the requirements of Section 8 by delivering a demand notice to the corporate debtor in the prescribed form. This notice must demand payment of the operational debt and must be delivered in accordance with the procedural requirements specified in the Code and the rules made thereunder.

Upon receiving the demand notice, the corporate debtor has a period of ten days to respond. During this period, the corporate debtor may choose one of two courses of action. It may repay the unpaid operational debt, thereby resolving the matter without the need for insolvency proceedings. Alternatively, it may bring to the notice of the operational creditor the existence of a dispute between the parties or the record of pendency of a suit or arbitration proceeding that was filed before receipt of the notice or invoice in relation to such dispute. The corporate debtor must exercise this option within the ten-day period, as the statute does not provide for any extension of this timeline.

The timing of when a dispute arose and when it was communicated has significant implications. As established in the Ahluwalia Contracts case, the dispute must pre-exist the demand notice. However, as clarified in Mobilox, the dispute need not have been formalized into legal proceedings before the demand notice was issued. What matters is whether there was a genuine disagreement between the parties regarding the debt before the operational creditor issued the demand notice under Section 8.

If the corporate debtor fails to respond within the ten-day period, or if it responds but fails to establish the existence of a genuine dispute, the operational creditor may file an application under Section 9 of the IBC with the adjudicating authority. The application must be filed within the prescribed format and must be accompanied by the required documents and evidence. The adjudicating authority will then examine whether all statutory requirements have been met and whether any dispute exists that would preclude admission of the application.

Role and Limitations of the Adjudicating Authority

The role of the National Company Law Tribunal as the adjudicating authority under the IBC is carefully circumscribed when it comes to examining disputes. The Supreme Court in Mobilox emphasized that the adjudicating authority should not conduct a detailed examination of the merits of the dispute at the stage of admission of an insolvency application. The authority’s role is limited to determining whether a plausible contention exists that requires further investigation and whether the dispute raised is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

This limited scrutiny serves important policy objectives. The IBC is designed to provide a time-bound resolution mechanism for corporate insolvency, and extended litigation about the existence of disputes would undermine this objective. At the same time, the limited scrutiny ensures that genuine disputes are not brushed aside in the rush to admit insolvency applications. The adjudicating authority must therefore perform a delicate balancing act, examining disputes sufficiently to identify spurious defenses while avoiding detailed adjudication that would delay proceedings and defeat the Code’s objectives.

The adjudicating authority must examine the correspondence between the parties, any contractual documents, and other evidence on record to determine whether a dispute existed before the demand notice was issued. It must assess whether the corporate debtor’s contentions have any factual or legal basis or whether they are merely bluster designed to evade legitimate obligations. However, this examination should not extend to determining which party is likely to succeed on the merits of the dispute. Questions of fact and law that require detailed investigation should be left to be determined by appropriate courts or arbitral tribunals.

Implications for Operational Creditors and Corporate Debtors

The judicial interpretation of the concept of ‘Dispute’ Under IBC has significant practical implications for both operational creditors and corporate debtors. Operational creditors must carefully evaluate whether any dispute exists before initiating insolvency proceedings under Section 9 of the IBC. If correspondence or other evidence suggests that the corporate debtor had raised legitimate concerns about the quality of goods or services, the existence or quantum of debt, or breaches of representations or warranties, the operational creditor faces the risk that its insolvency application will be rejected on the ground of pre-existing dispute.

Operational creditors should therefore conduct thorough due diligence before invoking the insolvency process. This includes reviewing all correspondence with the corporate debtor, examining any complaints or concerns raised, and assessing whether any disputes were pending resolution through other forums. If genuine disputes exist, operational creditors may be better served by pursuing resolution through appropriate dispute resolution mechanisms rather than attempting to use insolvency proceedings as a debt recovery tool.

For corporate debtors, the law provides important protection against premature or improper initiation of insolvency proceedings. However, this protection is available only where genuine disputes exist. Corporate debtors cannot manufacture disputes for the purpose of avoiding insolvency proceedings. Any dispute raised must be genuine, must be supported by evidence, and must relate to the matters specified in Section 5(6) of the IBC. Corporate debtors who raise frivolous or spurious disputes risk not only rejection of their defense but also potential liability for costs and damages.

Corporate debtors should maintain proper documentation of all disputes and should raise concerns promptly when issues arise. Waiting until a demand notice is received to suddenly raise disputes that were never mentioned previously is likely to be viewed unfavorably by adjudicating authorities. Contemporaneous correspondence, complaints, and other evidence of disputes will carry greater weight than after-the-fact assertions.

Conclusion

The interpretation of the term ‘dispute’ under the Insolvency and Bankruptcy Code, 2016 represents a critical aspect of the insolvency resolution framework. The Supreme Court’s judgment in Mobilox Innovations established foundational principles that have shaped subsequent judicial interpretation and application of this concept. The inclusive definition of dispute, the plausible contention test, and the recognition that disputes need not be formalized into legal proceedings before demand notices are issued collectively create a balanced framework that protects the interests of both creditors and debtors.

The evolution of jurisprudence in this area reflects the broader objectives of the IBC, which seeks to balance multiple competing interests. On one hand, the Code aims to provide creditors with an effective mechanism for recovering debts and resolving corporate insolvency in a time-bound manner. On the other hand, it seeks to prevent abuse of the insolvency process and protect viable businesses from being pushed into insolvency due to commercial disputes that should be resolved through other mechanisms. The interpretation of dispute Under IBC serves as a crucial gatekeeper that ensures the insolvency process is used appropriately.

Looking forward, continued judicial vigilance will be necessary to maintain this balance as the insolvency resolution framework matures. Adjudicating authorities must remain alert to both spurious disputes raised by debtors seeking to evade legitimate obligations and improper attempts by creditors to use insolvency proceedings to bypass genuine disputes. The principles established through judicial interpretation provide a sound foundation for addressing these challenges and ensuring that the IBC achieves its intended objectives.

References

[1] Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353

[2] Samee Khan v. Bindu Khan, (1998) 7 SCC 59

[3] DF Deutsche Forfait AG v. Uttam Galva Steels Limited 

[4] Ahluwalia Contracts (India) Limited v. Raheja Developers Limited, Company Appeal (AT) (Insolvency) No. 703 of 2018

[5] Insolvency and Bankruptcy Code, 2016 

[6] Supreme Court of India, Judgments Database

[7] National Company Law Tribunal

[8] National Company Law Appellate Tribunal

[9] Ministry of Corporate Affairs, Insolvency and Bankruptcy Board of India