Mobilox Innovations Private Limited v. Kirusa Software Private Limited

Star T.V. engaged Mobilox for tele-voting on a television dance show. Mobilox gave that work to Kirusa Software.

Mobilox later withheld payment. It alleged that Kirusa had breached a non-disclosure agreement by showing on its webpage that it had worked on that show.

Kirusa sent a demand notice under Section 8. Within days, Mobilox replied that there was a serious dispute.

The N.C.L.T. rejected Kirusa's application because of this dispute. The N.C.L.A.T. sent the matter back for admission. Mobilox then appealed to the Supreme Court.

1. What does "dispute" mean when an operational creditor seeks to start the insolvency process?

2. Must the dispute be pending in a suit or arbitration before it can count?

3. What test should the N.C.L.T. apply to decide whether a genuine dispute exists?

4. When must the dispute have existed?

It says only that Mobilox replied to the demand notice that there was a serious dispute, based on Kirusa's alleged breach of the non-disclosure agreement, and that Mobilox appealed against the N.C.L.A.T.'s order. Kirusa's arguments are not described.

On 21 September 2017, the Supreme Court allowed Mobilox's appeal and restored the N.C.L.T.'s rejection of Kirusa's application.

First, the definition of "dispute" in Section 5(6) is inclusive. A dispute therefore need not be pending in a suit or arbitration. The word "and" in Section 8(2)(a) had to be read as "or". According to the lecture, Parliament later amended the clause to say so.

Second, the Court laid down a test. The N.C.L.T. must only see whether there is a plausible contention that requires further investigation. It must also check that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It must not decide whether the defence will finally succeed.

Third, the dispute must exist before the demand notice.

Insolvency and Bankruptcy Code, 2016 (the lecture calls it only "the Code"); Section 5(6) (definition of dispute); Section 8 (demand notice by operational creditor); Section 8(2)(a) (reply showing existence of a dispute)

Mobilox is the leading case on what counts as a "dispute" for operational creditors. The lecture describes it as telling students "what an operational creditor must survive". It should be studied with Innoventive (what a financial creditor must show) and Macquarie (how an operational creditor must start the process).

Its "plausible contention" test is the standard the N.C.L.T. uses to screen operational creditor applications. It stops the insolvency process from being used as a pressure tactic to recover disputed dues.

Hypothetical: Zoya runs a firm that supplies cotton to Farhan's textile company. Before Zoya sends any demand notice, Farhan writes to her complaining that the cotton is of poor quality and refuses to pay. Zoya later sends a Section 8 demand notice and files to start insolvency against Farhan's company. Applying Mobilox, the N.C.L.T. sees that a plausible dispute existed before the demand notice. It is not a feeble or unsupported claim. The N.C.L.T. rejects Zoya's application, and Zoya must go to a civil court or arbitration to recover her dues.