Pre-Existing Dispute Under IBC: The Mobilox Test Explained

The Dispute Defence Under IBC

When an operational creditor files an application under Section 9 of the IBC, the corporate debtor's most common line of defence is to claim that there exists a pre-existing dispute regarding the operational debt. If this defence succeeds, the NCLT is required to reject the application outright.

Section 8(2)(a) of the IBC gives the corporate debtor the right to communicate, within 10 days of receiving a demand notice, that there exists a dispute or that payment has already been made.

The Supreme Court's Test: Mobilox Innovations

The landmark judgment in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 settled the law on this point. The Supreme Court held:

• The word "dispute" in Section 8(2)(a) must be interpreted broadly and inclusively
• The NCLT is not required to determine whether the dispute is valid or meritorious
• Even a dispute that is not finally adjudicated suffices if it is real and not spurious
• The standard is whether there is a genuine dispute and not whether the debt is ultimately payable

What Must the Corporate Debtor Show?

The corporate debtor must demonstrate:

1. A dispute existed before the receipt of the demand notice
2. The dispute relates to the existence or amount of the debt
3. The dispute is not merely a pretence to avoid payment

What Does NOT Qualify as a Dispute?

Courts have consistently held that the following do not constitute a pre-existing dispute:

• Disputes raised for the first time in response to the demand notice
• General denials with no documentary support
• Objections that the invoice amount is incorrect without any prior communication to this effect
• Post-notice deductions or set-offs raised strategically

Burden of Proof

The operational creditor must first demonstrate a default. Once a prima facie case of default is established, the burden shifts to the corporate debtor to show the existence of a pre-existing dispute.

Practical Guidance

For operational creditors, the best strategy is to anticipate the dispute defence early and gather evidence that no dispute existed before the demand notice. Any prior communications in which the debtor acknowledged the debt are valuable.

For corporate debtors, a dispute raised in writing before the demand notice — even if not formally litigated — can be a valid defence. Document any objections to invoices as soon as they arise.

Recent Developments

Post-Mobilox, tribunals have refined the test further. NCLAT has held in several cases that where the debtor raises quality or defect issues in services rendered — which it had never raised during the performance of the contract — such belated disputes are not "pre-existing" within the meaning of the Code.