NCLAT: Pre-Existing Commercial Disputes Over Defective Supplies Bar Section 9 IBC Proceedings
- REEDLAW
- Aug 9
- 3 min read
Updated: Aug 12
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal (NCLAT) held that a Section 9 application under the Insolvency and Bankruptcy Code (IBC) is not maintainable when genuine pre-existing disputes exist over defective goods. The Tribunal found that contemporaneous communications, warranty obligations, and an indemnity bond evidenced such disputes, and reaffirmed that under the Mobilox test, substantive commercial disputes bar the initiation of the Corporate Insolvency Resolution Process (CIRP).
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra, while adjudicating a Company Appeal, held that a Section 9 application under the IBC is not maintainable where contemporaneous communications, warranty obligations, and an indemnity bond collectively establish genuine pre-existing disputes over defective goods, as per the Mobilox test. The Tribunal reaffirmed that such substantive disputes constitute a complete bar to the initiation of CIRP against the corporate debtor.
The National Company Law Appellate Tribunal, while deciding an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, upheld the order of the NCLT, New Delhi Bench-IV, dismissing the Section 9 application filed by the Appellant/Operational Creditor, an MSME engaged in the supply of batteries, against the Respondent. The Operational Creditor had claimed that outstanding payments for supplies made between April and August 2022 remained unpaid despite the issuance of a Section 8 demand notice. The Adjudicating Authority dismissed the petition on the ground of pre-existing disputes, which the Appellant challenged as being fabricated and unrelated to the invoices in question.
The Appellant argued that the disputes raised were moonshine defences, unsupported by independent evidence, and that the Corporate Debtor’s placing of high-value orders in August 2022 was inconsistent with the claim of ongoing disputes. The Respondent, however, contended that the batteries supplied were defective, causing financial losses and reputational harm, and that repeated communications, including WhatsApp exchanges, emails, warranty proposals, and an indemnity bond, substantiated genuine disputes predating the demand notice. The Respondent further asserted that no crystallised operational debt existed, as defective supplies remained unresolved.
The Tribunal examined the voluminous record of communications exchanged between the parties from December 2021 to October 2022, including admissions by the Operational Creditor acknowledging defective supplies, agreeing to replacements, and referencing warranty obligations. It noted that the indemnity bond and warranty proposal, though disputed by the Appellant as unsigned or coerced, raised issues requiring deeper investigation, beyond the limited scope of summary IBC proceedings. Applying the test laid down by the Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the Tribunal held that the disputes were genuine, substantial, and pre-existing, rather than spurious or illusory.
Concluding that the operational debt was genuinely disputed and unfit for adjudication under Section 9 proceedings, the NCLAT found no error in the NCLT’s rejection of the petition. The appeal was accordingly dismissed, with liberty to the Appellant to pursue remedies before an appropriate forum in accordance with law.
Mr. Anand Chhibbar, Sr. Advocate with Mr. Abhishek Anand, Mr. Karan Kohli, Mr. Vaibhav Sahni and Mr. Arjun Chhibbar, Advocates, represented the Appellant.
Dr. Swaroop George, Mr. Abhinandan Jain, Mr. Sunil Roy, Mr. Shivam Prajapati, and Mr. Kartikey, Advocates, appeared for the Respondent.
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