Pre-existing Dispute Due to Contract Termination Bars CIRP Initiation under Section 9 of IBC, Rules NCLAT

The NCLAT ruled that the initiation of CIRP under Section 9 of the IBC was barred due to a pre-existing dispute arising from the termination of the contract.

Today, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a company appeal, held that the existence of a genuine pre-existing dispute arising from the alleged unilateral and wrongful termination of contract—evidenced through prior communications and the Corporate Debtor’s Notice of Dispute—barred admission of the Section 9 IBC application under Section 9(5)(ii)(d), as clarified in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545. The Tribunal reiterated that the IBC remedy is inapplicable where the dispute requires adjudication before a civil forum.

The Appellant had challenged the rejection of its Section 9 application by the NCLT, Allahabad Bench, through an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016. The dispute arose from a contract dated 12.03.2020 between the Appellant and Respondent, M/s Jindal Poly Films Ltd., for the supply of non-woven fabric on FOB export terms. The Appellant paid an advance of ₹3 crores and asserted that the Respondent failed to deliver the goods by the agreed deadline of 23.03.2020. Citing non-performance, the Appellant terminated the contract on 01.04.2020 and issued a demand notice under Section 8 of the IBC, followed by a Section 9 application seeking initiation of CIRP against the Respondent.

The Respondent opposed the application, contending that the goods had already been manufactured and were ready for dispatch, but the Government of India’s notification dated 19.03.2020—prohibiting exports due to the COVID-19 pandemic—rendered delivery impossible. It argued that the Appellant’s termination of the contract was unilateral and wrongful, thereby giving rise to a genuine commercial dispute. The Adjudicating Authority accepted this contention and, relying on the Supreme Court’s ruling in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, concluded that a pre-existing dispute under Sections 8 and 9(5)(ii)(d) of the IBC barred admission of the application.

The NCLAT, upon examining the communications between the parties, including emails dated 18.03.2020 and WhatsApp exchanges on 20.03.2020, found that while the Respondent had admitted a delay in dispatch, it had consistently maintained that the goods were ready and stored for delivery. The Appellant, rather than disputing this, had instructed the Respondent to keep the goods ready for dispatch, thereby implicitly accepting the Respondent’s position. Furthermore, the Notice of Dispute dated 20.05.2020 clearly refuted the claim of liability and characterised the termination as illegal and disputed.

The Appellate Tribunal held that the dispute regarding the termination had clearly arisen prior to the demand notice, and the defence raised by the Respondent was neither spurious nor unsupported. It endorsed the NCLT’s view that the matter was one of contractual disagreement rather than an instance of default under IBC. Emphasising that the Code is not a debt recovery tool but a mechanism for resolving genuine insolvency, the NCLAT dismissed the appeal while granting the Appellant liberty to pursue civil remedies.

Mr. Gaurav Kejriwal, Mr. Gaurav Choudary, Mr. A.N. Purushotham, and Mr. A.V. Subba Raju, Advocates, represented the Appellant.

Mr. Alok Dhir, Ms. Varsha Banerjee and Ms. Aishwarya Nabh, Advocates, appeared for the respondent.

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