Section 9 Application Dismissed: Pre-Existing Dispute and Pending Civil Suit Bar Initiation of IBC Proceedings
- REEDLAW
- 5 hours ago
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REEDLAW Legal News Network reports: In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, held that a Section 9 application under the Insolvency and Bankruptcy Code, 2016, cannot be admitted when a pre-existing dispute exists, including pending civil proceedings concerning the same claim. The Appellate Tribunal emphasised that a notice of dispute issued by the Corporate Debtor effectively bars the initiation of insolvency proceedings, safeguarding the principle that IBC proceedings should not override existing legal disputes.
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 and connected Interlocutory Application, held that a Section 9 application under the IBC cannot be admitted when a pre-existing dispute exists, including pending civil proceedings addressing the same claim, and a notice of dispute by the Corporate Debtor bars initiation of insolvency proceedings.
The National Company Law Appellate Tribunal (NCLAT), chaired by Justice Ashok Bhushan, allowed an appeal filed by a suspended director challenging the admission of a Section 9 application by the adjudicating authority. The operational creditor had issued a demand notice claiming ₹12.76 crore from the corporate debtor under a Term Sheet relating to a residential project, which the corporate debtor disputed. The corporate debtor highlighted that substantial payments had already been made, that the flats lacked a clear marketable title, and that multiple legal notices had been previously responded to, asserting a pre-existing dispute. Additionally, a civil suit filed by the operational creditor in May 2022 sought recovery of the same amount, and the corporate debtor had filed a written statement refuting the claim while emphasising ongoing criminal proceedings against the operational creditor’s directors.
The Tribunal examined the statutory framework under Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016, and observed that the adjudicating authority had erroneously relied on a High Court order which merely recognised the existence of a dispute without admitting any debt. Referring to Supreme Court precedents, including Rajratan Babulal Agarwal v. Solartex India Private Limited and Others, REEDLAW 2022 SC 10507 and Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, the NCLAT held that the existence of a pre-existing dispute or notice of dispute bars admission of a Section 9 application. The Tribunal found that the corporate debtor had established a real and substantial dispute supported by evidence, which predated the issuance of the demand notice.
In light of the foregoing, the Tribunal concluded that the adjudicating authority erred in admitting the Section 9 application, as the operational creditor had already initiated civil proceedings to recover the same amount. The NCLAT set aside the order dated 21.08.2024, dismissed the Section 9 application, and clarified that the operational creditor and corporate debtor were free to pursue their respective claims and defences in the pending civil suit. Connected applications, if any, were disposed of, and each party was directed to bear its own costs.
This ruling reaffirmed the principle that Section 9 proceedings cannot be invoked where a pre-existing dispute exists, and that civil or other legal proceedings addressing the same claim take precedence over insolvency initiation.
Mr. Abhijeet Sinha, Sr. Advocate, with Mr. Prakhar Mithal, Mr. Devashish Chuhan, Ms. Jasleen Singh Sandha and Ms. Cynthia Duggal, Advocates, represented the Appellant.
Mr. Sonal Anand, Sr. Advocate, with Ms. Surbhi Singh and Mr. Rishabh Kr. Singh, Advocates, appeared for the Respondent No. 1.
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