Pre-Existing Disputes Bar Section 9 Admission When Debt is Contingent on Third-Party Reconciliation: NCLAT
- REEDLAW
- Aug 5
- 3 min read
Updated: Aug 12
REEDLAW Legal News Network reports that the National Company Law Appellate Tribunal (NCLAT) has ruled that a Section 9 IBC application is not maintainable when the operational debt is subject to pre-existing disputes and contingent upon third-party reconciliation, thereby reaffirming the legal bar on insolvency proceedings in the presence of genuine contractual uncertainty.
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 when genuine and pre-existing disputes exist regarding the crystallization and liability of operational debt—particularly where payments are contractually contingent upon third-party certification and reconciliation—a Section 9 application under the IBC is not maintainable. The Tribunal reaffirmed that the insolvency process cannot be invoked as a tool for debt recovery in the face of plausible contractual disputes, consistent with the Mobilox precedent.
The National Company Law Appellate Tribunal (NCLAT), while deciding an appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, set aside the admission of a Section 9 application that had led to the initiation of CIRP against Pravin Electricals Pvt. Ltd., the Corporate Debtor. The application had been filed by Akshaya Engineering Works Pvt. Ltd., the Operational Creditor, who claimed outstanding dues of ₹1.54 crore for work performed under sub-contracts related to a larger contract awarded by MSEDCL to the Corporate Debtor. The Adjudicating Authority had accepted the application, observing that services were rendered, invoices were raised, and payments were only partially made, with no pre-existing disputes evident.
The Corporate Debtor, however, contended that the payment structure was back-to-back and dependent on payment and certification from MSEDCL. It submitted several email communications dated prior to the issuance of the demand notice, highlighting deficiencies in performance, non-receipt of payments from MSEDCL, and the need for reconciliation before releasing final payments. The Operational Creditor argued that invoices were accepted without demur and that liability was acknowledged by the Corporate Debtor in its previous communications. Nonetheless, the NCLAT found that these contentions did not negate the existence of pre-existing disputes that were adequately supported by the record.
The Tribunal placed significant reliance on the Supreme Court’s decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REEDLAW 2017 SC 09545, emphasizing that where a genuine and plausible dispute exists, a Section 9 application under IBC is not maintainable. It held that the Adjudicating Authority had failed to consider critical communications in which the Corporate Debtor had explicitly denied any final liability and had conditioned payments upon account closure with MSEDCL. The NCLAT also noted that MSEDCL had issued repeated warnings and eventually partially terminated the contract due to delays and substandard work during the period in which the Operational Creditor was executing its sub-contracted responsibilities.
Finding that the debt had neither crystallized nor become due and payable, the NCLAT concluded that the initiation of CIRP was unsustainable. It accordingly allowed the appeal and set aside the impugned order dated 17.10.2023, releasing the Corporate Debtor from insolvency proceedings and restoring control to its board. While not expressing any view on the merits of the commercial claims, the Tribunal clarified that the Operational Creditor was free to pursue any other legal remedy as permitted under law.
Mr. Gaurav Mitra, with Ms. Poorva Garg, Ms. Lavanya Pathak, Mr. Abhay Sinha and Mr. Saswat Patnaik, Advocates, represented the Appellant.
For the Respondent/ Defendant: Mr. Pragyan Pradip Sharma, Sr. Advocate with Mr. Manish Sarkar, Mr. Hardik Jain, Mr. Rustam Chaudhuri and Mr. Kushagra Goyal, Advocates, appeared for the Respondent.
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