The Supreme Court has reaffirmed that the initiation of corporate insolvency resolution process under Section 9 of the Insolvency and Bankruptcy Code cannot proceed where a plausible pre-existing dispute exists between the operational creditor and the corporate debtor. This judgment clarifies the scope of judicial scrutiny at the admission stage, emphasizing that the adjudicating authority need not determine the merits of the dispute, only its existence.
Background & Facts
The Dispute
The dispute arose from repeated supply of defective solvent chemicals by Chemical Suppliers India Private Limited (respondent) to GLS Films Industries Private Limited (appellant) between 2020 and 2021. The appellant alleged that multiple consignments received on 10.04.2021, 11.04.2021, 20.04.2021, 23.04.2021, and 21.06.2021 were contaminated, emitted a stringent smell, and were unfit for use, causing significant losses. The appellant repeatedly demanded reconciliation of accounts and compensation, but the respondent failed to respond substantively until after the appellant filed a police complaint.
Key Facts
- The appellant raised a debit note on 31.12.2021 for ₹2,42,11,648/-, claiming the respondent owed it ₹70,09,430/- after adjustment
- On 10.12.2020, the appellant sent a letter detailing defective supplies from September - October 2020, resulting in a ₹6.50 crore debit by its customer, and requested a ₹1.66 crore credit note
- The respondent acknowledged the issue in its internal ledger on 31.07.2021 by recording a credit entry of ₹1,66,89,770/- as a ‘sale discount’
- The appellant’s ledger reflected the same credit entry on 31.03.2021, annotated as due to ‘stringent smell and impurity in solvents’
- On 14.07.2021, the respondent denied the defect claims in an email, despite having already recorded the credit
- On 10.09.2021, the respondent demanded ₹4,60,05,397/-, which included the ₹1.66 crore credit amount
- On 09.12.2021, the respondent emailed a clarification stating the ₹4.60 crore demand was a mistake and had been adjusted
- The appellant lodged a police complaint on 27.09.2021, alleging coercion and threats of suicide by the respondent’s representative
- The respondent issued eight invoices between 27.03.2021 and 26.07.2021 for ₹1,72,13,065/-, and a demand notice under Section 8 on 11.11.2021 for ₹2,92,93,223/- (principal + interest)
- The respondent filed its Section 9 application on 21.12.2021
- The appellant filed Civil Suit No. 37 of 2022 in April 2022, seeking recovery of ₹70,09,430/-
- The respondent’s Director, Ankur Aggarwal, admitted in cross-examination in the civil suit that written correspondence began only after disputes arose, and that no prior written protests of delayed payments existed from 2016 - 2021
Procedural History
- 10.12.2020: Appellant’s letter to respondent detailing defective supplies and requesting ₹1.66 crore credit
- 14.07.2021: Respondent’s email denying defect claims
- 27.09.2021: Police complaint filed by appellant
- 31.07.2021: Respondent records ₹1.66 crore credit in its ledger
- 10.09.2021: Respondent demands ₹4,60,05,397/-
- 11.11.2021: Respondent issues demand notice under Section 8 for ₹2,92,93,223/-
- 21.12.2021: Respondent files Company Petition (IB)-792(ND) of 2021 under Section 9
- 16.12.2022: NCLT dismisses application, holding pre-existing dispute exists
- 11.02.2025: NCLAT reverses NCLT order, admits Section 9 application
- 28.03.2025: Supreme Court stays NCLAT order
- 09.04.2026: Supreme Court delivers judgment
Relief Sought
The appellant sought restoration of the NCLT’s order dated 16.12.2022 dismissing the Section 9 application, and a declaration that the corporate insolvency resolution process could not be initiated due to the existence of a plausible pre-existing dispute.
The Legal Issue
The central question was whether the existence of a plausible pre-existing dispute over defective supplies, account reconciliation, and coercive debt recovery tactics, documented prior to the issuance of the demand notice under Section 8, is sufficient to bar initiation of corporate insolvency resolution process under Section 9 of the Insolvency and Bankruptcy Code, even if the dispute has not yet been adjudicated.
Arguments Presented
For the Appellant
The appellant relied on Mobilox Innovations Private Limited v. Kirusa Software Private Limited and Sabarmati Gas Limited v. Shah Alloys Limited to argue that the adjudicating authority need not determine the merits of the dispute, only its plausibility. It emphasized that the letter dated 10.12.2020, police complaint dated 27.09.2021, and email dated 16.10.2021 all predated the demand notice and clearly indicated a dispute over quality, liability, and reconciliation. The belated adjustment of ₹1.66 crore and contradictory demands for ₹4.60 crore further demonstrated lack of consensus. The admission by the respondent’s Director that written communication began only after disputes arose confirmed the dispute’s pre-existence.
For the Respondent
The respondent contended that the credit note of ₹1.66 crore issued on 31.07.2021 resolved the September - October 2020 dispute, and that subsequent complaints about April - June 2021 supplies were raised only after the demand notice. It argued that the appellant’s failure to raise defects within seven days of delivery, as per invoice terms, rendered its claims invalid. The respondent also asserted that the police complaint was unrelated to the debt and that the civil suit was filed after the Section 9 application, hence irrelevant.
The Court's Analysis
The Supreme Court undertook a meticulous review of the timeline, correspondence, ledger entries, and admissions. It emphasized that the threshold under Section 9 is not whether the dispute is likely to succeed, but whether it is plausible, non-spurious, and existed prior to the demand notice.
"All that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the ‘dispute’ is not a patently feeble legal argument or an assertion of fact unsupported by evidence."
The Court found that the appellant’s letter dated 10.12.2020, filed nearly a year before the demand notice, was not a post-hoc fabrication but a documented assertion of loss. The respondent’s internal ledger entry of ₹1.66 crore on 31.07.2021, without reference to the letter, and its subsequent demand for ₹4.60 crore just two months later, demonstrated inconsistency and lack of good faith. The Court noted that the respondent’s own Director admitted in cross-examination that written communication commenced only after disputes arose, confirming the dispute’s pre-existence.
The NCLAT erred in treating the credit note as conclusive resolution, ignoring that the original was never delivered and the appellant’s ledger reflected the adjustment months earlier. The Court held that the respondent’s attempt to inflate interest claims dating back to 2016, without prior written protest, was an afterthought to manufacture a debt. The police complaint and the civil suit, though filed at different times, corroborated the existence of a genuine dispute.
The Court reiterated the principles from Mobilox and Sabarmati Gas: the adjudicating authority must not act as a mini-trial court. The existence of a dispute requiring investigation is sufficient to reject a Section 9 application. The NCLAT’s substitution of its own view for the NCLT’s factual finding was impermissible.
The Verdict
The appeal was allowed. The Supreme Court set aside the NCLAT’s order dated 11.02.2025 and restored the NCLT’s order dated 16.12.2022 dismissing the Section 9 application. The corporate insolvency resolution process was not initiated. Parties were directed to bear their own costs.
What This Means For Similar Cases
Pre-Existing Dispute Is Not Limited to Formal Litigation
- Practitioners must now argue that any documented, non-frivolous disagreement over quality, quantity, or reconciliation - even without a pending suit - qualifies as a pre-existing dispute under Section 9
- Emails, letters, internal ledgers, and police complaints dated before the demand notice are admissible evidence of dispute
- A credit note not physically delivered or inconsistently applied does not extinguish a dispute
Operational Creditors Cannot Manufacture Debt Through Post-Hoc Interest Claims
- Interest claims on invoices with no prior written protest, especially dating back years, will be viewed as speculative
- Raising exorbitant interest rates after a dispute arises, particularly when inconsistent with prior conduct, undermines the claim’s legitimacy
- The burden shifts to the operational creditor to demonstrate consistent, contemporaneous communication regarding payment defaults
Adjudicating Authorities Must Avoid Merits-Based Evaluation
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NCLTs and NCLATs must not conduct mini-trials to assess whether the debtor’s defence will succeed
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The standard is plausibility, not probability
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Where there is a genuine factual conflict requiring evidence, the Code’s summary process is inapplicable
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Practitioners should advise clients to maintain clear, dated documentation of all quality complaints and reconciliation attempts
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Operational creditors must ensure all debt claims are unambiguous, contemporaneously communicated, and free from contradictory demands
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A single inconsistent demand (e.g., ₹4.60 crore followed by ₹2.92 crore) can be fatal to a Section 9 application
