Pre-Existing Dispute Under Section 9 of the IBC: Supreme Court Reaffirms the Limits of NCLT’s Inquiry

Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted to provide a time-bound framework for insolvency resolution, value maximisation and preservation of viable businesses. It was not designed to operate as a substitute for civil recovery proceedings. This distinction assumes particular importance in applications filed by operational creditors under Section 9 of the IBC, where unpaid invoices, disputed supplies, reconciliation issues and contractual counterclaims often form the backdrop to insolvency proceedings.

Unlike a financial creditor under Section 7, an operational creditor must cross an additional statutory filter. Before initiating the corporate insolvency resolution process (“CIRP”), the operational creditor must issue a demand notice under Section 8. If the corporate debtor brings to its notice the existence of a dispute or the pendency of a suit or arbitration proceeding relating to such dispute, the Section 9 application cannot be admitted. Sections 8 and 9 therefore create a deliberate safeguard against using insolvency proceedings to coerce payment of genuinely disputed operational debts.

The Supreme Court’s decision in GLS Films Industries Private Limited v. Chemical Suppliers India Private Limited, Civil Appeal No. 4019 of 2025, decided on 9 April 2026, reiterates this safeguard with clarity. The Court held that the National Company Law Tribunal (“NCLT”) is not required to decide whether the corporate debtor’s defence will ultimately succeed. Its inquiry is limited to whether a plausible pre-existing dispute exists and whether such dispute is not spurious, hypothetical or illusory.

The judgment is significant because it reinforces the jurisdictional boundary between insolvency adjudication and contractual dispute resolution. It also provides practical guidance for operational creditors, corporate debtors and insolvency practitioners on how disputes relating to quality of goods, reconciliation of accounts, debit notes, interest claims and counterclaims should be assessed at the admission stage.

Statutory Scheme: Why Pre-Existing Dispute Matters

Section 8 of the IBC enables an operational creditor to issue a demand notice upon occurrence of default. The corporate debtor then has ten days to either make payment or bring to the operational creditor’s notice the existence of a dispute or the record of pendency of a suit or arbitration proceeding filed before receipt of the demand notice. Section 9 permits the operational creditor to approach the NCLT only if payment is not received and no notice of dispute is received. The application must also be accompanied by an affidavit stating that no notice of dispute has been given by the corporate debtor.

This structure is important. Operational debts usually arise from supply contracts, services, work orders, invoices and commercial arrangements where disputes regarding quality, quantity, delay, defects, breach of representations or reconciliation of accounts are common. Parliament therefore placed a stricter threshold on operational creditors to ensure that the IBC is not used as a debt recovery weapon in cases requiring detailed adjudication.

The NCLT’s role under Section 9 is consequently summary and limited. It must examine whether there is an operational debt exceeding the statutory threshold, whether default is shown, and whether a pre-existing dispute existed before the demand notice. It is not required to conduct a mini-trial, weigh evidence, determine liability or assess damages. Those questions belong to civil courts, arbitral tribunals or other competent contractual forums.

The Mobilox Test: Plausible Dispute, Not Proven Defence

The governing standard continues to be the Supreme Court’s decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited. The Court held that the NCLT must reject a Section 9 application if the notice of dispute discloses a plausible contention requiring further investigation. The defence need not be one that is likely to succeed. At the same time, the dispute cannot be a mere afterthought, unsupported assertion, sham defence or plainly frivolous objection.

This test strikes a careful balance. It prevents corporate debtors from defeating genuine insolvency applications by raising artificial disputes after receiving a demand notice. Equally, it protects corporate debtors from being pushed into CIRP where the claim is genuinely contested and requires adjudication on evidence.

Subsequent cases have reinforced this principle. In K. Kishan v. Vijay Nirman Company Pvt. Ltd., the Supreme Court held that where an arbitral award is under challenge, insolvency proceedings cannot be used to bypass the statutory mechanism for resolving that challenge. In S.S. Engineers v. Hindustan Petroleum Corporation Ltd., the Court reiterated that the NCLT must examine the existence of a dispute, not adjudicate its merits. In Sabarmati Gas Ltd. v. Shah Alloys Ltd., the Court recognised that reconciliation of accounts may itself indicate a genuine dispute where parties do not agree on the amount payable. The 2026 decision in GLS Films fits squarely within this line of authority.

GLS Films v. Chemical Suppliers: Facts and Procedural History

The dispute arose out of chemical supplies made by Chemical Suppliers India Private Limited to GLS Films Industries Private Limited. The operational creditor claimed that a sum of approximately ₹2.92 crore, including interest at 24% per annum, was due under various invoices and issued a demand notice under Section 8 of the IBC on 11 November 2021.

The corporate debtor resisted the claim on the ground that there were pre-existing disputes regarding defective supplies, short quantities, reconciliation of accounts and debit entries. It relied on correspondence predating the demand notice, including a letter dated 10 December 2020 alleging defective supplies and a police complaint dated 27 September 2021 referring to quality issues and reconciliation concerns. The NCLT rejected the Section 9 application, holding that the disputes required detailed examination beyond the summary jurisdiction of the insolvency forum.

The NCLAT reversed the NCLT’s order. It assessed the merits of the debtor’s defence, considered whether the quality objections were credible, and treated certain issues as resolved through credit notes. It also held that some subsequent developments could not be considered for determining pre-existing dispute. The NCLAT accordingly directed admission of the Section 9 application after granting time for settlement.

The Supreme Court set aside the NCLAT’s decision and restored the NCLT’s rejection of the insolvency application.

Supreme Court’s Reasoning: NCLT Cannot Conduct a Mini-Trial

The Supreme Court found that the material on record clearly showed disputes predating the Section 8 demand notice. The corporate debtor had raised issues regarding defective supplies, reconciliation of accounts, debit entries and the quantum of demand well before the demand notice was issued. The Court noted that the operational creditor’s own demand had varied significantly, including an earlier demand of approximately ₹4.60 crore and a later demand of approximately ₹2.92 crore. This confusion supported the debtor’s case that accounts required reconciliation.

The Court also considered ledger discrepancies, debit notes for interest allegedly raised much later, and questions regarding whether interest at 24% could be claimed on the basis of unilaterally signed invoices for delayed payments dating back several years. These facts, according to the Court, were sufficient to demonstrate that the dispute was not illusory.

Most importantly, the Court criticised the NCLAT for delving into the merits of the dispute. The question was not whether GLS Films would ultimately succeed in its defence, but whether the defence was plausible and required further investigation. Once the NCLT found that the dispute existed before the demand notice and was not spurious, the Section 9 application had to be rejected.

The judgment therefore reaffirms that the pre-existing dispute test is a jurisdictional threshold. If the dispute crosses the Mobilox standard, the NCLT has no jurisdiction to admit the operational creditor’s application. The creditor must pursue its contractual remedies through civil litigation, arbitration or other appropriate proceedings.

Why the Judgment Matters

The decision is important for three reasons.

• First, it preserves the purpose of the IBC. CIRP has serious consequences: moratorium, displacement of management, public announcement, appointment of an interim resolution professional and potential change in control. These consequences should not be triggered merely to pressure a corporate debtor into paying a disputed invoice.
• Second, it clarifies that reconciliation disputes can be legally significant. In commercial supply relationships, parties often maintain running accounts, issue debit notes, credit notes, quality objections and set-off claims. Where these issues predate the demand notice and are supported by correspondence or records, they may constitute a pre-existing dispute sufficient to defeat a Section 9 application.
• Third, it restrains appellate overreach. The NCLAT cannot substitute the NCLT’s limited inquiry with a merits-based analysis. If the debtor’s defence is plausible, the insolvency forum must step back, even if the creditor believes the defence is weak or commercially motivated.

Practical Implications for Creditors and Debtors

For operational creditors, the judgment is a reminder to conduct a dispute audit before issuing a Section 8 demand notice. Creditors should review all emails, ledger entries, debit notes, quality complaints, reconciliation requests and prior correspondence. If a genuine dispute exists, a Section 9 petition may be dismissed and may weaken the creditor’s broader recovery strategy.

For corporate debtors, the case highlights the importance of contemporaneous documentation. A debtor resisting a Section 9 application must show that the dispute existed before receipt of the demand notice. Vague objections raised for the first time after the notice will not suffice. However, emails, complaints, account reconciliation requests, quality reports, debit notes and prior legal proceedings can be powerful evidence of a genuine dispute.

For insolvency professionals and advisors, the decision reinforces that Section 9 is not a forum for adjudicating contractual performance. Where the dispute concerns defective goods, delayed supplies, disputed interest, set-off or reconciliation, the appropriate remedy may lie outside the IBC.

Conclusion

The Supreme Court’s decision in GLS Films Industries Private Limited v. Chemical Suppliers India Private Limited is a valuable restatement of the law on pre-existing disputes under Section 9 of the IBC. It confirms that the NCLT’s inquiry is limited to identifying whether a plausible dispute existed before the demand notice. The tribunal is not required to decide whether the debtor’s defence will ultimately succeed.

By restoring the NCLT’s order and rejecting the NCLAT’s merits-based approach, the Court has reinforced the boundary between insolvency resolution and debt recovery. Operational creditors cannot use the IBC to short-circuit civil or arbitral adjudication where the debt is genuinely disputed. At the same time, corporate debtors cannot rely on sham or belated disputes to avoid legitimate insolvency proceedings.

The judgment strengthens commercial discipline under the IBC and ensures that Section 9 remains a gateway for genuine insolvency cases, not a coercive mechanism for recovery of disputed operational dues.

Last Updated on 3 July, 2026