SC: Section 9 IBC Application Must Be Rejected if There Is a Plausible Pre-Existing Dispute

Summary

[1]The Supreme Court set aside an NCLAT order and restored the NCLT’s decision to dismiss an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Court reiterated that while examining an application under Section 9, the Adjudicating Authority only needs to satisfy itself as to the existence of a plausible pre-existing dispute. The Court held that the NCLAT overstepped its jurisdiction by delving into the actual merits of the dispute to determine its likelihood of success.

Facts

• The respondent (Operational Creditor) supplied chemicals to the appellant (Corporate Debtor) and subsequently issued a demand notice on 11.11.2021 under Section 8 of the IBC claiming an outstanding debt of ₹2,92,93,223/-.
• The appellant replied, disputing the claim on the grounds of a pre-existing dispute regarding the supply of defective solvents.
• Prior to the demand notice, the appellant had addressed a letter dated 10.12.2020 complaining about the defective supplies and requesting a credit note for ₹1.66 crore. The appellant had also filed a police complaint on 27.09.2021 regarding the coercive tactics used by the respondent’s representative for payment.
• The NCLT dismissed the Section 9 application on 16.12.2022, observing that the correspondence and the police complaint indicated a plausible pre-existing dispute requiring detailed investigation beyond the scope of its summary jurisdiction.
• The NCLAT reversed this decision on 11.02.2025, holding that the defense was a “moonshine” defense. It relied on a credit note issued by the respondent, concluding that the issue of defective supplies had been resolved, and directed the admission of the Section 9 application.

Issues

• Whether the NCLAT was justified in delving into the merits of the pre-existing dispute to admit an application under Section 9 of the IBC.
• Whether there existed a plausible pre-existing dispute between the parties prior to the issuance of the demand notice.

Judgement

• Existence of Pre-existing Dispute: The Supreme Court found glaring discrepancies in the ledger accounts, delayed replies by the respondent to complaints of defective supplies, and arbitrary, belated debit notes for interest. Furthermore, the police complaint lodged long before the demand notice explicitly sought reconciliation of accounts. The respondent’s director also admitted in a cross-examination that written correspondence only started after disputes arose regarding payment. These factors sufficiently demonstrated a pre-existing dispute.
• Scope of NCLT’s Inquiry: Relying on the precedent set in Mobilox Innovations and Sabarmati Gas, the Court emphasized that the Adjudicating Authority is only required to see if there is a plausible contention requiring further investigation. It is not required to be satisfied that the defense is likely to succeed.
• NCLAT’s Error: The Court held that it was not for the NCLAT to delve into the actual merits of the appellant’s dispute. As long as the pre-existing dispute is not spurious, hypothetical, or illusory, the application under Section 9 must be rejected.
• Conclusion: The Supreme Court allowed the appeal, setting aside the NCLAT’s judgment and restoring the NCLT’s order dismissing the Section 9 application, noting clearly that there was no consensus between the parties on the liability or the payable amount.

Analysis

This judgment strongly reaffirms the Mobilox principle, serving as a reminder to the Appellate Tribunals not to conduct a “mini-trial” evaluating the merits or the eventual success of a corporate debtor’s defense in Section 9 proceedings. If the documentary evidence establishes that a genuine, plausible dispute regarding the goods or services existed before the issuance of the statutory demand notice, the IBC cannot be invoked as a debt recovery mechanism.

[1] BEFORE THE HON’BLE SUPREME COURT OF INDIA

GLS Films Industries Private Limited v. Chemical Suppliers India Private Limited

Civil Appeal No. 4019 of 2025

Judgment Dated: April 09, 2026