Application under IBC Section 9 rejected due to pre-existing dispute and allegations of fraudulent conduct involving corporate debtor's employees.
In a significant decision, the National Company Law Tribunal (NCLT), New Delhi Special Bench, dismissed an insolvency petition filed by Elite Design Private Limited against Colorbar Cosmetics Private Limited. The application, brought under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, was rejected on the grounds of a substantial pre-existing dispute between the operational creditor (Elite Design) and the corporate debtor (Colorbar Cosmetics).
The case revolves around an alleged default by Colorbar Cosmetics in making payments amounting to Rs. 1,43,82,868 for goods supplied by Elite Design. However, Colorbar Cosmetics contested the claim, citing a pre-existing dispute and accusing former employees of fraudulent activities in collusion with vendors, including Elite Design.
The tribunal, comprising Judicial Member Mr. Ashok Kumar Bhardwaj and Technical Member Mr. Banwari Lal Meena, found that the defense raised by Colorbar was not merely frivolous but was substantiated by significant evidence. The corporate debtor alleged that employees had engaged in fraudulent conduct by obtaining purchase orders and generating fake invoices in collusion with vendors, leading to financial losses for the company.
Colorbar further supported its defense with a police complaint lodged on February 6, 2026, and an investigation report by Ernst & Young, which uncovered illegal activities by former employees and vendors, including Elite Design. The tribunal noted these allegations and the ongoing criminal investigation as factors contributing to the pre-existing dispute.
The tribunal's decision underscores the importance of addressing substantial disputes before proceeding with insolvency petitions under the IBC. It reiterated the necessity of ensuring that claims are free from disputes to prevent misuse of the insolvency process.
This judgment serves as a reminder to businesses and legal practitioners about the due diligence required when filing for insolvency, particularly in cases involving allegations of fraud and pre-existing disputes.
Bottom line:-
Insolvency and Bankruptcy Code (IBC) - Application under Section 9 of IBC, 2016 dismissed due to existence of pre-existing dispute between the operational creditor (OC) and corporate debtor (CD).
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(6), 9, 9(5)(2).
