Tribunal holds existence of bona fide pre-existing dispute on success-fee enforceability and operational debt bars insolvency petition under IBC Section 9
In a significant ruling dated August 25, 2026, the National Company Law Tribunal (NCLT), Chennai Bench, dismissed the Section 9 petition filed by Ernst & Young LLP ("EY") against Mobase Electronics India Private Limited, rejecting the claim of an operational debt amounting to over Rs. 3.11 crore. The petition filed by EY sought initiation of the Corporate Insolvency Resolution Process (CIRP) on the grounds of non-payment of a success-fee arrangement as per an Engagement Letter related to GST proceedings.
EY, represented by Partner Mr. Rajaram Ramanan, had entered into an agreement with Mobase Electronics in December 2023, wherein it was to provide professional services connected with GST notices and proceedings for financial years 2019-20 to 2021-22. The arrangement included a fixed fee of Rs. 25 lakh and an additional 1% of the relief amount secured as a success fee. EY alleged that despite securing substantial reliefs amounting to over Rs. 235 crore in GST demands for Mobase, the success fee remained unpaid.
Mobase Electronics, however, contested the claim vehemently, asserting the existence of a genuine pre-existing dispute. The company contended that the success-fee clause was obscure, not negotiated, and legally impermissible under statutory and ethical regulations governing professional fees of chartered accountants and similar professionals. Mobase also pointed to the quashing of one of the key GST orders by the Madras High Court and ongoing appellate proceedings, undermining the finality of the `success' claimed by EY.
The NCLT meticulously examined the correspondence, invoices, GST orders, and judicial precedents, including the Supreme Court's ruling in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) which guides on pre-existing disputes barring insolvency petitions. The Tribunal observed that Mobase had consistently disputed the success fee prior to the statutory demand notice, supported by contemporaneous email communications and rejection of invoices on the GST Portal.
The Tribunal further noted the complexity surrounding the enforceability of an outcome-based fee for services connected with statutory GST proceedings. It highlighted the necessity for scrutiny by the Institute of Chartered Accountants of India (ICAI) regarding whether such success fees align with professional codes and regulatory frameworks, particularly Section 116 of the CGST Act, 2017, which governs authorized representation before GST authorities.
Importantly, the NCLT emphasized that the dispute was not limited to the amount claimed but extended to the very entitlement, legal permissibility, and crystallization of the debt. Such intricate questions fall outside the limited jurisdiction of the Tribunal under Section 9 of the Insolvency and Bankruptcy Code (IBC).
Consequently, the Tribunal dismissed EY's petition under Section 9 of the IBC, ruling that the conditions for initiation of insolvency proceedings were not met due to the bona fide pre-existing dispute. The order also permitted EY to pursue other legal remedies for its contractual claims and directed a copy of the judgment to be forwarded to the ICAI for appropriate examination of the professional and ethical aspects involved.
This ruling underscores the judiciary's cautious approach in insolvency matters where genuine disputes exist, reaffirming that insolvency proceedings cannot be misused to bypass contractual controversies and professional regulatory frameworks.
Bottom Line:
The presence of a genuine, bona fide pre-existing dispute regarding operational debt, including enforceability of success-fee arrangements, precludes admission of a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016.
Statutory provision(s):
Section 9, Insolvency and Bankruptcy Code, 2016; Section 23, Indian Contract Act, 1872; Section 116, Central Goods and Services Tax Act, 2017; Chartered Accountants Act, 1949 (Professional Code provisions)
