Tribunal Upholds that Insolvency Proceedings Under Section 9 of IBC Cannot Be Used for Disputed Contractual Claims; Emphasizes Need for Adjudication Beyond Summary Process
In a significant decision impacting the application of the Insolvency and Bankruptcy Code, 2016 (IBC), the National Company Law Tribunal (NCLT), Indore Bench, on September 3, 2026, dismissed an application filed by Oswal Woollen Mills Ltd. seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against M/s EKI Energy Services Limited. The dismissal was grounded on the existence of a genuine, plausible, and pre-existing dispute between the parties prior to the issuance of the demand notice under Section 8 of the IBC.
The dispute arose from an Emission Reduction Purchase Agreement (ERPA) executed on April 12, 2022, under which the petitioner committed to deliver Certified Emission Reductions (CERs) to the respondent. The petitioner claimed that it duly fulfilled its contractual obligations by delivering the CERs in January 2023 and that the respondent defaulted on payment due within 15 days, as prescribed under Clause 1.9 of the agreement. The petitioner then issued a demand notice under Section 8 of the IBC on April 22, 2024, seeking recovery of over INR 1.85 crore, including interest.
However, the respondent raised multiple defences, notably the existence of a pre-existing dispute relating to the contractual price, invoicing, and quantity of CERs delivered. The respondent contended that Clause 2.14(m) of the ERPA allowed revision of the purchase price due to "change in market dynamics," which it invoked in March 2023-well before the demand notice was issued. Moreover, the respondent pointed to discrepancies in the quantity of CERs, non-issuance of invoices, and a failure of the payment obligation to crystallize as conditions precedent were allegedly unfulfilled.
The Tribunal engaged in a detailed analysis of the pleadings and contemporaneous correspondence between the parties, including emails exchanged from March to December 2023, which showed substantive disagreement over contract terms prior to the demand notice. Citing the Supreme Court precedent in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018), the Tribunal clarified that at the Section 9 stage, it is not required to adjudicate the merits of the contractual dispute but to ascertain whether the dispute is genuine, real, and not spurious or illusory.
The Tribunal found that the respondent's defence was founded on an express contractual provision and supported by contemporaneous material, thereby constituting a real and substantial dispute. Consequently, the statutory bar under Section 9(5)(ii)(d) of the IBC was attracted, mandating dismissal of the CIRP application. The Tribunal emphasized that the IBC is not intended as a substitute for civil recovery or dispute resolution of contested contractual claims. It also noted that the existence of an arbitration clause in the ERPA did not preclude the raising of a pre-existing dispute defence under the IBC.
The NCLT further clarified that the dismissal was limited to the threshold maintainability of the insolvency proceedings and did not address the ultimate merits of the parties' claims and counterclaims, which remain open for resolution by the appropriate forum as per the contractual dispute resolution mechanism or other legal remedies.
This ruling reaffirms the principle that CIRP under the IBC cannot be invoked for recovery of disputed debts where a genuine dispute exists prior to the statutory demand notice, thereby providing clarity on the scope and limits of insolvency proceedings in commercial disputes.
Bottom Line:
Insolvency and Bankruptcy Code, Section 9 - Application for initiation of Corporate Insolvency Resolution Process (CIRP) dismissed on the ground of a genuine pre-existing dispute between the Operational Creditor and the Corporate Debtor.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(6), 8, 9(5)(ii)(d)
