By Shailendra Singh
March 10, 2025
Introduction
The jurisprudential landscape surrounding Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) continues to evolve with nuanced interpretations by appellate tribunals. The recent pronouncement by the National Company Law Appellate Tribunal (“NCLAT”) on March 5, 2025, offers a significant reinforcement of the established doctrine regarding pre-existing disputes and their effect on the initiation of Corporate Insolvency Resolution Process (“CIRP”) against corporate debtors. This judgment merits thorough analysis, particularly for operational creditors contemplating recourse under the insolvency regime.
Factual Matrix
The case emanated from an appeal under Section 61 of the IBC, challenging the Adjudicating Authority’s order dated July 26, 2024, wherein an application under Section 9 was dismissed on the ground of pre-existing disputes. The factual constellation involved a senior advocate (the Appellant) who had rendered professional services to the State Trading Corporation of India Ltd. (the Corporate Debtor/Respondent) and subsequently sought to recover professional fees amounting to approximately Rs. 6.27 crores, comprising principal (Rs. 3.94 crores) and interest (Rs. 2.33 crores).
Despite purported communications and alleged acknowledgments of liability, the Appellant’s remuneration remained unsettled, precipitating the issuance of a demand notice under Section 8 on July 26, 2019, followed by a Section 9 application before the National Company Law Tribunal (“NCLT”) on December 16, 2019.
Multifaceted Objections
The Respondent mounted a multifarious defense, contending inter alia:
- Professional Impropriety: That a senior advocate ought not to invoke Section 9 against a client, as such proceedings could potentially culminate in insolvency, thereby contravening professional ethics;
- Parallel Proceedings: That the Appellant had concurrently approached the Delhi High Court through Writ Petition (C) No. 6146/2022, seeking processing and payment of invoices, implicitly acknowledging that the alleged debt remained undetermined;
- Limitation Impediment: That the claim was time-barred vis-à-vis invoices raised between 2006 and 2015, relying on the Supreme Court’s dictum in B.K. Educational Services Pvt Ltd vs Parag Gupta and Associates (AIR 2018 SC 5601);
- Pre-existing Dispute: That disputes regarding the accuracy of invoices had been raised antecedent to the issuance of the demand notice, and discrepancies in the claimed amounts substantiated the existence of a genuine pre-existing dispute, rendering the Section 9 petition untenable under the Mobilox Innovations Private Limited vs Kirusa Software Private Limited [2017 INSC 975] precedent.
The NCLAT’s Analytical Framework
Upon meticulous examination of the factual matrix, the NCLAT discerned that the Appellant had initially served a demand notice on January 8, 2019, quantifying the claim at Rs. 6.48 crores, which elicited a contestation from the Respondent in its reply dated January 18, 2019. Subsequently, the Appellant withdrew the first notice, admitting calculation errors, and issued a revised demand notice on July 26, 2019, reducing the claim to Rs. 6.27 crores.
The Tribunal observed that disputes concerning outstanding fees had manifested as early as 2017, with the Respondent persistently challenging the validity and quantum of invoices. Furthermore, the Appellant’s concurrent pursuit of relief before the Delhi High Court further substantiated that the alleged debt was not indisputably established.
Significantly, the Tribunal noted that Section 8(2)(a) of the IBC mandates a Corporate Debtor to notify an Operational Creditor of an existing dispute within ten days of receiving a demand notice—a requirement scrupulously adhered to by the Respondent.
Jurisprudential Reliance
The NCLAT anchored its reasoning in the seminal precedents established in Mobilox Innovations and Sabarmati Gas Limited vs Shah Alloys Limited (Civil Appeal No. 1669 of 2020), concluding that a legitimate pre-existing dispute subsisted, thereby rendering the Section 9 application non-maintainable. Accordingly, the appeal was dismissed, and the Adjudicating Authority’s order dated July 26, 2024, was affirmed.
Critical Analysis and Implications
The NCLAT’s decision reinforces the well-entrenched principle that the existence of a bona fide dispute concerning the debt precludes the initiation of CIRP under Section 9 of the IBC. This judgment crystallizes several crucial aspects of insolvency jurisprudence:
- Substantive Examination of Disputes: The Tribunal conducted a comprehensive analysis of the factual circumstances to ascertain whether a genuine dispute existed, emphasizing the necessity for a substantive rather than procedural evaluation.
- Temporal Precedence: The judgment reiterates that disputes must predate the issuance of the demand notice under Section 8, thereby preventing corporate debtors from manufacturing post-facto objections.
- Varied Manifestations of Disputes: The NCLAT recognized that disputes may manifest in diverse forms, including objections to invoices, demands for supporting documentation, or parallel legal proceedings, all of which may constitute legitimate pre-existing disputes.
- Procedural Compliance: The Tribunal underscored the importance of adhering to the procedural framework delineated in Section 8(2)(a), which mandates timely notification of existing disputes.
A Nuanced Perspective
While the NCLAT’s judgment aligns with established precedents and fortifies the legal framework surrounding pre-existing disputes, certain nuanced considerations warrant contemplation:
The tribunal’s approach, though jurisprudentially sound, potentially elevates form over substance in certain contexts. There exists a fine line between legitimate disputes and dilatory tactics employed by recalcitrant debtors. The broad interpretation of what constitutes a “pre-existing dispute” might inadvertently incentivize corporate debtors to raise perfunctory objections to frustrate legitimate recovery efforts.
Furthermore, the judgment does not delve extensively into the qualitative assessment of disputes—specifically, whether all disputes, regardless of their substantive merit, should uniformly preclude the initiation of CIRP. A more calibrated approach, distinguishing between superficial contestations and substantive disputes, might better serve the objectives of the IBC.
The tribunal’s reliance on the parallel proceedings before the Delhi High Court as indicative of an undetermined debt merits cautious consideration. Operational creditors often pursue multiple remedial avenues concurrently, and such pursuit should not automatically be construed as an admission of dispute regarding the underlying debt.
Conclusion
The NCLAT’s recent pronouncement reinforces the Mobilox doctrine and provides valuable guidance to operational creditors contemplating recourse under Section 9 of the IBC. It underscores the imperative for operational creditors to meticulously evaluate the existence of pre-existing disputes before initiating insolvency proceedings, as even ostensibly minor contestations may potentially impede their path to recovery.
For corporate debtors, the judgment reaffirms the significance of promptly and explicitly communicating disputes in accordance with the statutory framework, thereby preserving their right to contest the initiation of CIRP.
As the jurisprudential landscape continues to evolve, stakeholders must remain vigilant and adaptive, navigating the intricate interplay between substantive rights and procedural requirements under the IBC’s insolvency regime.
Disclaimer: This blog post is intended for informational purposes only and does not constitute legal advice. The views expressed herein represent the author’s analysis of the judgment and should not be construed as the official position of August Attorneys LLP. Readers are advised to consult qualified legal practitioners for specific guidance tailored to their individual circumstances.