Adjudicating Authority Only Needs To Check For 'Plausible' Pre-Existing Dispute Under Section 9 IBC, Not Its Success On Merits: Supreme Court

"All that is required is for the adjudicating authority to satisfy itself as to the existence of a plausible pre-existing dispute, which was not spurious, hypothetical or illusory," Supreme Court of India, in a significant ruling held that an adjudicating authority dealing with an application under Section 9 of the Insolvency and Bankruptcy Code (IBC) must only look for a "plausible pre-existing dispute" and cannot delve into the merits to check if the defense will ultimately succeed.

A bench of Justice Sanjay Kumar and Justice R. Mahadevan observed that the inquiry is strictly limited to ensuring the corporate debtor's dispute is "not spurious, hypothetical or illusory" before rejecting the insolvency plea.

The dispute arose when the respondent, an operational creditor, filed an application under Section 9 of the IBC claiming unpaid dues for chemical supplies, which the corporate debtor contested by citing defective materials and a need for account reconciliation. While the National Company Law Tribunal (NCLT) dismissed the application noting a pre-existing dispute that required detailed investigation, the National Company Law Appellate Tribunal (NCLAT) reversed this decision and directed the admission of the insolvency plea. Aggrieved by the NCLAT's interference and evaluation of the merits of its defense, the corporate debtor approached the Supreme Court.

The primary question before the court was whether the NCLAT erred in assessing the actual merits of the corporate debtor's defense rather than merely verifying the existence of a plausible pre-existing dispute. The court was also called upon to determine what constitutes sufficient evidence of a pre-existing dispute under Section 9 of the IBC prior to the issuance of a statutory demand notice.

Standard For Pre-Existing Disputes

The Supreme Court heavily relied on its landmark decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited to delineate the scope of inquiry under Section 9 of the IBC. The bench clarified that the adjudicating authority is not required to conduct a mini-trial to determine the ultimate outcome of the conflict between the parties. The court noted that it only needs to see if there is a plausible contention that requires further investigation. Rejecting the NCLAT's approach, the court emphasised that whether the party raising the dispute would ultimately succeed on the strength of its defense is entirely outside the scope of summary jurisdiction.

NCLAT Erred In Examining Merits

The bench observed that the NCLAT fundamentally erred by delving into the merits of the corporate debtor's defense to ascertain if it had actual weight. The court found that prior communications, including a police complaint and emails demanding the reconciliation of accounts, clearly pointed to a conflict existing long before the demand notice was issued under Section 8 of the IBC. Criticizing the appellate tribunal's overreach, the court reiterated the limited scope of the adjudicating authority's power.

"It was not for the NCLAT to delve into the appellant’s dispute to decide whether it had actual merit."

Correspondence And Fluctuating Demands

Scrutinizing the timeline of events, the court noted that the operational creditor's financial demand fluctuated massively, dropping from ₹4.60 crore to ₹2.92 crore just months before the demand notice was issued. The bench held that this lack of clarity on the exact amount due strongly supported the corporate debtor's claim that the accounts required thorough reconciliation. The court further highlighted that the operational creditor's delayed replies and sudden issuance of multiple debit notes were calculated moves. The bench noted that these actions were "just afterthoughts to build up a case so as to file an application under Section 9 of the Code."

Arbitrary Interest Claims Open To Question

The court took strong exception to the operational creditor unilaterally raising debit notes for interest at 24 percent per annum on alleged delayed payments dating back to 2016-17. The bench observed that these claims, raised suddenly in August 2021 after a reply to the debtor's complaints regarding defective supplies, were legally suspect. The judges noted that claiming such exorbitant interest based on unilaterally signed invoices, in sheer defiance of the law of limitation, further cemented the existence of a genuine, pre-existing dispute between the parties.

Pre-CIRP Admissions Cannot Be Ignored

Addressing the NCLAT's refusal to consider admissions made by the operational creditor's director in a subsequent civil suit, the Supreme Court held this exclusion to be wholly incorrect. The bench pointed out that while the civil suit was filed after the initiation of the Corporate Insolvency Resolution Process (CIRP), the admissions made under oath related directly to pre-CIRP practices. The director had admitted during cross-examination that written correspondence only began after payment disputes arose, which the Supreme Court found highly relevant to establishing the timeline of the conflict.

"There was clearly no consensus between the parties as to who was liable to pay to the other and the amount that was payable."

Concluding that the NCLAT was not justified in reversing the initial decision, the Supreme Court allowed the appeal and set aside the appellate tribunal's judgment. The NCLT's original order dismissing the Section 9 application was restored, reaffirming that the IBC cannot be weaponised as a debt recovery mechanism when a plausible, pre-existing dispute over accounts and product quality exists.

Date of Decision: 09 April 2026