A genuine pre-existing dispute requiring detailed adjudication mandates rejection of a Section 9 application.

The appellant, an operational creditor, supplied goods through multiple transactions to the respondent-corporate debtor and raised approximately 132 invoices. Alleging non-payment of operational debt amounting to ₹3,61,24,534.33, the appellant issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) on 7 October 2024 and filed a Section 9 application for initiation of CIRP.

The application was initially dismissed because the respondent had been admitted into CIRP in separate proceedings, but it was subsequently restored after that admission order was set aside.

The respondent opposed the application on the ground of a pre-existing dispute. It alleged that former employees had colluded with the appellant, generated fraudulent purchase orders, caused payments to be wrongfully released, and arranged delivery of goods to third parties without authorisation.

The respondent had issued a legal notice dated 28 August 2024, before the Section 8 demand notice, disputing the transactions and denying liability under identified purchase orders valued at ₹2,27,03,468.

It had also lodged complaints concerning the alleged fraud and subsequently instituted a civil suit before the Delhi High Court. The appellant filed a counterclaim in that suit for the operational debt claimed in the insolvency proceedings.

The Adjudicating Authority dismissed the Section 9 application on the ground that a genuine pre-existing dispute existed regarding the purchase orders, supplies, delivery, and alleged fraud. It also noted that the Information Utility record marked the debt as “disputed”.

The Court applied Sections 8 and 9 of the IBC, particularly the principle that a Section 9 application must be rejected where the operational creditor has received a notice of dispute or where a record of dispute exists in the Information Utility.

Relying on Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353, the Court held that the Adjudicating Authority must determine whether there is a plausible contention requiring further investigation and whether the dispute is genuine rather than spurious, hypothetical, or illusory; it is not required to examine the likelihood of success on the merits.

The Court also relied on Bhawani Prasad Mishra v. Armaco Infralinks Pvt. Ltd. & Anr., Company Appeal (AT) (Insolvency) No. 557 of 2025, for the proposition that rejection follows where either a notice of dispute has been received by the operational creditor or the Information Utility contains a record of dispute.

Insolvency proceedings under Section 9 cannot be used to adjudicate complex and seriously contested questions of fact that require a civil trial.

The NCLAT found that the respondent’s dispute was neither an afterthought nor a mere assertion made in reply to the Section 8 notice.

The respondent had issued a detailed legal notice on 28 August 2024, before the demand notice dated 7 October 2024, specifically denying the purchase orders and alleging fraudulent conduct by former employees and collusion with the appellant.

The subsequent civil suit and the complaints lodged before the authorities were based on the same factual allegations and demonstrated that the dispute concerned the very foundation of the debt.

The appellant’s own documents also disclosed material inconsistencies: only six of the 132 invoices were linked to purchase orders, those invoices related to only two purchase orders, and the consignee details did not correspond with the “ship to” details in the purchase orders.

Since the respondent denied liability for the impugned transactions and alleged that the entire set of transactions was fraudulent, the Court rejected the appellant’s argument that any undisputed balance exceeding the insolvency threshold could independently sustain the application.

These matters raised substantial factual issues requiring trial and therefore satisfied the Mobilox threshold of a plausible, genuine, and pre-existing dispute.

The dispute was supported by the respondent’s prior legal notice, complaints, civil proceedings, documentary inconsistencies, and the Information Utility record marking the debt as disputed.

Accordingly, the Section 9 application was rightly rejected, as the disputed issues could not be resolved in summary insolvency proceedings.

The appeal was dismissed, and the pending applications were disposed of.