Supreme Court Holds Section 9 IBC Application Not Maintainable Where Pre-Existing Dispute Exists; Restores NCLT Rejection

Held: The Supreme Court held that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 is not maintainable where a plausible pre-existing dispute exists between the parties prior to issuance of the demand notice, and that the adjudicating authority must reject such application without examining the merits of the dispute.

Summary: The case arose from a Section 9 IBC application filed by the respondent claiming unpaid operational debt for supply of chemicals. The appellant resisted the claim on the ground of pre-existing disputes relating to defective supplies, issuance of debit notes, and reconciliation of accounts, which had been communicated through correspondence and even a police complaint prior to the demand notice. The NCLT dismissed the application holding that there existed a genuine dispute requiring detailed adjudication, which was beyond the summary jurisdiction under the Code. However, the NCLAT reversed this decision, treating the dispute as a moonshine defence and directing admission of CIRP. The Supreme Court examined the sequence of events, ledger discrepancies, correspondence, and conduct of parties, and found that disputes regarding quality of goods, reconciliation of accounts, and competing claims existed well before issuance of the demand notice. The Court reiterated the principles laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. that the adjudicating authority is only required to see whether a plausible dispute exists and not whether it would succeed. It held that the NCLAT erred in examining the merits of the dispute and ignoring material evidence indicating lack of consensus on liability and amount payable.

Decision: The Supreme Court allowed the appeal, set aside the judgment of the NCLAT, restored the order of the NCLT rejecting the Section 9 application, and held that CIRP could not be initiated in view of the pre-existing dispute, with parties directed to bear their own costs.