NCLAT Ruling on Disputed Contractual Debts in Insolvency Under Section 60(5) of the IBC

The National Company Law Appellate Tribunal in Delhi has clarified a key boundary of the Insolvency and Bankruptcy Code by holding that disputed contractual debts in insolvency cannot be recovered through the summary powers of an insolvency court. In a ruling in Pooja Bahry v. UP Rajkiya Nirman Nigam, the NCLAT said that a liquidator cannot use Section 60(5) of the IBC to compel payment of receivables that are still contested and not yet crystallized.

The tribunal observed that the liquidator was attempting to “sidestep and short-circuit” ordinary legal forums by bringing disputed claims directly before the insolvency court. It reaffirmed that only claims that are clearly admitted or already adjudicated can be enforced through the insolvency process.

The ruling brings clarity to how far insolvency courts can go when dealing with receivables that are the subject of contractual disputes.

What triggered the dispute over disputed contractual debts in insolvency

The case arose during the liquidation of a corporate debtor. The liquidator claimed that UP Rajkiya Nirman Nigam owed money to the company under a contract. The amount was shown as a receivable in the company’s books.

However, the alleged debtor disputed the liability. According to it, the amounts claimed were not admitted and were subject to contractual disagreements.

Instead of filing a civil suit or arbitration to establish the debt, the liquidator approached the National Company Law Tribunal under Section 60(5) of the Insolvency and Bankruptcy Code, seeking a direction to compel payment.

This raised a central question. Can disputed contractual debts in insolvency be recovered through the special jurisdiction of insolvency courts, or must they be resolved through ordinary legal processes first?

What Section 60(5) of the IBC provides

Section 60(5) of the Insolvency and Bankruptcy Code gives the NCLT wide powers to decide questions of law or fact arising out of or in relation to insolvency or liquidation proceedings.

It is often used by resolution professionals and liquidators to seek directions, resolve issues, or deal with matters connected to the insolvency estate.

However, the provision does not turn the insolvency court into a general civil court. Its role is to support the insolvency process, not to replace all other forums.

The NCLAT’s ruling makes this distinction clear in the context of disputed contractual debts in insolvency.

What the NCLAT said about uncrystallized debts

The NCLAT described the amounts claimed by the liquidator as uncrystallized. In legal terms, this means the debt had not been finally determined or accepted.

A crystallised debt is either:

• Admitted by the debtor

• Established by a court, tribunal, or arbitral award

In this case, the alleged debtor had not admitted liability, and no prior adjudication existed.

The tribunal held that disputed contractual debts in insolvency that remain uncrystallized cannot be enforced through Section 60(5) proceedings.

Such claims must first be resolved through appropriate legal forums that can examine evidence, interpret contracts, and decide liability.

Why the liquidator’s approach was rejected

The NCLAT took issue with the way the liquidator sought to recover the money.

By going directly to the insolvency court, the liquidator was attempting to avoid the normal process of proving the claim. The tribunal said this amounted to an attempt to “sidestep and short-circuit” ordinary legal remedies.

The insolvency process, the NCLAT explained, is not designed to convert disputed contractual claims into automatically recoverable assets.

This is especially important in liquidation, where the liquidator must gather assets for distribution to creditors but must do so in accordance with the law.

The ruling makes it clear that disputed contractual debts in insolvency cannot be treated as ready to collect just because the company has entered liquidation.

What kinds of claims can be recovered through insolvency courts?

The NCLAT drew a line between two categories of claims.

Claims that can be enforced through insolvency courts include:

• Admitted debts

• Amounts determined by court orders

• Sums fixed by arbitral awards

• Liabilities clearly acknowledged by the debtor

On the other hand, disputed contractual debts in insolvency that require detailed examination of facts, evidence, or contract terms must go through regular legal channels.

The insolvency court is not meant to conduct full trials to determine whether a contract was breached or how much is payable.

Why this distinction matters

The Insolvency and Bankruptcy Code is designed to be a time-bound process. Its goal is to resolve insolvency or liquidate assets efficiently.

If insolvency courts were required to decide every disputed contract claim, the process would become slow and complex.

The NCLAT’s ruling preserves the balance between speed and fairness by ensuring that disputed contractual debts in insolvency are resolved in the right forum.

This prevents the insolvency process from being clogged with lengthy contractual disputes.

How the decision fits into the IBC framework

The Insolvency and Bankruptcy Code separates two roles.

• Ordinary courts and arbitral tribunals decide whether a debt exists

• Insolvency courts deal with what to do once the debt is established

The NCLAT’s ruling reinforces this separation.

By holding that uncrystallized and disputed claims cannot be recovered through Section 60(5), the tribunal has ensured that insolvency proceedings remain focused on managing insolvency rather than adjudicating complex commercial disputes.

This clarity is important for all cases involving disputed contractual debts in insolvency.

What does this mean for the liquidation process

During liquidation, the liquidator is responsible for collecting all assets and receivables of the corporate debtor.

However, this ruling makes it clear that:

• Only receivables that are admitted or legally established can be collected through insolvency courts

• Contested amounts must be pursued separately

The liquidator still has the option to file suits or arbitration to establish the claim. Once a debt is crystallised, it can then be brought into the insolvency estate.

The NCLAT’s decision ensures that disputed contractual debts in insolvency do not bypass this necessary step.

Why the UP Rajkiya Nirman Nigam case is significant

The case highlights a recurring issue in insolvency practice. Many corporate debtors have pending claims against customers, government bodies, or contractors.

These claims often appear in balance sheets but are subject to dispute.

The NCLAT’s ruling makes it clear that such entries do not automatically become recoverable assets in liquidation.

Only when a claim is admitted or adjudicated does it become part of the insolvency estate in a way that can be enforced.

This brings clarity to how disputed contractual debts in insolvency should be treated.

What happens to disputed claims now

For claims that are still contested, the path is clear.

The liquidator must:

• Approach a civil court, arbitral tribunal, or other appropriate forum

• Prove the existence and amount of the debt

• Obtain a judgment or award

Only after this process can the claim be enforced through the insolvency framework.

The insolvency court will then recognise it as a crystallized asset of the corporate debtor.

Why this ruling will shape future insolvency cases

The NCLAT’s judgment provides guidance for liquidators, debtors, and tribunals across the country.

It ensures that disputed contractual debts in insolvency are not used to inflate the value of the insolvency estate without a proper legal basis.

It also protects alleged debtors from being forced to pay amounts that have not yet been legally determined.

Where the law stands now

The ruling in Pooja Bahry v. UP Rajkiya Nirman Nigam sets a clear standard.

Insolvency courts are not the place to decide contested contract claims. Their role begins after the existence of a debt is established.

For now, the message from the NCLAT is straightforward. Disputed contractual debts in insolvency must be resolved through proper legal channels before they can be enforced under the IBC.