NCLT Mumbai: Corporate Debtor Can Cite Pre-Existing Dispute Even Without Timely Reply to IBC Demand Notice

The Mumbai Bench of the National Company Law Tribunal (NCLT), comprising Hon’ble Shri K.R. Saji Kumar (Judicial Member) and Hon’ble Shri Sanjiv Dutt (Technical Member), has clarified that a Corporate Debtor is not barred from citing a pre-existing dispute simply because it failed to respond to a demand notice within the 10-day window prescribed under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC). The ruling emphasized that when such disputes are evident before the issuance of the demand notice, they must be duly considered.

Background of the Case

The case stems from a default related to five unpaid invoices for cotton fibre supplied during the 2021–22 period. Though the exact date of default was not specified in the application, the invoices—dated between 16 December 2021 and 19 January 2022—allowed for a 30-day payment period. Upon non-payment, the Operational Creditor initiated proceedings under Section 9 of the IBC, seeking the commencement of the Corporate Insolvency Resolution Process (CIRP) against the debtor.

Arguments by the Operational Creditor

The Operational Creditor argued that the Corporate Debtor did not challenge the quality or quantity of the goods prior to the issuance of the demand notice. Referring to emails dated 3 November 2021 and 10 January 2022, they claimed these communications reflected an ongoing and cooperative business relationship rather than any dispute. They further contended that the Corporate Debtor had accepted the goods without objection and could not now evade payment, citing legal precedent from Deepak Modi v. Shalfeyo Industries (2023).

Arguments by the Corporate Debtor

In defense, the Corporate Debtor stated that the creditor failed to provide proof of performance on its part. They challenged the legitimacy of the invoices and pointed to various communications, including a detailed reply to the demand notice submitted on 9 June 2022. This reply—along with previous email correspondence—demonstrated the existence of disputes regarding the quality of goods and payment delays, which had been raised well before the Section 8 notice was served.

Tribunal's Observations

The Tribunal took note of a series of emails from the Corporate Debtor sent in January 2022, which flagged concerns about substandard goods and delayed supplies. It also referenced a meeting held on 6 April 2022, the minutes of which were later shared via email and went uncontested by the Operational Creditor.

Citing the decision in Brand Realty Services Ltd. v. Sir John Bakeries India Pvt. Ltd., the Tribunal reiterated that failure to respond within the stipulated 10-day period under Section 8 does not eliminate a Corporate Debtor’s right to present valid pre-existing disputes. The adjudicating authority can consider all relevant evidence, including emails and prior legal applications, to determine the legitimacy of the claimed debt.

Judgment

Based on its review of the evidence and the parties’ communications, the Tribunal concluded that there were indeed disputes predating the demand notice. As a result, the operational debt could not be treated as undisputed. Accordingly, the petition under Section 9 was dismissed.