In a significant reaffirmation of one of the foundational principles of the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court has declined to interfere with the National Company Law Appellate Tribunal’s (NCLAT) decision rejecting an operational creditor’s insolvency application against Essar Power Gujarat Limited. Holding that the record clearly disclosed the existence of a genuine pre-existing dispute between the parties, the Court reiterated that the corporate insolvency resolution process under Section 9 of the IBC cannot be invoked as a substitute for ordinary debt recovery proceedings. A Bench comprising Justice Nongmeikapam Kotiswar Singh and Justice K. Vinod Chandran dismissed the appeal filed by Narayani Resources Pvt. Ltd., thereby endorsing the consistent judicial approach that insolvency law is intended for resolution of genuine corporate distress and not as a coercive mechanism to recover disputed commercial claims.
The dispute arose from commercial transactions relating to the supply of coal by Narayani Resources to Essar Power Gujarat Limited. According to the operational creditor, an amount of approximately ₹85 crore remained outstanding towards supplies made to the respondent company. Invoking Section 9 of the IBC, the operational creditor sought initiation of the Corporate Insolvency Resolution Process (CIRP), contending that the admitted default satisfied the statutory threshold prescribed under the Code. The respondent company, however, resisted the insolvency proceedings by asserting that the parties had already entered into a comprehensive settlement in January 2025 involving reconciliation of accounts for approximately ₹107 crore. Essar Power contended that substantial payments had already been made pursuant to the settlement, while payment of the remaining amount was contingent upon the operational creditor issuing a debit note, a contractual requirement which, according to the company, was never fulfilled. The respondent further asserted that it had already paid ₹8 crore in advance towards interest and that the amount was, in fact, refundable to it.
The operational creditor disputed the respondent’s version of events and argued that even on Essar Power’s own case, outstanding dues continued to remain payable. It was submitted that disputes regarding reconciliation of accounts could not extinguish an admitted liability and that the insolvency application ought to have been admitted for commencement of the CIRP. The National Company Law Tribunal (NCLT), however, rejected the application after concluding that the material placed on record demonstrated the existence of a genuine dispute predating the statutory demand notice. That finding was subsequently affirmed by the NCLAT, prompting the operational creditor to approach the Supreme Court.
During the hearing before the apex court, the Bench examined the findings recorded by the appellate tribunal and found no reason to exercise its discretionary jurisdiction under Article 136 of the Constitution. The Court endorsed the NCLAT’s conclusion that the correspondence exchanged between the parties clearly established an ongoing disagreement regarding reconciliation of accounts, implementation of the settlement agreement and quantification of the alleged outstanding liability. The NCLAT had specifically observed that the defence raised by the corporate debtor was not a “feeble legal argument” created merely to avoid insolvency proceedings but reflected a bona fide commercial dispute supported by documentary material that existed well before issuance of the statutory demand notice. Accepting this reasoning, the Supreme Court dismissed the appeal and thereby reaffirmed the settled legal position governing operational creditor petitions under the IBC.
The judgment assumes considerable importance because it reinforces one of the cardinal principles governing Section 9 proceedings under the IBC. The Code draws a clear distinction between financial creditors and operational creditors. While financial creditors primarily lend money and participate in assessing the financial viability of a corporate debtor, operational creditors generally supply goods or services. Recognising the possibility that ordinary commercial disputes could otherwise be converted into insolvency proceedings, Parliament incorporated a statutory safeguard by requiring the Adjudicating Authority to reject a Section 9 application where a genuine “pre-existing dispute” exists between the parties.
The doctrine of pre-existing dispute has been one of the defining features of Indian insolvency jurisprudence since the Supreme Court’s landmark decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited. In that judgment, the Supreme Court authoritatively held that the NCLT is not expected to determine whether the corporate debtor’s defence will ultimately succeed during trial. Instead, the tribunal must merely ascertain whether the dispute is genuine, bona fide and not a patently unsupported or illusory defence invented solely to avoid insolvency proceedings. If a plausible dispute exists prior to the issuance of the statutory demand notice under Section 8 of the IBC, initiation of the Corporate Insolvency Resolution Process becomes legally impermissible.
The present decision faithfully applies this settled doctrine. Both the NCLAT and the Supreme Court found that the disagreement between Narayani Resources and Essar Power Gujarat was not manufactured after receipt of the demand notice but had existed much earlier in the form of correspondence concerning settlement terms, reconciliation of accounts and contractual obligations. Such disputes, the Court effectively recognised, are better suited for adjudication through civil proceedings, arbitration or other contractual dispute resolution mechanisms rather than insolvency proceedings designed to rescue financially distressed companies.
From a commercial law perspective, the ruling carries significant implications for business entities engaged in contractual transactions. Commercial settlements often involve phased payments, account reconciliation, debit notes, adjustments and continuing negotiations regarding outstanding liabilities. The existence of such unresolved contractual issues ordinarily indicates that the dispute concerns enforcement of contractual rights rather than corporate insolvency. The Supreme Court’s decision reinforces that the IBC cannot be transformed into an aggressive recovery tool merely because one party believes money remains payable. The insolvency process is intended to resolve genuine financial distress, not to compel payment of disputed commercial claims.
The judgment also reiterates the distinction between insolvency and debt recovery—a distinction consistently emphasised by the Supreme Court since the enactment of the IBC. Proceedings under the Code are collective in nature and affect not merely the interests of the applicant creditor but also those of financial institutions, employees, workmen, government authorities and other stakeholders connected with the corporate debtor. Admission of a CIRP carries serious commercial consequences, including imposition of a moratorium, suspension of the board of directors and commencement of a resolution process affecting the entire corporate enterprise. Such far-reaching consequences cannot be triggered merely because parties disagree regarding contractual payments.
The decision further strengthens the institutional role of the NCLT and NCLAT as specialised insolvency forums rather than civil courts deciding contractual disputes. The Supreme Court has repeatedly cautioned that insolvency tribunals are not expected to conduct elaborate trials concerning disputed contractual liabilities. Their jurisdiction remains confined to determining whether the statutory conditions for initiation of insolvency proceedings exist. Where substantial factual controversies regarding liability, settlement or reconciliation require detailed evidentiary examination, the appropriate remedy ordinarily lies outside the insolvency framework.
Another noteworthy aspect of the ruling is its emphasis on commercial certainty. Businesses frequently negotiate settlements after disputes arise, and such settlements may involve reciprocal obligations to be performed by both parties. If every disagreement concerning implementation of a settlement could automatically trigger insolvency proceedings, the very purpose of commercial negotiation and contractual resolution would be undermined. By recognising settlement-related disputes as valid pre-existing disputes where supported by evidence, the Supreme Court has strengthened confidence in negotiated commercial resolutions.
The judgment also aligns with the broader legislative objective underlying the Insolvency and Bankruptcy Code. Since its enactment in 2016, the Code has consistently been interpreted as a legislation intended to maximise value of distressed assets, preserve viable businesses and balance the interests of all stakeholders. It was never conceived as a substitute for civil litigation or arbitration. The Supreme Court’s repeated insistence that operational creditors cannot invoke the IBC to recover disputed dues protects the integrity of the insolvency framework and prevents unnecessary disruption of commercially viable enterprises through premature initiation of corporate insolvency proceedings.
Ultimately, the dismissal of the appeal in Narayani Resources Pvt. Ltd. v. Essar Power Gujarat Ltd. serves as another authoritative reminder that the threshold for admission of an operational creditor’s insolvency application is not confined to proving the existence of an unpaid debt. The applicant must also demonstrate the absence of any genuine pre-existing dispute. Where documentary evidence reveals bona fide disagreements regarding contractual performance, reconciliation of accounts or implementation of settlement terms, insolvency jurisdiction cannot be invoked to pressure the corporate debtor into payment. In reaffirming this principle, the Supreme Court has once again strengthened the distinction between insolvency resolution and debt recovery one of the cornerstones upon which the modern Indian insolvency regime continues to rest.
