Can a Section 9 Application Survive a “Disputed” Status in NeSL? NCLAT Clarifies in Span Engineers v. Pragati Infra

Can an Operational Creditor maintain a Section 9 application under the Insolvency and Bankruptcy Code when the debt is recorded as “disputed” in NeSL and the Corporate Debtor asserts a pre-existing dispute? The National Company Law Appellate Tribunal (NCLAT), Principal Bench, rejected this view in the case of Span Engineers v. Pragati Infra and Engineering LLP¹, affirming that the existence of a plausible, non-spurious dispute prior to the issuance of a demand notice is a complete bar to the initiation of the Corporate Insolvency Resolution Process (CIRP). The tribunal clarified that once a notice of dispute is received or a record of dispute exists within an Information Utility like NeSL, the adjudicating authority is mandated to reject the application without delving into the deep merits of the claim. 

Background of the Claim and Outstanding Dues 

The case centers on an operational debt claimed by Span Engineers, which was engaged by Pragati Infra and Engineering LLP for civil works and the supply of goods under a work order dated May 1, 2020. The appellant asserted that it had raised three invoices between June 2020 and February 2021, totaling approximately ₹1.26 crore, for which only partial payments were received. Following the alleged failure of the Corporate Debtor to clear the outstanding dues within the agreed six-month timeframe, the appellant issued a Section 8 demand notice on April 1, 2023. In response, the Corporate Debtor issued a reply on April 12, 2023, categorically disputing the claim on several grounds, including defective service, breach of work order terms, failure to deposit GST and labour law payments, and the lack of reconciled accounts. 

The rationale provided by the NCLAT emphasizes that the IBC’s summary proceedings are not intended for the adjudication of complex contractual disputes or the reconciliation of contested accounts. The tribunal observed that the payment terms required mutual agreement and approval of bills, a condition that was never met as the veracity and tenability of the invoices remained under dispute. Crucially, the court relied on the Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.² precedent, which dictates that an adjudicating authority must only determine if there is a “plausible contention” requiring further investigation and that the dispute is not a “patently feeble” or “spurious” defense. The NCLAT found that the Corporate Debtor’s objections were substantiated by evidence, including a “DISPUTED” authentication status in the NeSL report dated May 5, 2023, which further solidified the existence of a genuine pre-existing dispute. 

Conclusion

The judgment reinforces the statutory scheme of Section 9(5)(ii)(d) of the IBC, which requires the mandatory rejection of an insolvency application when a notice of dispute has been received by the operational creditor. By dismissing the appeal, the NCLAT upheld the principle that the insolvency framework cannot be used as a substitute for debt recovery in instances where the debt itself has not crystallized due to unresolved contractual disagreements. The ruling provides a clear reminder that for an operational creditor to succeed, the debt must be undisputed and the default must be clear, leaving the parties to pursue other civil remedies for contested claims.

Citations

1. Span Engineers v. Pragati Infra and Engineering LLP, Company Appeal (AT) (Insolvency) No. 1111 of 2023 (NCLAT, Principal Bench) ↩︎
2. Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353 ↩︎

Expositor(s): Adv. Jahnobi Paul,