New Delhi, August 6, 2024
The National Company Law Appellate Tribunal (NCLAT) has dismissed the appeal filed by Khushbu Dye Chem Private Limited against Chemical Suppliers India Private Limited, thereby affirming the order of the National Company Law Tribunal (NCLT), New Delhi Bench, dated 17 January 2024.[1]
The NCLT had earlier declined to admit Khushbu Dye Chem’s application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC)[2], on the twin grounds that (i) the alleged debt, when adjusted for payments and disputed credits, fell below the statutory threshold of ₹1 crore under Section 4 of the Code[3], and (ii) the claim was vitiated by the existence of a pre-existing
dispute between the parties.[4]
Background of the Case: –
The dispute traces back to 2021, when Chemical Suppliers placed several purchase orders on Khushbu Dye Chem for the supply of solvents, including Isopropyl Alcohol (IPA). Khushbu Dye Chem fulfilled these orders and raised invoices totalling ₹1,82,54,891, with payment terms of 70 days. Despite repeated follow-ups, the payments were allegedly not made.
On 24 June 2022, Khushbu Dye Chem issued a demand notice under Section 8 of the IBC[5], seeking recovery of the outstanding amount. In reply, Chemical Suppliers acknowledged part of the liability but asserted that it was entitled to adjustments against a separate transaction involving the supply of 450 metric tons of IPA, of which only 143.850 MT was lifted. It claimed that this unsettled
transaction offset the dues sought under the demand notice.
Complicating matters further, Chemical Suppliers had issued six cheques towards repayment, but these were subsequently dishonoured on presentation with the remark “payment stopped by drawer.” Thereafter, both parties lodged criminal complaints—Khushbu Dye Chem alleging default and Chemical Suppliers accusing its counterparty of cheque forgery.
Key Legal Issues: –
- Pre-existing Dispute:
Chemical Suppliers contended that the alleged operational debt was inseparably linked to unsettled cross-transactions relating to IPA supplies. Since only 143.850 MT of the contracted 450 MT had been lifted, a substantial balance remained payable by Khushbu Dye Chem. The issuance of unilateral credit notes and dishonored cheques only aggravated the controversy, demonstrating a genuine dispute predating the demand notice.[6] - Minimum Threshold for Insolvency:
Section 4 of the IBC prescribes a minimum default of ₹1 crore for initiation of the corporate insolvency resolution process (CIRP). Chemical Suppliers argued that once the payment of ₹20.71 lakh and disputed debit adjustments of ₹72.25 lakh were accounted for, the net operational debt fell below the threshold, rendering the application non maintainable. - Forged Cheques and Criminal Allegations:
The respondent also relied on the dishonored cheques and subsequent police complaint to show that the dispute was not only civil in nature but had also escalated into allegations of fraud and forgery. This, in its view, fortified the case for treating the matter as unsuitable for resolution through IBC proceedings.
NCLT’s January 2024 Decision: –
By its order dated 17 January 2024, the NCLT dismissed Khushbu Dye Chem’s petition under Section 9 of the IBC.[7] It held that, once the alleged setoffs and disputed credits were factored in, the operational debt fell short of the ₹1 crore threshold. More significantly, the tribunal found ample evidence of a pre-existing dispute, reflected in communications, debit notes, and criminal complaints exchanged prior to issuance of the demand notice.The NCLT underscored that the IBC is not a mechanism for recovery of disputed debts, but a forum for resolving genuine insolvency.
NCLAT’s Decision: –
On appeal, Khushbu Dye Chem contended that the NCLT had erred in discounting admitted invoices and argued that the dishonoured cheques constituted clear evidence of default. It further asserted that the alleged set-offs were baseless and that the tribunal had misapplied the statutory threshold under the IBC. The NCLAT, however, upheld the NCLT’s findings in full. It concluded that, after accounting for the disputed adjustments, the net claim was below the ₹1 crore threshold prescribed under Section
4 of the IBC. It also found that the record demonstrated a bona fide pre-existing dispute, as evidenced by extensive correspondence, debit notes, and reciprocal criminal complaints.
Citing the Supreme Court’s landmark ruling in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, the appellate tribunal reiterated that where a plausible pre-existing dispute exists, the adjudicating authority is bound to reject a Section 9 application without delving into the merits of the underlying claim [8]. Stressing this principle, the NCLAT cautioned that insolvency proceedings cannot be misused as a substitute for debt recovery or as a tool of commercial pressure.
Accordingly, the appellate tribunal dismissed the appeal as untenable and affirmed the NCLT’s order in its entirety.
Conclusion:-
The decision in Khushbu Dye Chem v. Chemical Suppliers India Pvt. Ltd. reaffirms two critical principles under the IBC: the mandatory threshold of ₹1 crore for initiating insolvency proceedings, and the bar on admission of Section 9 applications in the presence of genuine preexisting disputes.[9]
By echoing the Mobilox precedent, the NCLAT reinforced the limited scope of the insolvency framework—designed not as a debt recovery mechanism but as a process for resolving cases of actual insolvency. The ruling also highlights the importance of careful scrutiny of correspondence and contemporaneous conduct in distinguishing between a real dispute and a mere ruse to evade payment.
While the criminal complaints and cross-allegations between the parties may continue in other legal forums, the appellate decision conclusively settles the insolvency aspect of the controversy, underscoring the judiciary’s commitment to maintaining the integrity of the IBC’s objectives.
[1]Khushbu Dye Chem Pvt. Ltd. v. Chemical Suppliers India Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 664 of 2024, NCLAT (New Delhi, Aug. 6, 2024). https://indiankanoon.org/doc/38699544/
[2]Insolvency and Bankruptcy Code, 2016, § 9.
[3]Insolvency and Bankruptcy Code, 2016, § 4.
[4]NCLT, New Delhi Bench, C.P. (IB)-892 (ND)/2022, order dated Jan. 17, 2024.
[5]Insolvency and Bankruptcy Code, 2016, § 8.
[6]Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353.
[7]NCLT, New Delhi Bench, C.P. (IB)-892 (ND)/2022, order dated Jan. 17, 2024.
[8]Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353.:https://indiankanoon.org/doc/1614514/
[9]IBBI. (2016). The Insolvency and Bankruptcy Code, 2016: Bare Act with Rules and Regulations. New Delhi: Government of India.
