The Insolvency and Bankruptcy Code, 2016 [hereinafter referred to as the “IBC/ Code”], was enacted to reform India’s insolvency regime and aimed towards the speedy resolution of the debts of companies. Designed to offer a consolidated, time-bound framework for the resolution and/or liquidation of corporate entities, the IBC seeks to maximise asset value, promote entrepreneurship, and reinforce financial discipline in credit markets. It is creditor-oriented and provides higher decision-making power with respect to the company to the creditors themselves.

As per Sections 5(7) and 5(8) of the IBC, financial creditors are those whose claims are in respect of debt which was disbursed against the consideration for the time value of money. In other words, the financial debt arises from financial transactions involving interest-bearing instruments, such as term loans or bonds and where there is time value for money.

In contrast, operational creditors, as defined under Sections 5(20) and 5(21), are those whose claims derive from the provision of goods or services in the ordinary course of business.

Though both categories of creditors are vested with the right to initiate the Corporate Insolvency Resolution Process [hereinafter referred to as “CIRP”], the IBC prescribes distinct procedural rights for each category. Notably, operational creditors are required to comply with an additional prerequisite stipulated under Section 8, which is that they must issue a demand notice or deliver a copy of the unpaid invoice prior to initiating proceedings under Section 9. And consequently, the corporate debtor is granted a statutory period of ten days to respond, either by settling the outstanding dues or by bringing to the creditor’s attention the subsistence of a pre-existing dispute.

The existence of a dispute is a critical determinant in the admission of an insolvency application. As per Section 9(5)(ii)(d), the Adjudicating Authority is mandated to reject an application if it is established that a genuine dispute already exists between the parties. The said mechanism ensures that the insolvency mechanism does not become a mere recovery tool, particularly in cases where the debt itself is substantively contested.

The statutory framework under Sections 8(2)(a) and 9(5)(ii)(d) of the IBC creates a jurisdictional threshold by precluding admission of insolvency applications where a dispute exists prior to the issuance of the demand notice. Initially, the draft Insolvency and Bankruptcy Bill, 2015 included the term bona fide in defining a dispute, indicating a legislative intent to incorporate a standard of good faith. However, under Section 5(6), this term was omitted, and the definition of “dispute” was made to be an inclusive one.

The Supreme Court, in Mobilox Innovations Private Limited v. Kirusa Software Private Limited [hereinafter referred to as “Mobilox Case”], clarified that a “dispute” must rest on substantial grounds which would not include a roving enquiry. It was held that the Adjudicating Authority is not to conduct a detailed analysis of the merits but must ascertain whether there is a plausible contention that merits further examination and that the dispute is not merely a feeble argument or an assertion of fact unsubstantiated by evidence.

It was also observed that a mere assertion unsupported by evidence is insufficient to prevent admission. However, a plausible contention supported by material facts and proof would suffice. Additionally, the Hon’ble Supreme Court relied upon the Australian case of Spencer Construction Pty Ltd v. G&M Aldrige Pty Ltd, wherein the Hon’ble Australian High Court elaborated on the aspect of “genuine dispute” stating that it requires that the dispute must be bona fide, truly exist in fact and the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. This ensures the insolvency process is not misused as a coercive recovery tool.

Moreover, in Sabarmati Gas Limited v. Shah Alloys Limited, the Hon’ble apex court reiterated that the existence of a “pre-existing dispute” would entail dismissal of an application under Section 9 at the threshold. Further, the term “pre-existing dispute” is applicable only to the existence of a dispute prior to the receipt of a demand notice under Section 8 of the IBC.

Similarly, in Soham Polymers Private Limited v. Flocksur India Private Limited, the Hon’ble National Company Law Appellate Tribunal [hereinafter referred to as “NCLAT”] reaffirmed that the dispute must not be superficial but must materially exist, thereby serving as a substantive barrier to proceedings under Section 9.

The notion of “existence” implies that a dispute must not only be raised but must truly subsist in fact. It should be neither illusory nor hypothetical. Defensive claims that are frivolous, vague, or clearly untenable must be filtered out. The adjudicatory function thus demands a careful balance: while ensuring that debtors are not wrongfully subjected to insolvency proceedings based on fictitious or disputed claims, it must also prevent unscrupulous debtors from obstructing legitimate claims through frivolous assertions.

A mandatory procedural requirement under the IBC for commencing an insolvency procedure under Section 9 is the mandatory service of a demand notice or copy of an invoice by the operational creditor in accordance with Section 8(1), while granting the debtor an opportunity to contest the claim within ten days. However, what is important to delve into is whether a failure on the part of the corporate debtor to reply within the stipulated ten-day period operates as a bar against raising a pre-existing dispute before the Adjudicating Authority as defence?

This issue has been decisively addressed by the NCLAT. In Brandy Realty Services Limited v. Sir John Bakeries India Private Limited, the Hon’ble Appellate Tribunal held that the absence of a reply to the demand notice within ten days does not act as an estoppel for the corporate debtor from producing material evidence before the Adjudicating Authority to establish the existence of a pre-existing dispute. It was further maintained that the statutory scheme under Section 8 and Section 9 does not indicate that in case a reply to the demand notice is not filed or filed but not within 10 days’ timeline, the corporate debtor is precluded from bringing forth the question of the existence of any disputes.

Further, in Anil Kumar Seth (Suspended Director, Supercast Technologies Pvt. Ltd.) v. Valplast Technologies, while setting aside the admission order and remanding the matter back to NCLT, Hon’ble NCLAT reiterated that even if no reply is filed to the notice issued under Section 8 of the IBC, the Adjudicating Authority is obliged to look into the material produced before it by the corporate debtor for proving that there was a pre-existing dispute between the parties before the issuance of the demand notice under Section 8.

The IBC’s distinction between financial and operational creditors serves both a procedural and substantive purpose, reflecting the varied nature of their claims and the inherent risks involved. For operational creditors, the existence of a pre-existing dispute constitutes a critical jurisdictional bar. The judiciary has consistently interpreted this requirement, with a view to balancing competing interests—protecting the insolvency mechanism from misuse as a debt recovery forum while upholding the rights of genuine and admitted claimants.

This evolving legal framework underscores the principle that insolvency proceedings are not a substitute for civil litigation and a process for recovery, but must only be invoked where a debt is truly undisputed and due. Through judicial exposition and statutory safeguards, the IBC continues to strive for an equitable insolvency regime that promotes resolution and balances creditor interests with debtor protections, ensuring a fair and equitable mechanism to revive the corporate debtor without compromising the stake of the creditors, whether financial or operational.

About the authors: Ashish Kumar is a Partner (Litigation and Head of Japan Desk), Lokesh Malik is a Senior Associate, and Atika Chaturvedi is an Associate at SNG & Partners.