Supreme Court Upholds NCLAT Order Rejecting ₹85 Crore Insolvency Plea Against Essar Power Gujarat
In a significant ruling reinforcing the objectives of the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court on 8 July 2026 declined to interfere with an order passed by the National Company Law Appellate Tribunal (NCLAT), which had rejected an insolvency application of approximately ₹85 crore filed against Essar Power Gujarat Ltd.
A vacation bench comprising Justice Nongmeikapam Kotiswar Singh and Justice K. Vinod Chandran dismissed the appeal and reaffirmed a fundamental principle of insolvency law: the IBC is not a substitute for debt recovery proceedings where a genuine pre-existing dispute exists between the parties.
The judgment serves as an important reminder that insolvency proceedings cannot be invoked as a pressure tactic to recover disputed commercial dues and that the insolvency framework must remain focused on resolving genuine cases of corporate insolvency.
Background of the Dispute
The dispute arose when Narayani Resources Pvt. Ltd. initiated insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 against Essar Power Gujarat Ltd..
According to Narayani Resources, Essar Power Gujarat had defaulted on payments amounting to approximately ₹85 crore arising out of the supply of coal. Claiming to be an operational creditor, the company sought commencement of the Corporate Insolvency Resolution Process (CIRP) against Essar Power Gujarat.
However, Essar Power Gujarat strongly opposed the insolvency application and contended that the matter was not a simple case of unpaid operational debt. The company argued that the parties had already entered into a comprehensive settlement agreement in January 2025 for an amount of approximately ₹107 crore.
Essar Power Gujarat further submitted that substantial payments had already been made pursuant to the settlement arrangement and that the remaining payment obligations were dependent upon the issuance of a debit note by Narayani Resources. According to the respondent company, the required debit note was never furnished, making the claim itself disputed.
In addition, Essar Power Gujarat contended that it had already paid nearly ₹8 crore in advance towards interest and maintained that the amount was refundable under the terms of the settlement.
NCLT and NCLAT Proceedings
The insolvency application was initially considered by the National Company Law Tribunal (NCLT), which dismissed the petition.
Aggrieved by the dismissal, Narayani Resources approached the National Company Law Appellate Tribunal (NCLAT).
Upon examining the material on record, the NCLAT found that the correspondence exchanged between the parties clearly demonstrated the existence of disputes relating to account reconciliation and implementation of the settlement agreement long before the statutory demand notice under the IBC was issued.
The appellate tribunal observed that the dispute was neither artificial nor an afterthought raised merely to avoid insolvency proceedings. Rather, the documentary evidence reflected a genuine disagreement regarding the settlement terms and outstanding liabilities.
The NCLAT noted:
“The dispute between the parties regarding reconciliation and settlement is very much apparent from reply to demand notice and the rejoinder. Thus, the above dispute clearly exists much before issuance of demand notice. Thus, the defence which was raised by the corporate debtor in its reply to demand notice was not feeble contention unsupported by evidence.”
Based on these findings, the NCLAT concluded that a genuine pre-existing dispute existed between the parties and therefore the application under Section 9 of the IBC was not maintainable.
Supreme Court’s Decision
The matter was subsequently carried before the Supreme Court.
After considering the findings recorded by the NCLAT, the Supreme Court declined to interfere with the appellate tribunal’s decision and dismissed the appeal.
The Court effectively reaffirmed one of the most important principles governing operational creditor proceedings under the IBC: where a real and substantial dispute exists prior to the issuance of the demand notice, an insolvency application cannot be admitted.
The Supreme Court found no reason to disturb the NCLAT’s conclusion that the dispute concerning reconciliation of accounts and implementation of the settlement agreement had existed well before the initiation of insolvency proceedings.
As a result, the insolvency plea seeking commencement of CIRP against Essar Power Gujarat was rejected.
Importance of the Judgment
This decision is significant because it reinforces the distinction between insolvency resolution proceedings and debt recovery mechanisms.
The Insolvency and Bankruptcy Code was enacted to address situations where a company is genuinely unable to meet its financial obligations and requires a structured insolvency resolution process. It was never intended to function as an alternative forum for resolving contractual disputes or enforcing disputed claims.
By refusing to entertain insolvency proceedings in the presence of a bona fide dispute, the Supreme Court has once again protected the integrity of the insolvency framework and prevented its misuse as a commercial recovery tool.
The ruling also sends a clear message that operational creditors cannot invoke the IBC merely as a pressure tactic to compel payment where legitimate disputes regarding liability already exist.
Pre-Existing Dispute: A Key Principle Under Section 9 IBC
Under Section 9 of the IBC, an operational creditor may initiate insolvency proceedings against a corporate debtor for unpaid operational debt. However, such proceedings can only be admitted if there is no genuine dispute regarding the debt.
The existence of a pre-existing dispute remains one of the strongest defences available to a corporate debtor.
Courts and tribunals have consistently held that where evidence demonstrates a real dispute concerning the amount claimed, contractual obligations, quality of goods or services, settlement terms, or account reconciliation, insolvency proceedings should not be used to resolve such disputes.
Instead, the parties must pursue appropriate remedies through civil proceedings, arbitration, or other contractual dispute resolution mechanisms.
Conclusion
The Supreme Court’s decision in Narayani Resources Pvt. Ltd. v. Essar Power Gujarat Ltd. serves as another important reaffirmation of the principles underlying the Insolvency and Bankruptcy Code, 2016.
By upholding the NCLAT’s order and rejecting the ₹85 crore insolvency plea, the Court has reiterated that insolvency proceedings cannot be converted into a debt recovery mechanism where a genuine pre-existing dispute exists between the parties.
The judgment strengthens the objective of the IBC by ensuring that the insolvency process remains focused on resolving genuine cases of financial distress rather than being used as a tool to enforce contested commercial claims. For businesses, creditors, and insolvency professionals alike, the ruling is a timely reminder that the IBC is a resolution framework, not a substitute for traditional debt recovery proceedings.
Keywords: Insolvency and Bankruptcy Code, IBC, Section 9 IBC, Operational Creditor, Corporate Debtor, Pre-Existing Dispute, Narayani Resources Pvt. Ltd., Essar Power Gujarat Ltd., NCLAT, Supreme Court Judgment, CIRP, Insolvency Law, Debt Recovery, Corporate Insolvency Resolution Process.