NCLAT: Warranty Claims Cannot Be Enforced Through Insolvency Proceedings

The National Company Law Appellate Tribunal (NCLAT) has upheld the dismissal of a Section 9 application filed under the Insolvency and Bankruptcy Code, 2016, holding that a genuine pre-existing dispute between the parties, arising out of warranty claims and not the sale of goods, barred initiation of corporate insolvency proceedings.

The Tribunal further observed that insolvency proceedings cannot be used as a coercive mechanism or as a counterblast in the face of an ongoing dispute.

A bench comprising Justice Yogesh Khanna (Member Judicial) and Ajai Das Mehrotra (Member Technical) dismissed the appeal and affirmed the order of the National Company Law Tribunal (NCLT), New Delhi dated 13.10.2023, which had rejected the Section 9 application filed by Vave India Energy Solutions Private Limited against Eastman Auto & Power Limited on the ground of pre-existing dispute.

The Appellate Tribunal held that the dispute had arisen prior to the issuance of the demand notice under Section 8 of the IBC and therefore disentitled the Operational Creditor from triggering the Corporate Insolvency Resolution Process.

The case arose out of a commercial arrangement between the parties for the supply of inverter batteries, pursuant to which the Corporate Debtor supplied batteries and raised invoices against purchase orders issued by the Operational Creditor.

The Operational Creditor later claimed that the batteries supplied were defective and relied on a credit note allegedly issued by the Corporate Debtor acknowledging liability of over Rs. 1 crore.

However, the Corporate Debtor contended that the credit note had been issued under economic coercion and that disputes regarding warranty obligations existed between the parties.

The record revealed that correspondence between the parties regarding defects in the batteries and warranty claims dated back to 2018. Notably, the Corporate Debtor had, by way of an email dated 08.12.2022, disputed its liability and alleged coercion in issuance of the credit note.

This communication preceded the issuance of the demand notice under Section 8 on 28.12.2022.

The NCLAT held that this sequence clearly established the existence of a pre-existing dispute prior to initiation of insolvency proceedings.

The Tribunal also examined the nature of the dispute and found that the claim of the Operational Creditor stemmed from alleged defects and warranty issues, rather than a straightforward unpaid operational debt arising from the sale of goods.

It was observed that such disputes, particularly those involving contractual obligations and warranty claims, are not amenable to resolution under the summary framework of Section 9 proceedings under the IBC.

Reinforcing settled legal principles laid down by the Supreme Court, including in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the Tribunal reiterated that the Adjudicating Authority is only required to determine whether a real dispute exists and is not expected to adjudicate on the merits of the dispute.

It held that once a plausible dispute requiring further investigation is demonstrated, the application under Section 9 must be rejected.

The Tribunal further noted that the defence raised by the Corporate Debtor was not illusory or spurious, but supported by contemporaneous material, including email communications and the nature of the underlying contractual relationship.

It emphasised that insolvency proceedings are not intended to serve as a substitute for debt recovery or as a pressure tactic against solvent companies.

In this regard, the Tribunal took note of the financial position of the Corporate Debtor, describing it as a solvent and established battery manufacturer.

It observed that the invocation of insolvency proceedings in such circumstances, particularly where disputes are evident, could amount to coercive action and misuse of the IBC framework.

The NCLAT also recorded that arbitration proceedings had been invoked by the Corporate Debtor to resolve disputes between the parties, further indicating that the matter was not suited for adjudication under insolvency law.

It held that where disputes pertain to contractual or warranty issues requiring detailed examination of evidence, the appropriate remedy lies in civil or arbitral proceedings rather than under the IBC.

On a comprehensive consideration of the facts and legal position, the Tribunal concluded that the NCLT had rightly rejected the Section 9 application; It held that the existence of a genuine pre-existing dispute, raised prior to the demand notice, was sufficient to non-suit the Operational Creditor.

Accordingly, the appeal was dismissed, with the Tribunal declining to interfere with the findings of the Adjudicating Authority.

Case Title: Vave India Energy Solutions Private Limited v. Eastman Auto & Power Limited

Bench: Justice Yogesh Khanna (Member Judicial) and Ajai Das Mehrotra (Member Technical)

Date of Judgment: 17.03.2026