Pre-Existing Dispute Defence Limited to Section 9, Not Section 7 IBC: Supreme Court

The Supreme Court has said that a corporate debtor can show that no financial debt is actually due, or that no default has occurred, in order to oppose a financial creditor’s plea to start insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code. However, it clarified that this cannot be used as an indirect way of raising a “pre-existing dispute”, which is a defence available only against operational creditors under Section 9 of the Code.

A Bench of Justices Sanjay Kumar and K Vinod Chandran also noted that the court does not usually re-examine facts when both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have reached the same conclusion. But this rule can be relaxed if those findings are clearly perverse or unreasonable.

In this case, Court allowed a civil appeal filed by Catalyst Trusteeship Ltd and set aside the orders of the NCLT Mumbai (February 3, 2023) and the NCLAT (April 16, 2025), which had dismissed its plea to initiate insolvency proceedings against Ecstasy Realty Pvt Ltd. The application was filed under Section 7 of the Code for recovery of dues, along with interest, amounting to over Rs 1,203 crore.

The respondent company had argued that it was in the process of filing a commercial suit along with an interim application.

The Supreme Court reiterated that while deciding a Section 7 application, the adjudicating authority only needs to check whether a financial debt exists and whether there has been a default. The idea of a “pre-existing dispute” does not apply in such cases, it said.

Court noted that the respondent had already filed a commercial suit before the Bombay High Court, seeking a declaration that the debenture trust deed had been modified through emails exchanged in March 2022. It also sought related reliefs. However, the high court refused to grant interim relief to stop the lenders from taking action or demanding payments under the agreement.

The Bench observed that this high court order, which had become final, was wrongly ignored by both the NCLT and the NCLAT.

It further pointed out that while the NCLAT noted that the company had received Rs 600 crore out of Rs 850 crore and repaid about Rs 508.48 crore, it failed to consider the passage of time and the increase in liability due to interest. This led to a significant gap between what the company claimed it owed and what was actually due.

The Supreme Court held that both tribunals erred in ignoring the binding terms of the debenture trust deed dated March 27, 2018. Instead, they effectively rewrote the terms based on assumptions and conjectures, which were not supported by the facts or the law.

Accordingly, Court restored the company petition to the NCLT Mumbai for further proceedings in accordance with law.

Case Title: Catalyst Trusteeship Ltd Vs Ecstasy Realty Pvt Ltd

Bench: Justices Sanjay Kumar and K Vinod Chandran 

Date of Judgment: February 24, 2026