IBC Cannot Be Used As Recovery Mechanism To Resolve Contractual Disputes: NCLAT Reaffirms
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench at New Delhi, has reiterated that insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 cannot be invoked as a recovery mechanism for resolving disputed contractual claims. Dismissing an appeal filed by FTI Consulting India Pvt. Ltd., the appellate tribunal upheld the rejection of its Section 9 application seeking initiation of corporate insolvency resolution process (CIRP) against MGF Developments Ltd.
The Bench comprising Justice Ashok Bhushan, Chairperson, and Barun Mitra, Technical Member, held that Section 9 proceedings are meant for cases involving clear and undisputed operational debt, and not for adjudicating complex contractual disputes relating to performance of services or quantum of fees. It observed that the insolvency framework cannot be converted into a substitute for a civil recovery forum.
The dispute arose out of an engagement between FTI Consulting India Pvt. Ltd. and MGF Developments Ltd. for providing independent expert services in connection with an ICC arbitration seated in London, involving claims related to Emaar MGF Land Limited. The parties entered into an agreement dated February 26, 2020, under which the work was divided into four phases. The agreement identified Mr. Montek Mayal, Senior Managing Director of FTI, as the primary contact and expert witness for the arbitration.
It was an admitted position that Mr. Montek Mayal ceased to be in the employment of FTI with effect from January 14, 2022. Thereafter, MGF Developments continued to avail the services of Mr. Mayal through another entity, Osborne Partners, under a separate agreement. FTI, however, continued to raise invoices under the original engagement and claimed that substantial amounts remained unpaid despite part-payments made by MGF over time.
On July 15, 2024, FTI issued a demand notice under Section 8 of the IBC claiming an outstanding operational debt of USD 367,353.29. In response, MGF replied on July 25, 2024, disputing the claim in detail. It asserted that the agreement was fundamentally premised on the involvement of Mr. Montek Mayal and that his exit from FTI frustrated the contract. MGF further alleged that there was duplication of services, that no further services were rendered by FTI after Mr. Mayal’s departure, and that it had already made substantial payments exceeding the value of services actually received.
Despite the reply disputing liability, FTI proceeded to file a Section 9 application before the National Company Law Tribunal, New Delhi. The NCLT rejected the application, holding that the dispute was purely commercial and contractual in nature and that the insolvency process could not be used as a recovery tool. Aggrieved, FTI carried the matter in appeal before the NCLAT.
Before the appellate tribunal, FTI argued that there was no pre-existing dispute prior to the issuance of the demand notice and that the exit of Mr. Mayal did not affect its capacity to perform the contract. It contended that the services were rendered in accordance with the agreement and that the unpaid invoices constituted an operational debt.
The NCLAT, however, was not persuaded. It examined whether MGF’s reply to the demand notice constituted a valid “notice of dispute” under Section 8(2) of the IBC. Relying on the Supreme Court’s decision in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., the tribunal reiterated that at the Section 9 stage, the adjudicating authority is only required to see whether there exists a genuine dispute, and not to determine the merits of the defence. Quoting the settled principle, the tribunal observed that “so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”
Applying this test, the NCLAT found that MGF had raised detailed and plausible objections relating to performance of the contract after Mr. Mayal’s departure, alleged overlap of services with Osborne Partners, payments already made, and frustration of the agreement under Section 56 of the Indian Contract Act. It noted that these issues pre-dated the demand notice and could not be treated as an afterthought.
The tribunal further relied on the Supreme Court’s ruling in SS Engineers v. Hindustan Petroleum Corporation Ltd., which clarified that a Section 9 application can be entertained only where the operational debt is undisputed. If there is a genuine and substantial dispute on liability, the proper course is to dismiss the insolvency application.
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Concluding that the reply dated July 25, 2024 constituted a valid notice of dispute within the meaning of Section 8(2) of the IBC, the NCLAT held that the NCLT had rightly rejected the Section 9 petition. It reiterated that insolvency proceedings are not meant to resolve ordinary contractual disagreements or to recover disputed dues. Accordingly, finding no infirmity in the impugned order, the NCLAT dismissed the appeal and affirmed that the IBC cannot be used as a recovery mechanism to settle contractual disputes.
Appearance
For Appellant: Senior Advocate Nalin Kohli with Anshul Malik, Shank Sengupta, Ribhu Garag and Arnav Doshi
Cause Title: FTI Consulting India Pvt. Ltd. Versus MGF Developments Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 1971 of 2025
Coram: Justice Ashok Bhushan, Chairperson, Barun Mitra, Technical Member
