Section 9 IBC: Demand Notice and Pre-existing Dispute Cases

Applications by operational creditors fail far more often than those by financial creditors, and almost always on one of two points: the demand notice, or a dispute that existed before it. A question on section 9 is therefore usually a question on Mobilox. The answer must identify when the dispute arose, whether it is plausible, and whether the default left after payments still crosses one crore rupees.

1. The Law in Brief

• Demand notice, section 8(1). On default, the operational creditor delivers a demand notice in Form 3, or a copy of the invoice with a notice in Form 4, to the corporate debtor.
• Ten days, section 8(2). Within ten days of receipt, the debtor must bring to the creditor's notice the existence of a dispute, or a pending suit or arbitration filed before receipt, or pay the unpaid debt.
• Application, section 9. If neither payment nor a notice of dispute is received within ten days, the creditor may apply; after 2026, it is first to submit the financial information to an information utility under section 215(3)
• Admission, section 9(5). The NCLT admits if the application is complete, the debt is unpaid, notice was delivered, no notice of dispute was received and there is no record of dispute in an information utility, and no disciplinary proceeding is pending against the proposed IRP; defects get seven days to rectify.

Figure 1: Deciding a section 9 application

2. When Do Prior Complaints Amount to a Pre-existing Dispute?

• Issue. Whether the emails show a pre-existing dispute that bars admission.
• Law. In Mobilox Innovations v Kirusa Software (2017), the Supreme Court held that the NCLT must reject a section 9 application if the debtor shows a dispute that existed before receipt of the demand notice and that is a plausible contention requiring further investigation, not a patently feeble legal argument or an assertion of fact unsupported by evidence. The NCLT does not decide whether the defence will succeed.
• Application. The emails were sent before the demand notice, relate to the quality of the very software invoiced, and expressly withheld payment on that ground. Whether the complaints were exaggerated is a matter for trial, not for the NCLT.
• Conclusion. There is a plausible pre-existing dispute, and the application must be rejected. AA Ltd's remedy is a suit or arbitration for the price.

3. Can a Dispute Raised First in Reply Defeat Section 9?

• Issue. Whether a dispute raised for the first time in reply to the notice bars admission, and whether a notice by an advocate without a bank certificate is valid.
• Law. Section 8(2)(a) and Mobilox (2017) require a dispute existing before receipt of the notice; a defence that is spurious or an afterthought may be rejected. In Macquarie Bank v Shilpi Cable (2017), the Supreme Court held that a demand notice may be issued by an authorised agent, including a lawyer, and that the bank certificate under section 9(3)(c) is not a mandatory condition.
• Application. DD Ltd accepted and used the steel and sought time to pay, which is inconsistent with a quality dispute. The allegation surfaced only after the notice. The notice by the advocate is valid, and the missing bank certificate is no ground for rejection.
• Conclusion. There is no pre-existing dispute, and the application, if complete, must be admitted.

Figure 2: What counts as a pre-existing dispute

4. Is a Challenged Arbitral Award a Pre-existing Dispute?

• Issue. Whether a pending challenge to an arbitral award under section 34 is a pre-existing dispute.
• Law. In K. Kishan v Vijay Nirman Company (2018), the Supreme Court held that where an award is under challenge under section 34, the operational debt remains disputed, and the Code cannot be used to bypass the arbitration process. It added that the Code is not a substitute for debt enforcement.
• Application. FF Ltd's section 34 petition was pending before the demand notice and challenges the very debt on which the notice rests.
• Conclusion. The application must be rejected. EE Ltd should pursue the section 34 proceedings and, if the award is upheld, enforce it, or apply under section 9 if the debt then remains unpaid.

5. Does Part Payment below One Crore Defeat Section 9?

• Issue. Whether the threshold in section 4 is tested on the default at the date of the notice or on the unpaid amount when the application is filed.
• Law. Section 9(1) permits an application only if payment of the unpaid operational debt is not received after ten days, and section 9(5) refers to the unpaid debt. The minimum default of one crore rupees under section 4 must therefore exist when the application is made.
• Application. After the payment, the unpaid operational debt is ₹90 lakh, below the threshold.
• Conclusion. The application is not maintainable. HH Ltd may sue for the balance. If HH Ltd presses a groundless application, the NCLT may also consider costs, and after 2026 a penalty for frivolous proceedings under section 64A.

6. Frequently Asked Questions

Must the dispute be pending in a court or arbitration?

No. Mobilox (2017) held that the word and in section 8(2)(a) is to be read as or, so correspondence showing a real dispute is enough even if no proceedings have begun.

Can the debtor raise a dispute after the ten-day period?

Tribunals have generally allowed a debtor to show from the record a dispute that existed before the notice even where its reply was late, but a dispute that first arises after the notice will not defeat the application.

Does the NCLT decide whether the goods were defective?

No. It only asks whether the dispute is plausible and pre-existing. The merits are for a civil court or arbitral tribunal.

7. Related Topics

• Topic 13: Sections 8 and 9. Demand notice and pre-existing dispute.
• Topic 97: Financial vs Operational Debt under IBC. Financial or operational debt.
• Topic 101: Section 10 IBC. The corporate applicant.