Arbitration Clause No Bar to Insolvency: NCLAT Reaffirms the Primacy of Section 9 Proceedings Over Contractual Dispute Resolution
Posco International Corporation v. Mohana Cotton Ginning Pvt. Ltd., (2026) ibclaw.in
1011 NCLAT
In this recent decision, a Bench of the National Company Law Appellate Tribunal, Chennai,
comprising Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain, has
reaffirmed three foundational principles under the Insolvency and Bankruptcy Code, 2016:
i. that the existence of a private arbitration clause in a commercial contract cannot oust
the statutory remedy available to an operational creditor under Section 9;
ii. that the definition of ‘operational creditor’ ; must be construed broadly and
purposively; and
iii. that a dispute raised for the first time only in reply to a Section 8 demand notice does
not qualify as a ‘pre-existing dispute’.
Background
The dispute arose out of an international shipment contract executed in December 2016
between Posco International, a trading company, and Mohana Cotton Ginning, an Indian
supplier, for the sale of raw cotton to a Portuguese buyer. After disputes emerged over the
quality of a portion of the goods supplied, the parties negotiated a settlement under which the
Respondent agreed to pay USD 74,342, later formalised through a settlement agreement in
September 2017 with a fixed payment deadline and a default interest clause. When the
Respondent failed to pay despite repeated correspondence acknowledging the liability, the
Appellant issued a demand notice under Section 8 of the Code. The Respondent replied
within the statutory period, asserting a pre-existing dispute over an unrelated purchase
agreement and a counter-claim for damages. The NCLT, Amaravati Bench, dismissed the
Section 9 application, holding that an arbitration clause existed, that a pre-existing dispute
had been established, and that the Appellant did not qualify as an operational creditor. The
Appellant approached the NCLAT.
The Tribunal’s Reasoning
The NCLAT’s analysis proceeded on three major findings.
First, on the effect of the arbitration clause, the Tribunal held that an arbitration clause is a
private contractual remedy resting on the consensus of the parties, and its existence cannot
deprive a creditor of the independent statutory remedy conferred by the Code. Relying on the
Supreme Court’s ruling in Indus Biotech Pvt Ltd v. Kotak India Venture (Offshore) Fund, and
its own earlier decision in Hasan Shafiq v. CT Technologies, the Tribunal reasoned that once
debt and default are established, the bogey of arbitration cannot be used to delay or defeat
admission of a Section 9 petition.
Secondly, on the status of the Appellant as an operational creditor, the Tribunal found that the
NCLT had erred in holding that the Appellant supplied no goods or services to the
Respondent. Reading Sections 5(20) and 5(21) of the Code together, and applying the
purposive interpretation endorsed by the Supreme Court in Consolidated Construction
Consortium Ltd v. Hitro Energy Solutions, the Tribunal held that the transaction for supply of
cotton, and the debt arising from disputes over that supply, squarely fell within the ambit of
operational debt, entitling the Appellant to invoke Section 9.
Thirdly, and most significantly from a practical standpoint, the Tribunal revisited the ‘pre-
existing dispute’ test laid down in Mobilox Innovations, holding that a dispute is
disqualifying only where it is not a patently feeble argument or an unsupported assertion of
fact. Since the Respondent had never agitated the alleged dispute before any adjudicatory
forum prior to the demand notice, and had raised it only in its reply, the Tribunal, following
its own ruling in Raakesh B Kulwal v. Param Dairy Limited, held that such a belated
assertion cannot constitute a pre-existing dispute.
What Is a ‘Pre-Existing Dispute’ Under the IBC?
A pre-existing dispute is a genuine dispute between the operational creditor and corporate
debtor that existed before the Section 8 demand notice and may prevent admission of a
Section 9 application. Under Mobilox Innovations v. Kirusa Software, the Adjudicating
Authority only examines whether a plausible dispute exists, not its merits. A dispute that is
spurious, hypothetical, unsupported by evidence, or raised merely to defeat insolvency
proceedings is insufficient. The dispute must predate the demand notice; subsequent
correspondence or litigation cannot create one retrospectively. Similarly, an arbitration clause
alone does not constitute a pre-existing dispute or bar IBC proceedings. In Posco, these
principles of timing and genuineness were decisive.
Significance for Practice
The judgment reinforces that belated disputes or arbitration clauses cannot be used to defeat
Section 9 proceedings. It highlights the evidentiary value of debt acknowledgements and
settlement agreements, adopts a broad understanding of “operational creditor,” and confirms
that genuine disputes must pre-exist the Section 8 demand notice.
