IBC Rulings Clarify CIRP Gateways: NCLAT Backs Procedural Fairness, NCLT Reinforces Contractual Sanctity

New Delhi/Mumbai – In a series of significant rulings that refine the contours of India's insolvency regime, the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) have delivered crucial judgments clarifying the procedural and substantive thresholds for initiating the Corporate Insolvency Resolution Process (CIRP). The NCLAT, in HDFC Bank v. Livein Aqua Solutions , championed procedural due process, holding that petitions cannot be dismissed on technical grounds without a fair opportunity to cure defects. Conversely, the NCLT Mumbai Bench, in the high-profile dispute between Dream Warrior Pictures and Reliance Entertainment , underscored the primacy of contractual terms, rejecting an insolvency plea where the alleged "operational debt" had not crystallized due to unmet contractual conditions.

These decisions, while distinct in their factual matrix, collectively serve as a vital guide for legal practitioners, delineating the boundaries between meritorious insolvency claims and commercial disputes ill-suited for the IBC framework. They reinforce that while the Code aims for expeditious resolution, it does not bypass the fundamental principles of natural justice or the sanctity of contracts.

NCLAT: Procedural Fairness Trumps Technical Dismissal

In a ruling that strengthens the procedural safeguards for financial creditors, the NCLAT's Principal Bench held that "neither the registry nor the NCLT can dismiss a section 7 application without giving an opportunity to the party to cure the defects in the supporting affidavit." This decision arose from an appeal by HDFC Bank, whose Section 7 application to initiate CIRP against a corporate debtor was dismissed by the adjudicating authority due to a defective affidavit.

The affidavit supporting the bank's petition was sworn on July 17, 2024, while the petition itself was signed and verified later, on July 26, 2024. Although the NCLT registry had initially granted the bank seven days to rectify certain defects—an opportunity it failed to utilize—the adjudicating authority subsequently dismissed the entire petition based on the respondent's objection to the defective affidavit.

The NCLAT bench, comprising Justice Rakesh Kumar Jain (Member-Judicial) and Naresh Salecha (Member-Technical), overturned this dismissal. The appellate tribunal firmly placed its reliance on the proviso to Section 7(5)(b) of the IBC and the Supreme Court's authoritative pronouncement in Dena Bank vs. C. Shivakumar Reddy & Anr., (2021) 10 SCC 330 .

The tribunal observed that the defect, while undisputed, was curable. The core of the NCLAT's reasoning was that the adjudicating authority has an independent obligation to provide an applicant with an opportunity to rectify defects before rejecting a petition. This duty is distinct from and supplementary to any similar opportunity provided by the registry.

The NCLAT highlighted that the legislative intent behind such provisions is to ensure that a meritorious case is not defeated on purely technical grounds. The appellant successfully argued that the mandate to issue a notice to cure defects, as established in Dena Bank , is an obligation of the adjudicating authority itself. Further citing Surendra Trading Company vs. Juggilal Kamlapat Jute Mills Company Ltd. & Ors., (2017) 16 SCC 143 , the NCLAT reiterated that the seven-day period prescribed for curing defects is directory, not mandatory, and can be extended.

By setting aside the dismissal order, the NCLAT has sent a clear message: procedural rules are handmaidens of justice, and a curable defect should not become a fatal flaw that prevents the adjudication of a substantial claim.

NCLT Mumbai: Contract is King in Operational Debt Claims

In stark contrast to the procedural focus of the NCLAT, the NCLT Mumbai Bench delved into the substantive definition of "operational debt" in a dispute involving major players in the film industry. The tribunal rejected a Section 9 application filed by Dream Warrior Pictures against Reliance Entertainment Studios, which stemmed from agreements for the Hindi remake of the Tamil blockbuster Kaithi .

Dream Warrior Pictures claimed an unpaid operational debt of over ₹5.93 crore. However, the case unravelled upon the tribunal's meticulous examination of the contractual agreements between the parties. Two clauses proved fatal to the applicant's claim.

1. The Invoice as a Condition Precedent:

The Remake Rights Agreement contained Clause 4.6, which stated: "It is clarified that the payment of the Consideration shall be plus applicable GST and subject to receipt of valid invoice from the Assignor..."

Reliance Entertainment successfully argued that since Dream Warrior Pictures had never issued a valid invoice for the outstanding amount, the obligation to pay had not crystallized. The NCLT, citing Supreme Court precedent in Venkataraman Krishnamurthy v. Lodha Crown Buildmart Pvt. Ltd. , affirmed that courts cannot rewrite contracts and must enforce them as agreed. The absence of the invoice, a clear condition precedent, meant that no operational debt was legally due and payable. The applicant’s explanation—that it avoided issuing the invoice to defer a significant GST liability of ₹72 lakhs—failed to persuade the tribunal.

The NCLT further analyzed the distinction between Form 3 and Form 4 for demand notices under the IBC. Relying on the NCLAT's ruling in Neeraj Jain v. Cloudwalker Streaming Technologies Pvt. Ltd. , it held that the choice is not discretionary. Where transactions involve invoices, Form 4 (which requires attaching the invoice) is appropriate. The applicant's use of Form 3 was seen as an attempt to circumvent a crucial contractual and evidentiary requirement.

2. The Effect of Contract Termination:

The second, and perhaps more definitive, blow to the application was the applicant's own action of terminating the agreement. In a legal notice dated October 28, 2024, Dream Warrior Pictures had invoked Clause 9 of the agreement, which stipulated that upon termination due to non-payment, all assigned remake rights would automatically revert to them.

The NCLT held that this reversion of rights extinguished Reliance Entertainment's corresponding obligation to pay the consideration for those rights. The tribunal reasoned that the applicant could not simultaneously reclaim the rights and demand payment for them. Any subsequent claim for unauthorized exploitation of the film post-termination would constitute a dispute over copyright infringement or a claim for damages, neither of which falls under the definition of "operational debt" under the IBC. This finding aligns with the principle that Section 9 is not a forum for adjudicating complex commercial or intellectual property disputes.

As the tribunal concluded, "As no debt and default existed, the application under Section 9 failed to meet the threshold requirement... and the CIRP could not be triggered."

Key Takeaways for Legal Professionals

These two rulings offer a nuanced and balanced perspective on the gateways to CIRP, providing critical guidance for insolvency practice:

• For Financial Creditors (Section 7): The NCLAT’s decision in HDFC Bank is a significant procedural victory. It reinforces that adjudicating authorities must actively ensure fairness and provide an opportunity to cure rectifiable defects, even if a preliminary chance was missed at the registry level. This prioritizes substance over form and prevents premature dismissal of potentially valid claims.
• For Operational Creditors (Section 9): The Dream Warrior case serves as a cautionary tale. It highlights the imperative of strict adherence to contractual prerequisites before invoking the IBC. Any condition precedent, such as the issuance of an invoice, must be fulfilled for a debt to be considered "due and payable."
• IBC is Not a Recovery Tool for All Disputes: The NCLT's refusal to entertain the claim post-termination reinforces a core tenet of the IBC: it is a mechanism for resolving insolvency, not a substitute for civil courts or arbitration for breach of contract, damages, or IPR infringement claims.
• The Primacy of Written Agreements: Both cases, in different ways, underscore the importance of meticulously drafted and executed agreements. The NCLT explicitly stated that it will not rewrite commercial terms, making contractual clarity paramount in determining the existence and nature of a debt.

Together, these judgments illustrate the evolving maturity of India's insolvency jurisprudence. While the NCLAT ensures the gates to CIRP remain accessible and fair, the NCLT acts as a vigilant gatekeeper, ensuring that only genuine, undisputed, and crystallized debts pass through, thereby preserving the integrity and purpose of the Insolvency and Bankruptcy Code.

Case Citation (NCLAT): HDFC Bank v. Livein Aqua Solutions Pvt. Ltd., Comp. App. (AT) (Ins) No. 1534 of 2024 Case Citation (NCLT): Dream Warrior Pictures Vs Reliance Entertainment Studios Pvt. Ltd., C.P.(IB) No.156/MB/2025