Can firms withhold payments to sanctioned suppliers without facing insolvency?
April 23, 2026
The issue has surfaced after the NCLT Ahmedabad, in a 26 March order, held that foreign sanctions cannot be used as a defence to avoid payment of dues to operational creditors such as suppliers and vendors.
At the heart of the dispute lies a key question: can companies legitimately withhold payments to a sanctioned supplier, or can the supplier initiate insolvency proceedings over non-payment? Whichever way this question is ultimately settled is likely to reshape bankruptcy disputes in India.
The issue has surfaced after the National Company Law Tribunal (NCLT) Ahmedabad, in a 26 March order, held that foreign sanctions cannot be used as a defence to avoid payment of dues to operational creditors such as suppliers and vendors.
The case involves an insolvency plea by Mumbai-based petrochemical supplier CJ Shah & Co. against Flint Group India Pvt. Ltd, a subsidiary of global packaging firm Flint Group, over unpaid dues of more than ₹1 crore for supplies made till August 2025. Payments allegedly due between October and November 2025 were not made despite repeated follow-ups and a demand notice.
Flint Group did not dispute the transactions, but withheld payment after CJ Shah was placed on the US Office of Foreign Assets Control (OFAC) sanctions list on 9 October 2025, citing compliance risks. The OFAC, under the US Treasury Department, enforces economic and trade sanctions based on American foreign policy and national security goals against individuals, companies, organisations, terrorists, regimes, and even entire countries.
The dispute has since moved to the National Company Law Appellate Tribunal (NCLAT), which on April 6 granted interim relief to Flint Group India, keeping the NCLT order in abeyance and clarifying that it should not be treated as a precedent until the appeal is finally decided.
With the case now pending before the appellate tribunal, lawyers say that if the NCLT ruling is upheld, it could create serious challenges for companies, forcing them to choose between insolvency proceedings in India and exposure to penalties under foreign sanctions regimes.
“It can be said that the NCLT order, if left uncorrected, may create a significant compliance paradox. On one hand, Indian subsidiaries of US or global entities are legally obligated to comply with foreign sanctions regimes, failing which they may be exposed to severe financial penalties, secondary sanctions exposure, and regulatory action against the parent entity,” said Yogendra Aldak, executive partner at Lakshmikumaran & Sridharan.
IBC may become a pressure tool
According to Aldak, if upheld, the ruling could encourage operational creditors, especially in sectors like chemicals, metals, and energy, to use the Insolvency and Bankruptcy Code (IBC) as a pressure tool in cases where payments are withheld citing sanctions.
“We are already seeing a rise in cases where US sanctions are invoked as a bona fide defence," said Prateek Kumar, partner at Khaitan & Co. At the same time, suppliers are using IBC as a pressure tactic in recovery proceedings, he said.
The present case comes at a time when the number of Indian businesses on the US sanctions list is on the rise. In October 2025, the US added several Indian companies, including CJ Shah, to its sanctions list as part of action targeting Iran-linked trade networks. Being placed on the OFAC Specially Designated Nationals list can lead to asset freezes, restrictions on dealings with US entities, and indirect exclusion from global financial systems.
At the same time, India has maintained that it does not recognise unilateral sanctions. In July 2025, the ministry of external affairs stated that India does not subscribe to any unilateral sanction measures, reinforcing that only UN-backed sanctions have legal validity domestically.
The NCLT relied on India's position on unilateral sanctions while rejecting Flint Group’s defence, and held that OFAC sanctions do not have automatic legal force in India unless recognised under domestic law. The tribunal noted that the transaction was between two Indian entities, conducted in Indian rupees, and governed by Indian law, with no statutory bar on payment. It held that a mere fear of foreign consequences does not amount to legal impossibility and cannot override contractual obligations.
Kumar of Khaitan said the NCLT ruling puts affected companies in a difficult position. It does not treat sanctions as a valid defence in insolvency cases, while also discouraging financially sound companies from depositing disputed amounts in court due to the risk that the money may be released to the sanctioned counterparty.
“Companies should document the issue contractually, seek regulatory guidance, explore alternative payment structures, and engage with counterparties instead of allowing it to turn into an insolvency dispute,” said Mukesh Chand, senior counsel at Economic Laws Practice.
“Resolution professionals and creditors will seek clarity on how sanctioned entities should be treated under the IBC. Unless the IBBI (Insolvency and Bankruptcy Board of India) or government provides guidance, the framework may struggle to reconcile Indian law with international restrictions,” said Hardeep Sachdeva, senior partner at AZB & Partners.
“Stakeholders are currently in a grey area,” said Aldak of Lakshmikumaran & Sridharan. He added that there is a need for clarity on whether sanctions-related payment restrictions can qualify as a valid dispute under the IBC, along with guidance on handling cross-border compliance conflicts, better coordination among regulators, and possible safe harbour protections for genuine compliance cases.
Krishna Yadav
Krishna Yadav is a Senior Correspondent at Mint, based in New Delhi, and part of the corporate bureau. He joined the newsroom as a trainee in 2023 and quickly grew into his current role. He writes on legal and regulatory developments in corporate India, with a focus on insolvency, taxation, company law, and policy. His reporting includes tracking and breaking key legal stories from the Supreme Court, Delhi High Court, NCLT, and NCLAT.With a background in law, Krishna is known for simplifying complex legal developments into clear, accessible stories for readers. His work focuses on trends in corporate law and policy that affect businesses. This ranges from explaining tax disputes—like whether coconut hair oil is edible—to writing on why celebrities are seeking personal rights protection. He closely tracks India’s insolvency system, covering issues such as creditor losses, gaps in the process, and challenges in how the framework works in practice.Krishna also tracks developments within law firms—covering hiring trends, how firms help companies navigate global challenges, and how the legal industry is adapting to artificial intelligence. Beyond legal reporting, he has written long-form pieces, including on-ground coverage of the 2024 general elections, capturing the scale and logistics of polling across India.Outside work, he enjoys travelling, exploring new places, and reading about geopolitics and history.
The issue has surfaced after the National Company Law Tribunal (NCLT) Ahmedabad, in a 26 March order, held that foreign sanctions cannot be used as a defence to avoid payment of dues to operational creditors such as suppliers and vendors.
The case involves an insolvency plea by Mumbai-based petrochemical supplier CJ Shah & Co. against Flint Group India Pvt. Ltd, a subsidiary of global packaging firm Flint Group, over unpaid dues of more than ₹1 crore for supplies made till August 2025. Payments allegedly due between October and November 2025 were not made despite repeated follow-ups and a demand notice.
Flint Group did not dispute the transactions, but withheld payment after CJ Shah was placed on the US Office of Foreign Assets Control (OFAC) sanctions list on 9 October 2025, citing compliance risks. The OFAC, under the US Treasury Department, enforces economic and trade sanctions based on American foreign policy and national security goals against individuals, companies, organisations, terrorists, regimes, and even entire countries.
The dispute has since moved to the National Company Law Appellate Tribunal (NCLAT), which on April 6 granted interim relief to Flint Group India, keeping the NCLT order in abeyance and clarifying that it should not be treated as a precedent until the appeal is finally decided.
With the case now pending before the appellate tribunal, lawyers say that if the NCLT ruling is upheld, it could create serious challenges for companies, forcing them to choose between insolvency proceedings in India and exposure to penalties under foreign sanctions regimes.
“It can be said that the NCLT order, if left uncorrected, may create a significant compliance paradox. On one hand, Indian subsidiaries of US or global entities are legally obligated to comply with foreign sanctions regimes, failing which they may be exposed to severe financial penalties, secondary sanctions exposure, and regulatory action against the parent entity,” said Yogendra Aldak, executive partner at Lakshmikumaran & Sridharan.
IBC may become a pressure tool
According to Aldak, if upheld, the ruling could encourage operational creditors, especially in sectors like chemicals, metals, and energy, to use the Insolvency and Bankruptcy Code (IBC) as a pressure tool in cases where payments are withheld citing sanctions.
“We are already seeing a rise in cases where US sanctions are invoked as a bona fide defence," said Prateek Kumar, partner at Khaitan & Co. At the same time, suppliers are using IBC as a pressure tactic in recovery proceedings, he said.
The present case comes at a time when the number of Indian businesses on the US sanctions list is on the rise. In October 2025, the US added several Indian companies, including CJ Shah, to its sanctions list as part of action targeting Iran-linked trade networks. Being placed on the OFAC Specially Designated Nationals list can lead to asset freezes, restrictions on dealings with US entities, and indirect exclusion from global financial systems.
At the same time, India has maintained that it does not recognise unilateral sanctions. In July 2025, the ministry of external affairs stated that India does not subscribe to any unilateral sanction measures, reinforcing that only UN-backed sanctions have legal validity domestically.
The NCLT relied on India's position on unilateral sanctions while rejecting Flint Group’s defence, and held that OFAC sanctions do not have automatic legal force in India unless recognised under domestic law. The tribunal noted that the transaction was between two Indian entities, conducted in Indian rupees, and governed by Indian law, with no statutory bar on payment. It held that a mere fear of foreign consequences does not amount to legal impossibility and cannot override contractual obligations.
Kumar of Khaitan said the NCLT ruling puts affected companies in a difficult position. It does not treat sanctions as a valid defence in insolvency cases, while also discouraging financially sound companies from depositing disputed amounts in court due to the risk that the money may be released to the sanctioned counterparty.
“Companies should document the issue contractually, seek regulatory guidance, explore alternative payment structures, and engage with counterparties instead of allowing it to turn into an insolvency dispute,” said Mukesh Chand, senior counsel at Economic Laws Practice.
“Resolution professionals and creditors will seek clarity on how sanctioned entities should be treated under the IBC. Unless the IBBI (Insolvency and Bankruptcy Board of India) or government provides guidance, the framework may struggle to reconcile Indian law with international restrictions,” said Hardeep Sachdeva, senior partner at AZB & Partners.
“Stakeholders are currently in a grey area,” said Aldak of Lakshmikumaran & Sridharan. He added that there is a need for clarity on whether sanctions-related payment restrictions can qualify as a valid dispute under the IBC, along with guidance on handling cross-border compliance conflicts, better coordination among regulators, and possible safe harbour protections for genuine compliance cases.
Krishna Yadav
Krishna Yadav is a Senior Correspondent at Mint, based in New Delhi, and part of the corporate bureau. He joined the newsroom as a trainee in 2023 and quickly grew into his current role. He writes on legal and regulatory developments in corporate India, with a focus on insolvency, taxation, company law, and policy. His reporting includes tracking and breaking key legal stories from the Supreme Court, Delhi High Court, NCLT, and NCLAT.With a background in law, Krishna is known for simplifying complex legal developments into clear, accessible stories for readers. His work focuses on trends in corporate law and policy that affect businesses. This ranges from explaining tax disputes—like whether coconut hair oil is edible—to writing on why celebrities are seeking personal rights protection. He closely tracks India’s insolvency system, covering issues such as creditor losses, gaps in the process, and challenges in how the framework works in practice.Krishna also tracks developments within law firms—covering hiring trends, how firms help companies navigate global challenges, and how the legal industry is adapting to artificial intelligence. Beyond legal reporting, he has written long-form pieces, including on-ground coverage of the 2024 general elections, capturing the scale and logistics of polling across India.Outside work, he enjoys travelling, exploring new places, and reading about geopolitics and history.