New Delhi, April 24 -- Law firms are closely watching a potentially precedent-setting case before the bankruptcy courts that could have far-reaching implications for firms dealing with entities facing international sanctions. At the heart of the dispute lies a key question: can firms 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. The issue 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 over Rs.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 didn't dispute the transactions, but withheld payment after CJ Shah was placed on the US Office of Foreign Assets Control (OFAC) sanctions list on October 9, 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, firms, organisations, terrorists, regimes, and even nations. 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. Queries emailed to CJ Shah & Co. and Flint Group India remained unanswered. 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. He said the ruling, if upheld, could push operational creditors, especially in sectors like chemicals, energy and metals, to use 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. 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 local 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....