Illusory or Unsupported Disputes Cannot Defeat Initiation of CIRP Under Section 9 of the IBC

Case Background

The appellant, a partnership firm engaged in the supply of pipes and cables, had supplied materials to the corporate debtor for execution of its contractual projects. The corporate debtor maintained a running account reflecting the transactions between the parties and periodically made payments against invoices raised by the firm. The ledger accounts maintained by the corporate debtor indicated a substantial outstanding balance payable to the appellant.

On 31 July 2021, the appellant shared its ledger account with the corporate debtor seeking confirmation. In response, the corporate debtor acknowledged only minor differences relating to two debit notes and one voucher pertaining to earlier transactions but otherwise forwarded its own ledger account showing a closing debit balance exceeding the threshold amount due and payable to the appellant.

Subsequently, the appellant issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 claiming the principal operational debt along with interest. In reply, the suspended Technical Director of the corporate debtor alleged non-supply against certain invoices, short and faulty supply of cables, and consequential financial losses. The appellant disputed these allegations and relied on documentary evidence such as delivery challans, e-way bills, transport records and tax invoices to demonstrate actual supply of goods.

What The Lower Authorities Held

The National Company Law Tribunal admitted the appellant’s application under Section 9 of the IBC and initiated CIRP against the corporate debtor. The NCLT relied on the corporate debtor’s own ledger account acknowledging the outstanding liability and also noted that substantial payments were made even after issuance of the demand notice, which negated the plea of a pre-existing dispute.

On appeal, however, the National Company Law Appellate Tribunal set aside the admission order. The NCLAT held that correspondence exchanged between the parties in earlier years, coupled with allegations relating to short supply and defective material, constituted a pre-existing dispute sufficient to defeat the Section 9 application. It also treated the delay in filing the insolvency application after issuance of the demand notice as indicative of continuing disputes between the parties.

The Court’s Reasoning

Existence of Operational Debt and Acknowledgment in Ledger Accounts

The Court first examined the ledger accounts maintained by the corporate debtor itself, which reflected a clear debit balance payable to the appellant. These accounts showed continuous business transactions, ongoing supplies, and periodic payments. Even after adjustment of certain amounts, the outstanding operational debt remained above the statutory threshold, thereby establishing the existence of a due and payable operational debt.

The Court observed that the corporate debtor had acknowledged only minor discrepancies relating to specific debit notes and vouchers and had otherwise certified the ledger balance. Such acknowledgment constituted strong evidence of liability and significantly undermined the plea that the debt itself was disputed.

Continued Payments After Demand Notice

A decisive factor considered by the Court was that, even after issuance of the demand notice under Section 8 of the IBC, the corporate debtor continued to make payments aggregating to a substantial sum. The Court reasoned that if a genuine pre-existing dispute truly existed, the corporate debtor would ordinarily have withheld payments and pursued its counter-claims rather than continue to pay substantial amounts towards the alleged outstanding dues.

The continuation of payments after the demand notice was therefore treated as conduct inconsistent with the assertion of a bona fide dispute and indicative of acknowledgment of the debt.

Authority of Suspended Director to Raise Dispute

The Court also noted that at the time the reply to the demand notice was issued, a separate CIRP had already been initiated against the corporate debtor and an Interim Resolution Professional had taken over its management. Consequently, the Technical Director stood suspended and had no authority to issue a reply on behalf of the corporate debtor raising disputes regarding the operational debt.

The reliance placed by the appellate tribunal on such a reply was therefore misplaced, as the communication lacked legal authority and could not be treated as a valid assertion of dispute on behalf of the corporate debtor.

Evaluation of Allegations Regarding Non-Supply and Faulty Goods

The Court closely scrutinised the allegations that no supplies were made against specific invoices and that the materials supplied were sub-standard or short in quantity. It found that the appellant had placed on record delivery challans, e-way bills, transport documents and tax invoices showing actual dispatch and delivery of goods. The belated attempt to question the weight capacity of the transport vehicle was also found unconvincing in light of the documentary evidence indicating full trailer loads.

Similarly, allegations of short supply and faulty cables were unsupported by clear particulars or consistent figures. Earlier communications mentioned only approximate quantities, whereas later replies inflated the alleged defective supply without explanation. No material was produced to substantiate the claim of losses or threat of blacklisting by clients. These inconsistencies demonstrated that the alleged dispute lacked credible evidentiary foundation.

Delay in Filing Section 9 Application Not Indicative of Dispute

The Court rejected the reasoning that delay in filing the insolvency application after issuance of the demand notice indicated the persistence of disputes. It noted that a separate CIRP had already been initiated against the corporate debtor by another operational creditor, during which the appellant had attempted to lodge its claim with the Interim Resolution Professional. Only upon learning of withdrawal of that earlier CIRP did the appellant file its own Section 9 application. The delay was therefore procedural and not indicative of a continuing dispute.

Application of the “Moonshine Defence” Principle

Applying the settled jurisprudence, the Court reiterated that the adjudicating authority must separate genuine disputes from spurious or illusory defences. The existence of some correspondence or minor differences in accounts cannot, by itself, establish a bona fide dispute if supplies continued, payments were made, and the debt stood acknowledged in the debtor’s own records.

The Court concluded that the corporate debtor’s defence of pre-existing disputes was merely a moonshine attempt lacking credible basis and that no real dispute existed as on the date of issuance of the demand notice that could justify withholding payment of the operational debt.

Statutory Interpretation

The case primarily involved interpretation of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016. Section 8 requires an operational creditor to issue a demand notice demanding payment of unpaid operational debt. Section 9 enables the operational creditor to initiate CIRP if the corporate debtor fails to make payment within the stipulated period, unless there exists a genuine dispute regarding the debt.

The Court reaffirmed that the expression “existence of dispute” refers to a real dispute that is bona fide and supported by evidence, and not a hypothetical or illusory contention raised merely to avoid insolvency proceedings. The adjudicating authority is required to examine whether the operational debt is due and payable, whether default has occurred, and whether any genuine dispute existed prior to receipt of the demand notice.

The Court also drew upon earlier jurisprudence holding that winding-up or insolvency proceedings cannot be defeated by a defence that is merely moonshine and lacks substantial basis. This interpretation preserves the objective of the IBC to ensure timely resolution of insolvency and prevent corporate debtors from frustrating the process by raising frivolous disputes.

Why This Judgment Matters

This judgment significantly clarifies the threshold for determining the existence of a “pre-existing dispute” in applications filed by operational creditors under the IBC. By emphasising that disputes must be real, substantial and supported by evidence, the decision discourages corporate debtors from raising vague or belated allegations solely to defeat insolvency proceedings.

The ruling also underscores the evidentiary value of ledger acknowledgments and continued payments in assessing whether a debt is genuinely disputed. It reinforces that adjudicating authorities must carefully evaluate the material placed on record and not be swayed by unsupported claims or unauthorised communications issued during insolvency proceedings.

Further, the decision promotes certainty in commercial transactions by ensuring that admitted liabilities reflected in financial records cannot be easily avoided through afterthought disputes. It therefore strengthens the effectiveness of the IBC framework by preventing misuse of the “pre-existing dispute” defence as a delaying tactic.

Final Outcome

The Supreme Court allowed the appeal, set aside the judgment of the National Company Law Appellate Tribunal, and restored the order of admission passed by the National Company Law Tribunal initiating CIRP against the corporate debtor. The Court directed that further proceedings in the company petition shall continue in accordance with law from the date of communication of the judgment. Parties were directed to bear their respective costs.

Case Details

• Case Title: M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan and Others
• Citation: 2025 INSC 1410
• Court: Supreme Court of India
• Bench: Sanjay Kumar, J.; Alok Aradhe, J.
• Date of Judgment: December 10, 2025