The Supreme Court rules that a corporate debtor’s claim of a pre-existing dispute must be genuine and supported by evidence. Spurious or illusory defenses cannot block insolvency proceedings under Section 9 of the IBC.
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NEW DELHI: In a ruling on December 10, 2025, the Supreme Court of India set aside the judgment of the National Company Law Appellate Tribunal (NCLAT) and restored the National Company Law Tribunal (NCLT) order admitting the insolvency petition against Dhanlaxmi Electricals Private Limited.
The Court found that the corporate debtor’s (CD) claim of a pre-existing dispute was “mere moonshine,” unsupported by facts, and contradicted by its own ledger entries and subsequent payments.
This judgment has major implications for operational creditors seeking to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code (IBC).
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Case Background
The dispute centered around an operational debt owed by Dhanlaxmi Electricals to M/s. Saraswati Wire and Cable Industries, a registered partnership firm supplying pipes and cables.
Key Facts:
- The Corporate Debtor maintained a running account with the firm.
- On August 4, 2021, the CD emailed its own ledger, confirming a debit balance of ₹1,79,93,690.80 due to the operational creditor.
- After receiving a Section 8 demand notice, the CD still paid ₹61 lakh, signifying no active dispute.
- A prior CIRP against the CD (initiated in Sept 2021) prevented the firm from filing its own petition earlier.
These elements played a critical role in the Supreme Court’s analysis.
NCLT’s & NCLAT’s Order
NCLT (Mumbai) Order – December 6, 2023
The NCLT admitted the Section 9 application based on:
- The Corporate Debtor’s clear acknowledgment of debt in its ledger.
- Payments made even after the demand notice, negating any dispute.
NCLAT Judgment – March 13, 2024
The NCLAT reversed the NCLT order, claiming:
- A pre-existing dispute existed based on emails from 2018–2019.
- A delay in filing the Section 9 application indicated ongoing disputes.
However, the NCLAT was seemingly unaware that a separate CIRP was already underway, barring the firm from filing its own petition earlier.
Supreme Court Observations
When the matter reached the Supreme Court, the Bench carefully examined each claim raised by the debtor. The Court found that the corporate debtor’s allegations, relating to non-supply, short supply, and quality defects, were raised only after the demand notice and were not backed by documentation.
The Court highlighted specific weaknesses:
- Invoice Nos. 203 and 205: Supply was proved through delivery challans, transporter bills, and e-way bills.
- Short-supply claims: Earlier communication reported a shortfall of 20,000 meters, yet the later allegation inflated this to 80 kilometres without explanation.
- Quality complaints: No customer complaints, loss records, or blacklisting threats were furnished.
The Court remarked that this shifting narrative showed a “lack of bona fides.”
Most critically, the reply to the demand notice was issued by a suspended Technical Director, who had no authority to act because the company was already undergoing a separate CIRP. This, the Court noted, alone weakened the debtor’s entire defence.
The Supreme Court once again emphasized the jurisprudence laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018), stating:
“A pre-existing dispute must be real, substantial, and backed by evidence, spurious or illusory defences cannot defeat a valid insolvency petition.”
Applying this, the Bench held that the debtor’s objections were neither timely nor credible, and were “mere attempts to wriggle out of admitted liability.”
The Supreme Court:
- Set aside the NCLAT judgment dated 13 March 2024,
- Restored the NCLT admission order of 6 December 2023, and
- Directed that CIRP will continue from the date the judgment is communicated.
Sections 8 & 9 of IBC
Section 8: Insolvency resolution by operational creditor
Section 8 lays down the first step an operational creditor must take before filing an insolvency case (CIRP) against a corporate debtor. It deals only with the demand notice and the debtor’s response.
When an operational creditor faces a default in payment, Section 8 requires them to first send a demand notice or an invoice demanding payment to the corporate debtor. This notice simply gives the debtor a final chance to clear dues before insolvency proceedings begin.
Once the debtor receives the notice, they have 10 days to respond. Their reply can mention:
- An existing dispute (or any pending suit/arbitration filed before the notice), or
- Proof of payment, such as bank transfer records or evidence that a cheque has been encashed.
If the debtor does not raise a genuine prior dispute or show that payment has been made, the operational creditor becomes eligible to file a Section 9 application to initiate CIRP.
In simple terms, Section 8 is the mandatory warning step before insolvency action.
Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.
Section 9 lays down the procedure for an operational creditor to formally start the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, but only after completing Section 8 steps.
After sending a Section 8 demand notice and waiting 10 days, an operational creditor can file an insolvency application only if the corporate debtor has neither paid nor raised a genuine dispute.
The application must be filed in the prescribed format and with the required court fee.
Along with the application, the creditor must submit:
- A copy of the demand notice/invoice
- An affidavit stating no dispute notice was received
- A bank certificate or Information Utility record (if available) showing non-payment
- Any other proof that the debt is still unpaid
The creditor may also name a proposed Interim Resolution Professional (IRP).
Once filed, the NCLT has 14 days to either admit or reject the application.
NCLT will admit the application if:
- It is complete
- Debt is unpaid
- Notice was delivered
- No dispute exists
- The proposed IRP has no disciplinary issues
NCLT will reject the application if:
- The application is incomplete
- Debt is already paid
- Notice was not delivered
- A dispute exists
- The IRP has disciplinary proceedings pending
If the application is incomplete, NCLT must give the creditor 7 days to fix defects.
Once admitted, CIRP officially begins from the date of admission.
Case Title:
M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan and others
Civil Appeal No. 12261 of 2024
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