Introduction
In a judgment that reinforces the rigorous, evidence-based
approach required in insolvency proceedings, the Supreme Court of India, in
M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan & Ors.
(Civil Appeal No. 12261 of 2024), delivered on December 10, 2025, has set aside
an order of the National Company Law Appellate Tribunal (NCLAT) and restored
the order of the National Company Law Tribunal (NCLT) admitting a petition
under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Court,
comprising Justices Sanjay Kumar and Alok Aradhe, meticulously analyzed the
concept of a "pre-existing dispute" and distinguished between a
genuine, substantive defence and a "moonshine" defence aimed solely
at derailing the Corporate Insolvency Resolution Process (CIRP).
This judgment serves as a critical reminder of the
adjudicatory discipline demanded by the IBC’s timeline-driven framework. It
underscores that while the law protects corporate debtors from being forced
into insolvency over a bona fide disputed debt, it does not permit the process
to be thwarted by spurious, hypothetical, or illusory claims raised as an
afterthought. The decision provides a masterclass in applying the legal
principles laid down in Mobilox Innovations and subsequent rulings, emphasizing
that the adjudicating authority must actively sift through the material to
"separate the grain from the chaff."
Factual Matrix and Procedural Journey
The appellant, M/s. Saraswati Wire and Cable Industries (the
Firm), is a registered partnership firm and an operational creditor. The
Corporate Debtor (CD), Dhanlaxmi Electricals Private Limited, is a licensed
engineering company that had placed purchase orders with the Firm for the
supply of pipes and cables. The parties maintained a running account.
The genesis of the dispute lies in the following sequence of
events:
1. Running Account
and Confirmation: On July 31, 2021, the Firm emailed its ledger account to
the CD seeking confirmation. On August 4, 2021, the CD’s Accounts Manager
replied, raising only three points of difference pertaining to two debit notes
and one voucher from November 2018. Crucially, the CD attached its own signed
ledger account for the period April 1, 2017, to April 1, 2021, which showed a closing
debit balance of ₹2,49,93,690.80 payable to the Firm. A subsequent ledger from
April 1, 2020, to March 30, 2022, reflected an opening balance of this same
amount, reduced by payments totalling ₹70 lakh made in mid-2020, resulting in a
debit balance of ₹1,79,93,690.80.
2. Demand Notice
and Reply: On August 25, 2021, the Firm issued a statutory demand notice
under Section 8 of the IBC for ₹1,79,93,691 along with interest. A reply was
sent on November 20, 2021, by the CD’s Technical Director. This reply, for the
first time, raised disputes regarding:
a. Non-supply against two specific invoices
(No. 203 & 205) totalling approximately ₹57 lakh.
b. Supply of sub-standard and short-supplied
cables, leading to a counterclaim of ₹67,96,800.
c. Financial losses and threat of blacklisting
from a client (MSEDCL).
3. Crucial
Overlooked Fact – A Pre-existing CIRP: Unbeknownst to the NCLAT during its
later appraisal, a separate CIRP against the same CD had already been initiated
on September 6, 2021, on an application by another operational creditor. The
Firm had consequently submitted its claim to the Interim Resolution
Professional (IRP) of that CIRP on November 9, 2021. The IRP, in a letter dated
November 19, 2021, vaguely referenced issues of sub-standard cables and short
supply (citing a 2018 email) but provided no details. The CD’s Technical
Director’s reply of November 20, 2021, was thus sent when the CD was under the
management of the IRP, and the director himself was suspended, rendering his
authority to reply questionable.
4. Withdrawal and
Fresh Application: The first CIRP was later settled, and a withdrawal
application under Section 12A was filed by its IRP. Upon becoming aware of this
development, the Firm filed its own Section 9 application before the NCLT on
February 10, 2023. The CD defaulted in filing its reply before the NCLT.
5. NCLT Admits the
Petition: The NCLT, Mumbai Bench-IV, admitted the petition on December 6,
2023. It relied heavily on the CD’s own ledger account confirming the debt and
noted the telling fact that the CD had paid an additional ₹61 lakh to the Firm
after the issuance of the Section 8 demand notice and the disputed replies,
which negated the assertion of a serious pre-existing dispute.
6. NCLAT Sets
Aside Admission: The NCLAT, on appeal by a suspended director of the CD,
reversed the NCLT’s order. It held that a pre-existing dispute existed,
referencing the 2018-19 correspondence. It also drew an adverse inference from
the Firm’s delay in filing the Section 9 application (from August 2021 to
February 2023), interpreting it as evidence of ongoing disputes.
7. Supreme Court’s
Intervention: The Supreme Court found the NCLAT’s reasoning flawed on
multiple counts, both factual and legal, leading to the present appeal.
Legal Principles Reiterated: The Test for a
"Pre-existing Dispute"
Before delving into its factual analysis, the Supreme Court
reaffirmed the settled legal position governing the admission of an operational
creditor’s application under Section 9 of the IBC. The cornerstone remains the
test laid down in Mobilox Innovations Private Limited v. Kirusa Software
Private Limited (2018) 1 SCC 353:
1. The adjudicating
authority must determine:
a. The existence of an "operational
debt";
b. That the documentary evidence furnished
shows the debt is due and payable and has not been paid; and
c. That no "dispute" existed prior to
the receipt of the demand notice or that no suit or arbitration proceedings are
pending in relation to such a dispute.
2. The Court in
Mobilox cautioned that the defence of a pre-existing dispute must be examined
to reject a "spurious defence which is mere bluster." The authority
does not need to be satisfied that the defence is likely to succeed, but it
must ascertain whether the dispute is "truly existing in fact and is not spurious,
hypothetical or illusory."
The Court traced this principle back to the pre-IBC era of
winding-up petitions under the Companies Act, 1956. In Amalgamated Commercial
Traders (P.) Ltd. v. A.C.K. Krishnaswami and Madhusudan Gordhandas & Co. v.
Madhu Woollen Industries Pvt. Ltd., it was held that a winding-up petition is
not a legitimate means to enforce a debt that is bona fide disputed. The
defence, however, must be "substantial and not mere moonshine."
The Court then connected this lineage to the IBC regime,
citing the three-judge bench decision in Inclus Biotech Private Limited v.
Kotak India Venture Fund and Tata Consultancy Services Limited v. SK Wheels
Private Limited. These judgments emphasize that the adjudicating authority has
a duty to examine the material placed by both the creditor and the debtor to
determine if a default has occurred. The process cannot be defeated by a
corporate debtor raising a "moonshine defence only to delay the
process."
The synthesized legal standard, therefore, is: The
adjudicating authority must actively examine the evidence to determine if the
alleged dispute is bona fide, substantial, and pre-existing, or merely a
moonshine defence raised to obstruct the CIRP.
Application of Law to Facts: Deconstructing the
"Moonshine" Defence
The Supreme Court applied this stringent standard to the
facts and found the CD’s defence utterly lacking in substance. Its analysis
provides a blueprint for identifying a spurious dispute.
1. The Overwhelming Weight of the CD’s Own Admission:
The most damning evidence against the CD was its own ledger
account, signed and communicated on August 4, 2021. This document was an
unambiguous admission of a debt of ₹2.49 crore, later acknowledged as ₹1.79
crore after accounting for payments. The Court held that this contemporaneous
commercial record, prepared in the ordinary course of business, carried far
greater evidentiary value than belated, unsupported allegations raised in a
reply to a demand notice. The NCLAT erred grievously in brushing this aside.
2. Conduct Inconsistent with a Genuine Dispute:
The Court applied the principle that actions speak louder
than words. The CD’s conduct was completely at odds with its claim of a
serious, pre-existing dispute:
a. Continued
Payments: The CD made substantial payments (₹70 lakh) in 2020 after the
alleged issues in 2018-19 arose.
b. Payments
Post-Demand Notice: Most significantly, the CD paid an additional ₹61 lakh
after receiving the Section 8 demand notice and after sending its disputed
reply in November 2021. The Court logically reasoned that a party genuinely
aggrieved by sub-standard goods, short supply, and non-supply would withhold
payment, not continue to pay crores of rupees. This conduct "clearly
negated a pre-existing dispute."
3. The Belated and Inflated Nature of the Counterclaims:
The Court scrutinized the specific allegations and found
them evolving, unsubstantiated, and implausible:
a. Non-supply
Invoices (203 & 205): The CD claimed no supplies were made against
these invoices from late 2019. The Firm produced the delivery challan, e-way
bill, tax invoice, and transport bill for the consignments. The Court found it
"hardly believable" that the Firm would have fabricated these
detailed transport and tax documents in 2019 in anticipation of litigation
years later. The CD’s new argument regarding truck weight was dismissed as a
belated, desperate clarification.
b. Short/Faulty
Supply: The alleged short supply morphed from approximately 20,000 meters
mentioned in a July 2019 email to a dramatic 80 kilometres claimed in the
November 2021 reply. The CD provided no explanation for this 400% inflation or
any material to substantiate the revised figure or the quantified counterclaim
of ₹67,96,800.
c. Sub-standard
Quality & Blacklisting Threat: The allegation of suffering huge losses
and facing blacklisting from MSEDCL was entirely unsupported by any documentary
evidence such as the client’s complaint, test reports, or correspondence
regarding the alleged faulty material.
4. The Invalidity of the Reply Itself:
The Court noted a critical jurisdictional flaw: the reply
disputing the debt was sent by the CD’s suspended Technical Director on
November 20, 2021. By this date, a CIRP against the CD was already underway
(since September 6, 2021), and the management of the CD had vested in the IRP.
The suspended director had no authority to represent the CD or acknowledge or
dispute debts on its behalf. This rendered the reply legally infirm.
5. Explaining the Delay in Filing:
The Court corrected the NCLAT’s erroneous inference drawn
from the Firm’s delay in filing its Section 9 application. The delay was not
due to ongoing negotiations or disputes but because a separate CIRP was already
pending against the CD. The Firm had rightfully submitted its claim in that
process. It was only upon learning of the application to withdraw that CIRP
that the Firm initiated its own proceeding. This delay was thus procedurally
justified and could not be held against the Firm.
Conclusion and Implications: A Victory for Procedural Rigor
Allowing the appeal, the Supreme Court set aside the NCLAT’s
judgment and restored the NCLT’s order admitting the Section 9 petition. The
Court held that the defence of a pre-existing dispute was "mere moonshine
and had no credible basis or foundation" and that the attempt to project
it was "mere bluster."
This judgment has significant implications for the
conduct of IBC proceedings:
1. Primacy of
Contemporary Documentary Evidence: The case elevates the status of
internally maintained ledger accounts and admission of debt by the corporate
debtor as powerful, if not decisive, evidence against a subsequently raised
dispute. Adjudicating authorities must give due weight to such documents.
2. Conduct as an
Indicator of Bona Fides: Continued payments by a debtor, especially after a
demand notice, will be heavily scrutinized and will severely undermine a later
claim of a serious, pre-existing dispute.
3. Duty of Active
Adjudication: The NCLT/NCLAT cannot take defences at face value. They have
a positive duty to "advert to the material," examine inconsistencies,
demand substantiation, and separate genuine disputes from spurious ones. The
standard is not a full trial on merits, but a reasoned evaluation of whether
the dispute is prima facie substantial.
4. No Shelter for
Moonshine Defences: The judgment firmly shuts the door on tactics aimed at
exploiting the "pre-existing dispute" threshold to cause unwarranted
delay. Defences must be specific, substantiated, and consistent. Vague,
evolving, and unsubstantiated allegations will be dismissed.
5. Awareness of
Overall Proceedings: The Supreme Court criticized the NCLAT for being
"kept in the dark" about the other CIRP. This highlights the need for
appellate tribunals to ensure a complete factual record is before them, as
contextual facts can completely alter the interpretation of a party’s conduct
(like the delay in filing).
In essence, Saraswati Wire and Cable Industries v. Mohammad
Moinuddin Khan reaffirms that the IBC is a serious mechanism for resolving insolvency,
not a battleground for tactical litigation. It empowers operational creditors
with genuine claims while protecting corporate debtors from frivolous triggers,
provided they can demonstrate a dispute that is real, not a mere shadow. The
judgment is a clarion call for adjudicating authorities to be vigilant
gatekeepers, ensuring the swift and efficient resolution envisioned by the Code
is not compromised by defences made of moonshine.
Case Cited: M/s. Saraswati Wire and Cable Industries
v. Mohammad Moinuddin Khan & Ors., Civil Appeal No. 12261 of 2024, Supreme
Court of India, Decided on December 10, 2025.
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