IBC | Pre-Existing Dispute Must Be Real, Not Moonshine: Supreme Court Restores Insolvency Proceedings, Says Admission Cannot Be Rejected Based on Spurious Defence

“Minor Issues Never Stopped Payments – Corporate Debtor’s Own Ledger Shows Admission of Debt”,  On 10 December 2025, the Supreme Court delivered a crucial verdict in M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan & Others, reinstating an insolvency petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), that had been earlier dismissed by the National Company Law Appellate Tribunal (NCLAT). The Supreme Court bench comprising Justice Sanjay Kumar and Justice Alok Aradhe held that the NCLAT had erroneously treated a “moonshine defence” as a genuine dispute, and thereby wrongly set aside the order of admission passed by the NCLT.

The Court emphasised that the defence of “pre-existing dispute” raised by the Corporate Debtor (CD) was devoid of merit, and the consistent payments along with an express acknowledgment of outstanding dues rendered the CD’s claims wholly unconvincing. The judgment not only clarified the contours of a "pre-existing dispute" under the IBC but also underscored the duty of the Adjudicating Authority to reject fictitious and speculative defences.

Dispute and Timeline of Events

The case originated from a Section 9 application filed by M/s. Saraswati Wire and Cable Industries, an operational creditor, against Dhanlaxmi Electricals Private Limited, the corporate debtor, seeking initiation of the Corporate Insolvency Resolution Process (CIRP). The application was admitted by the NCLT, Mumbai Bench-IV, on 6 December 2023. The CD’s suspended director, Mohammad Moinuddin Khan, challenged this order before the NCLAT, which allowed the appeal on 13 March 2024, citing “pre-existing disputes.”

The Supreme Court was called upon to examine whether there truly existed a bonafide dispute between the parties or whether the defence raised by the CD was merely a tactic to evade insolvency.

The appellant had issued a demand notice on 25 August 2021 for ₹1.79 crores in outstanding principal along with interest. The CD, through a suspended director, replied by alleging short supply and defective cables based on communications dating back to 2018 and 2019. The NCLAT accepted this as a pre-existing dispute. However, the appellant’s case rested on later admissions by the CD, including confirmation of the ledger balance and continued payments even after the demand notice.

Was There a Genuine Pre-Existing Dispute Under Section 9 of IBC?

The core legal issue before the Court was whether the allegations of short supply and defective goods, dating back to 2018-19, amounted to a bonafide pre-existing dispute capable of defeating a Section 9 application. The appellant contended that:

“The Corporate Debtor itself, in its email dated 04.08.2021, admitted the outstanding balance of ₹2.49 crores, and payments of ₹61 lakh were made even after the demand notice, leaving no scope for a real dispute.”

On the other hand, the respondent relied on prior correspondence and a reply to the demand notice from the suspended director, alleging defective materials and unfulfilled invoices.

Defence Was "Mere Bluster, Not a Real Dispute"

Rejecting the NCLAT’s findings, the Supreme Court meticulously dissected the factual matrix and held that:

“The defence of pre-existing disputes sought to be put forth by the Corporate Debtor was mere moonshine and had no credible basis or foundation.” [Para 19]

The Court reiterated the legal test laid down in Mobilox Innovations v. Kirusa Software [(2018) 1 SCC 353], which requires the adjudicating authority to see if a “real dispute exists in fact and is not spurious, hypothetical or illusory.”

In this context, the Court noted that the Corporate Debtor’s own ledger account confirmed the debt, and payments were made even after the notice under Section 8. The only discrepancies pointed out were minor voucher/debit note issues from 2018 worth a few thousand rupees—clearly insignificant against the admitted dues of over ₹1.79 crores.

“Minor issues raised by the CD obviously did not have the effect of either stopping further supplies by the firm or further payments to the firm by the CD.” [Para 20]

The Court further rejected the CD’s claim of non-supply under two disputed invoices (Nos. 203 and 205), as the Operational Creditor had produced delivery challans, transport bills, and e-way bills for both.

Noting that the CD attempted to allege 80 km of short supply without any substantiating documentation, the Court found the quantum of the dispute not only inconsistent but also inflated without basis:

“There is no explanation as to how the suspended Technical Director of the CD increased the length of the faulty cables allegedly supplied by the firm to 80 kilometres or how he quantified the counter-claim at ₹67,96,800/-.” [Para 14]

Court Pulls Up the NCLAT for Ignoring Crucial Facts and the Ledger Confirmation

In a strong rebuke, the bench observed:

“The NCLAT… failed to attach value and consequence to the CD’s own ledger account which clearly negated the claim of pre-existing disputes.” [Para 20]

Further, it held that the NCLAT erred in placing undue reliance on the reply from a suspended director, who had no authority to act on behalf of the company, especially after the appointment of an Interim Resolution Professional in an earlier CIRP proceeding.

The Supreme Court also brushed aside the NCLAT’s observation regarding delay in filing the Section 9 application, clarifying that the Operational Creditor had refrained from initiating proceedings while a prior CIRP was pending. There was no delay that could cast doubt on the firm’s claim.

Key Takeaways from the Judgment

• Confirmation of Debt Overrides Vague Disputes: Once a corporate debtor confirms the ledger balance and continues making payments, it cannot later raise vague disputes to deny liability.

• Spurious Disputes Cannot Defeat Insolvency Petitions: “Moonshine defences” and hypothetical claims lacking evidence do not qualify as “pre-existing disputes” under the IBC.

• Suspended Directors Cannot Represent the CD Post CIRP: Any reply or communication from suspended directors during CIRP has no legal effect unless authorised.

• Adjudicating Authority Must Scrutinise Evidence Carefully: Courts must “separate the grain from the chaff” and reject defences that are “mere bluster” and not rooted in fact.

Admission Restored, NCLAT’s Judgment Set Aside

Holding that the NCLAT had erred both on facts and law, the Supreme Court set aside its judgment and restored the NCLT’s admission order:

“We find no hesitation in holding that the defence… was mere moonshine and had no credible basis or foundation… There was no dispute worth the name… warranting the withholding of the operational debt.” [Para 19]

Accordingly, CIRP proceedings against the Corporate Debtor are to proceed as per law.

Date of Decision: 10 December 2025