Pre- Existing Dispute Defence Mere "Moonshine": Supreme Court Restores CIRP Admission Against Engineering Company [Read Order]

The Supreme Court has restored the admission of a Section 9 Insolvencyand Bankruptcy Code (IBC) application filed by an appellant, holding that the corporate debtor failed to establish any bona fide pre‑existing dispute and that the defence raised by the corporate debtor was illusory, unsupported by evidence, and contradicted by its own ledger entries and conduct, thereby falling squarely within the category of “moonshine” defences rejected in earlier jurisprudence.

The dispute arose from supplies of pipes and cables made by the operational creditor M/s. Saraswati Wire and Cable Industries, under various purchase orders. The corporate debtor Dhanlaxmi Electricals Pvt. Ltd., maintained a running account and made regular payments.

In July 2021, the operational creditor shared its ledger for confirmation, and on 4 August 2021, the corporate debtor responded with its own ledger, acknowledging a debit balance of ₹2.49 crore, later reduced to ₹1.79 crore after payments of ₹70 lakh. This acknowledgement formed a crucial piece of evidence demonstrating the admitted liability.

On 25 August 2021, the operational creditor issued a Section 8 demand notice claiming ₹1.79 crore plus interest. In a reply dated 20 November 2021, the suspended Technical Director of the corporate debtor alleged non‑supply under two invoices, short supply of cables, and sub‑standard material, causing losses.

However, at that time, a separate CIRP had already commenced against the corporate debtor on 6 September 2021, meaning the suspended director had no authority to issue such a reply.

The Supreme Court noted that this reply could not be relied upon and that the NCLAT erred in treating it as a valid basis for finding a dispute.

The operational creditor produced delivery challans, e‑way bills, and transport documents for the disputed invoices, demonstrating that supplies were indeed made.

The allegation of short supply also lacked consistency: an email in 2019 mentioned 20,000 meters of cable, while the 2021 reply inflated this figure to 80 kilometres without explanation. No material was produced to substantiate claims of sub‑standard quality or losses allegedly caused by the supplies.

The Supreme Court noted that after issuance of the Section 8 notice, the corporate debtor continued to make payments totalling ₹61 lakh, conduct wholly inconsistent with the existence of a genuine dispute.

The Court held that such payments strongly indicated acknowledgement of liability rather than contestation.

In its legal analysis, the Court applied the test laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) , which requires the adjudicating authority to determine whether a dispute truly exists in fact and is not spurious, hypothetical, or illusory.

The Court also relied on pre‑IBC precedents such as Amalgamated Commercial Traders v. A.C.K. Krishnaswami (1965), Madhusudan Gordhandas (1971), Mediquip Systems (2005), and Vijay Industries (2009), which consistently held that a defence must be bona fide and substantial, not mere bluster. Further, the Court cited Indus Biotech (2021) and TCS v. SK Wheels (2022) to reiterate that moonshine defences cannot derail insolvency proceedings.

Applying these principles, the Division Bench of Justice Sanjay Kumar and Justice Alok Aradhe held that the corporate debtor’s defence lacked credibility, was unsupported by contemporaneous evidence, and was contradicted by its own ledger and payments. The NCLAT, the Court observed, failed to consider the ongoing CIRP, ignored the ledger acknowledgement, and relied on an unauthorised reply.

Accordingly, the Supreme Court set aside the NCLAT’s judgment dated 13 March 2024 and restored the NCLT’s admission order dated 6 December 2023, directing that CIRP proceedings resume in accordance with law.

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