The Supreme Court has set aside a judgment of the National Company Law Appellate Tribunal (NCLAT) and restored the order of the National Company Law Tribunal (NCLT) admitting an insolvency petition against Dhanlaxmi Electricals Private Limited. The Court held that the defense of a pre-existing dispute raised by the Corporate Debtor was “mere moonshine” and contradicted by its own ledger account and subsequent payments.
The legal issue before the Apex Court involved the initiation of the Corporate Insolvency Resolution Process (CIRP) by an operational creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT, Mumbai Bench-IV, had admitted the application filed by M/s. Saraswati Wire and Cable Industries. However, the NCLAT, Principal Bench, set aside the admission, citing a pre-existing dispute. The Supreme Court, comprising Justice Sanjay Kumar and Justice Alok Aradhe, allowed the appeal, observing that the alleged disputes were spurious and not supported by the facts, particularly the Corporate Debtor’s admission of liability in its ledger.
Background of the Case
Dhanlaxmi Electricals Private Limited (Corporate Debtor/CD), an engineering company, had a running account with the appellant firm, M/s. Saraswati Wire and Cable Industries, for the supply of pipes and cables.
On July 31, 2021, the firm communicated its ledger account to the CD seeking confirmation. In response, on August 4, 2021, the CD’s Accounts Manager pointed out only minor differences regarding two debit notes and a voucher from 2018. Crucially, the CD communicated its own version of the firm’s ledger, showing a closing debit balance of Rs. 2,49,93,690.80 due to the firm. Subsequent payments reduced this balance to Rs. 1,79,93,690.80.
On August 25, 2021, the firm issued a demand notice under Section 8 of the IBC claiming the outstanding principal and interest.
Arguments and Proceedings
In response to the demand notice, the Technical Director of the CD sent a reply on November 20, 2021. He alleged that:
- No supplies were made against two specific invoices (Nos. 203 and 205) totaling over Rs. 57 lakh.
- The material supplied was sub-standard and short by approximately 80 kilometers.
- The CD incurred financial losses and faced threats of blacklisting from a client due to faulty supplies.
- Counter-claims were raised for Rs. 67,96,800 and Rs. 50 lakh.
It is pertinent to note that at the time of this reply, a separate CIRP had already been initiated against the CD by another operational creditor (M/s. Central Investigation and Security Services Limited) vide an order dated September 6, 2021. Consequently, the Technical Director who replied to the notice was suspended and had no authority to represent the CD.
The firm subsequently filed its Section 9 application on February 10, 2023, after the earlier CIRP was withdrawn following a settlement. The NCLT admitted the petition on December 6, 2023, relying on the CD’s ledger and the fact that the CD had paid Rs. 61 lakh to the firm even after the issuance of the demand notice.
The NCLAT, however, reversed this decision on March 13, 2024, holding that the delay in filing the Section 9 application and the correspondence from 2018-2019 indicated a persisting dispute.
Court’s Analysis
The Supreme Court scrutinized the evidence and found the NCLAT’s reasoning flawed. The Bench noted that the NCLAT appeared to be unaware that a separate CIRP was ongoing against the CD from September 2021 to June 2023, which explained why the firm could not file its application earlier.
1. Acknowledgment of Debt in Ledger
The Court placed significant weight on the email dated August 4, 2021, sent by the CD, which enclosed its own ledger account confirming a debit balance of over Rs. 1.79 crore. The Court observed that the CD had raised only minor differences regarding old debit notes, which did not impact the substantial debt acknowledged.
2. Payments Continued Despite Alleged Dispute
The Court highlighted that the CD continued to make payments to the firm even during the period of the alleged disputes.
“It is also an admitted fact that, even after issuance of the demand notice by the firm under Section 8 of the IBC, the CD continued to make payments to the firm and, in all, a sum of Rs. 61 lakh was paid.”
The Bench reasoned that such payments would not have been made if genuine pre-existing disputes and counter-claims existed.
3. “Moonshine” Defense
Regarding the specific allegations of non-supply under Invoice Nos. 203 and 205, the Court examined the delivery challans, e-way bills, and transport bills produced by the firm, which prima facie established supply. The Court rejected the CD’s belated argument regarding the truck’s weight capacity.
On the issue of faulty supplies, the Court noted inconsistencies in the CD’s claims—varying from 20,000 meters in 2019 to an “inflated figure” of 80 kilometers in 2021 without explanation. The CD also failed to produce documents substantiating the alleged financial losses or complaints from clients.
Referring to the precedent in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited (2018), the Court reiterated that the Adjudicating Authority must separate “the grain from the chaff” and reject a spurious defense.
“Applying this legal standard to the case on hand we have no hesitation in holding that the defence of pre-existing disputes sought to be put forth by the CD was mere moonshine and had no credible basis or foundation.”
Decision
The Supreme Court concluded that the NCLAT failed to attach “requisite importance” to the CD’s ledger account and the payments made after the demand notice.
The Court allowed the appeal, set aside the NCLAT judgment dated March 13, 2024, and restored the NCLT order dated December 6, 2023, admitting the CIRP. The proceedings are to be initiated from the date of communication of the judgment.
Case Details:
- Case Title: M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan and others
- Case No.: Civil Appeal No. 12261 of 2024
- Bench: Justice Sanjay Kumar and Justice Alok Aradhe
