Supreme Court: Holds Payments/Acknowledgment After Section 8 Notice Defeat Pre-Existing Dispute Defence

On December 10, 2025, the Supreme Court of India ("Court") in the case of Messrs. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan, Civil Appeal No. 12261 of 2024, has held that a corporate debtor acknowledging debt and making payments after the issuance of the demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 ("IBC") negates the defence of a pre-existing dispute.

Facts

1.Dhanlaxmi Electricals Private Limited, the Corporate Debtor ("CD"), is a licensed engineering company that carries out works on a contract basis and placed orders on Messrs. Saraswati Wire and Cable Industries, a registered partnership firm ("the Firm") for supply of pipes and cables for its projects.

2. The CD maintained a running account and used to make payments to the Firm, basis the invoices raised. The Firm communicated its ledger accounts to the CD vide an email and sought confirmation of the CD qua the same. The CD, through its accounts manager, addressed an email informing the Firm of three points of difference in the accounts maintained by the CD vis-à-vis the accounts maintained by the Firm, which points of difference related to two debit notes and a voucher pertaining to November, 2018.

3. In the ledger account maintained by the Firm for the period from April 01, 2017 to April 01, 2021 and duly communicated to the CD, a closing balance of Rs. 2.49 crore (Rupees two crore forty-nine lac) (approx.) was shown to be payable by the CD. Thereafter, various payments were made by the CD to the Firm, resulting in a closing balance of Rs. 1.79 crore (Rupees one crore seventy-nine lac) (approx.).

4. On August 25, 2021, the Firm issued a Demand Notice under Section 8 of the Code claiming the principal amount of Rs. 1.79 crore (Rupees one crore seventy-nine lac) along with interest. The amount claimed under the Demand Notice issued by the Firm under Section 8 of the IBC tallied with the debit balance showed by the CD in its ledger account pertaining to the Firm.

5. In response to the aforementioned Demand Notice issued by the Firm, the CD, through its Technical Director, vide a Reply, raised an issue with regard to two invoices mentioned in the Demand Notice, claiming that no supplies were made against the said invoices, however, a sum of Rs. 50 lac (Rupees fifty lac) was paid as an advance against the said invoices. It was further alleged that the material supplied by the Firm was sub-standard and there was a short supply of materials. The CD, in the said Reply, raised a counter claim towards faulty cable and non-supply of material.

6. Even after the issuance of the Demand Notice by the Firm under Section 8 of the IBC, the CD continued to make payments to the Firm.

7. A separate corporate insolvency resolution process ("CIRP") had already been initiated against the CD under Section 9 of the IBC by a separate operational creditor. The Firm, on November 09, 2021, submitted its claim before the interim resolution professional ("IRP") appointed and in reply, the IRP addressed a letter dated November 19, 2021 stating that the Firm had supplied sub-standard cables and there was also a short supply, as had already been conveyed by the CD. The IRP thus requested the Firm to accept the debit charges in order to process the payment but failed to detail the debit charges. The CIRP, already initiated, was withdrawn by the IRP in view of the settlement arrived at between the CD and the operational creditor.

8. Upon the withdrawal of the above CIRP, the Firm instituted its own application under Section 9 of the IBC. The CD failed to file its Reply and its right stood forfeited. On December 06, 2023, the Hon'ble National Company Law Tribunal, Mumbai ("NCLT") admitted the Firm's application under Section 9 of the IBC, relying upon the ledger account maintained by the CD itself and the fact that the CD had made payments to the Firm, after the issuance of the Demand Notice under Section 8 of the IBC, which clearly negated the pre-existing dispute.

9. The suspended director of the CD filed an appeal before the National Company Law Appellate Tribunal ("NCLAT") and the NCLAT accepted the plea of the suspended director of the CD that there was a pre-existing dispute with respect to certain invoices and short supply and faulty cables, warranting the dismissal of the Firm's application under Section 9 of the IBC. The NCLAT also emphasised on the fact that the Firm issued the Demand Notice under Section 8 of the IBC on August 25, 2021 but did not file the application under Section 9 of the IBC till February 10, 2023 and this delay in itself was a clear indication that there were pre-existing disputes between the parties.

10. The Firm, thus, preferred a civil appeal against the order passed by the NCLAT.

Observations of the Court

1. The NCLAT was not made aware of the pendency of the earlier CIRP initiated by another operational creditor, owing to which the Firm could not initiate its own CIRP against the CD. In terms of the procedure, the Firm filed its claim before the IRP and only upon becoming aware of the filing of the withdrawal application did the Firm file its own application under Section 9 of the IBC. The delay therefore could not be held against the Firm.

2. There were some exchanges between the Parties in 2018 and 2019 on certain issues regarding the supply of pipes and cables made by the Firm, however, the same had no effect of stopping further supplies or further payments. The same was established by the ledger accounts maintained by the CD.

3. Even after the issuance of the Demand Notice under Section 8 of the IBC and the replies issued by the IRP and the suspended Technical Director of the CD in November, 2021, a sum of Rs. 61 lac (Rupees sixty-one lac) were paid to the Firm by the CD, which established that there were no pre-existing disputes, giving rise to counter claims by the CD, as the CD would have withheld payments.

4. Upon receiving the ledger account forwarded by the Firm to the CD for confirmation, the CD vide its email dated August 04, 2021, raised only 3 (three) issues with respect to 2 (two) debit notes and one voucher and thereafter forwarded its own ledger account to the Firm on August 04, 2021. The said documents ought not to have been brushed aside by the NCLAT and ought not to have paid heed to the Reply issued by the Technical Director of the CD to the Demand Notice under Section 8 of the IBC, as he stood suspended on such date and the counter claims raised by the suspended Technical Director of the CD were not sustainable.

5. The adjudicating authority while dealing with an application under Section 9 of the IBC is required to determine whether there is an operational debt, whether evidence has been furnished to show the said debt was due and payable but had not been paid and whether there was any dispute in existence between the parties or any suit or any arbitration was pending in relation to such dispute on the date of the receipt of the Demand Notice of the unpaid operational debt. The Court would not examine the merits of the dispute as long as the dispute truly existed.

6. There was no dispute worth existing as on the date of the issuance of the Demand Notice by the Firm warranting the withholding of the payment of the operational debt due and payable by the CD.

7. The ledger account shared by the CD itself clearly evidenced that more than the threshold amount was due and payable to the Firm, even after requisite adjustments.

Decision of the Court

The Court held that the defence of the CD was a mere moonshine, especially in view of the acknowledgement of the operational debt by the CD in its ledger account and the subsequent payments made by the CD to the Firm, even after the issuance of the Demand Notice under Section 8 of the IBC and accordingly, set aside the order passed by the NCLAT and restored the order passed by the NCLT. The Court also directed that further proceedings in the company petition filed by the Firm shall be initiated in accordance with law and due procedure from the date of the communication of the judgement.

Comments

The present Judgement is relevant as most corporate debtors, immediately upon the initiation of any insolvency proceedings under the IBC, attempt to raise the defence of a pre-existing dispute with the creditor, whether operational or financial, when in most cases, such disputes do not exist. The Court has emphasized on the conduct of the corporate debtor while dealing with such debts, including acknowledgment of the debt in the ledger accounts and repayment of the debt, even after the issuance of the demand notice under the IBC.

Please find attached a copy of the judgement, here.

This update has been contributed by Namitha Mathews (Partner) and Poorva Pant (Principal Associate).

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