Corporate Insolvency Resolution Process (CIRP)

Source: Supreme Court 

Why in News? 

The bench of Justices Sanjay Kumar and Alok Aradhe in the case of M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan and Others (2025) set aside the NCLAT's judgment and restored the NCLT's order admitting the corporate insolvency resolution process, holding that the corporate debtor's defence of pre-existing disputes was mere moonshine without credible foundation. 

What was the Background of M/s. Saraswati Wire and Cable Industries v. Mohammad Moinuddin Khan and Others (2025) Case? 

• M/s. Saraswati Wire and Cable Industries (the firm) supplied pipes and cables to Dhanlaxmi Electricals Private Limited (the corporate debtor/CD). 
• On August 4, 2021, the CD sent its ledger account showing ₹1,79,93,690.80 due to the firm, raising only three minor discrepancies from November 2018 transactions. 
• On August 25, 2021, the firm issued a demand notice under Section 8 of the IBC claiming ₹1,79,93,691/- plus interest. 
• A separate CIRP had already been initiated against the CD on September 6, 2021, by another operational creditor. 
• On November 20, 2021, the CD's suspended Technical Director replied claiming non-supply, sub-standard material, and counterclaims of ₹1,17,96,800/-. 
• Despite these claims, the CD paid ₹61 lakh to the firm after the demand notice was issued. 
• After withdrawal application in the earlier CIRP, the firm filed its Section 9 application on February 10, 2023. 
• On December 6, 2023, the NCLT admitted the firm's application based on the CD's ledger account and post-demand payments. 
• A suspended director appealed to the NCLAT, which set aside the admission order on March 13, 2024, citing pre-existing dispute. 

What were the Court's Observations? 

• The Court held that the CD's defence of pre-existing disputes was "mere moonshine and had no credible basis or foundation." 
• The Court reiterated principles from Mobilox Innovations (2018) that adjudicating authorities must "separate the grain from the chaff" and reject spurious defences without examining full merits of disputes. 
• Applied the "moonshine defence" principle from pre-IBC cases emphasizing disputes must be bonafide, not mere bluster to delay proceedings. 
• The suspended Technical Director had no authority to reply on the CD's behalf as CIRP had commenced and the Interim Resolution Professional had taken over management. 
• The CD's own ledger account dated August 4, 2021, certified the debt at ₹1,79,93,690.80, providing clear evidence of operational debt. 
• Payment of ₹61 lakh after the demand notice clearly negated any pre-existing dispute. 
• The firm produced delivery challans, e-way bills, and transport bills proving supply of goods under the disputed invoices. 
• The CD provided no documentary evidence supporting claims of sub-standard material, client complaints, or how counter-claims were quantified. 
• The NCLAT was not informed about the separate CIRP that explained the firm's delay in filing its Section 9 application. 
• Set aside the NCLAT judgment and restored the NCLT admission order, directing further proceedings to continue from the date of the judgment. 

What is Corporate Insolvency Resolution Process (CIRP)? 

About: 

• CIRP is a mechanism under the Insolvency and Bankruptcy Code, 2016 (IBC), to resolve corporate insolvency in a time-bound manner. 
• Can be initiated by financial creditors (Section 7), operational creditors (Section 9), or the corporate debtor itself (Section 10). 
• The objective is to balance stakeholder interests while attempting to revive the corporate debtor. 

Section 9 Application by Operational Creditor: 

• An operational creditor is a person to whom an operational debt is owed, including suppliers of goods or services. 
• Before filing Section 9, the operational creditor must serve a demand notice under Section 8 demanding payment. 
• If the corporate debtor fails to pay within 10 days or disputes the debt, the creditor may file before the NCLT. 
• The NCLT must verify: (a) operational debt exceeding threshold limit, (b) debt is due and payable, and (c) no pre-existing dispute exists. 

Pre-existing Dispute Requirements: 

• Must exist before the date of the demand notice under Section 8. 
• Must be genuine, substantial, and not spurious, hypothetical, or illusory. 
• Mere assertions without documentary proof do not constitute valid dispute. 
• The adjudicating authority only determines if a genuine dispute exists, not the merits. 

Effect of CIRP Admission: 

• Moratorium is declared under Section 14, prohibiting suits and recovery proceedings. 
• An Interim Resolution Professional takes over management of the corporate debtor. 
• Board of directors and officers stand suspended and cannot act on behalf of the company. 
• Resolution process must be completed within 180 days (extendable by 90 days), failing which liquidation follows.