Pre-existing dispute under insolvency law defeated the section 9 application where invoice disputes were plausible and material.

A section 9 insolvency application was found unsustainable because the corporate debtor's reply to the demand notice amounted to a valid notice of dispute under the Insolvency and Bankruptcy Code. The reply specifically disputed the invoices, alleged non-supply and fake billing, and referred to return of materials and prior audit/investigation, showing a pre-existing controversy. The defence was held not to be spurious or moonshine because the record disclosed a plausible, material dispute requiring further examination. A later GST assessment order was also treated as relevant corroboration, as it reflected duplicate invoices, lack of vehicle movement, and invoices raised without actual supply.

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Issues: (i) whether the reply dated 15.06.2022 to the demand notice constituted a notice of dispute under the Insolvency and Bankruptcy Code, 2016; (ii) whether the defence raised by the corporate debtor in that reply and in its response to the section 9 application was spurious or moonshine; (iii) whether the GST assessment order dated 02.07.2025 was relevant and supported the corporate debtor's case.

Issue (i): whether the reply dated 15.06.2022 to the demand notice constituted a notice of dispute under the Insolvency and Bankruptcy Code, 2016.

Analysis: Section 8 requires the corporate debtor, upon receipt of a demand notice, to bring to the operational creditor's notice the existence of a dispute. Section 9(1) permits initiation of CIRP only if payment is not received and no notice of dispute is received, while section 9(5)(ii)(d) mandates rejection where a notice of dispute has been received. The reply dated 15.06.2022 specifically disputed the invoices, alleged non-supply, fake invoices, return of materials, and audit/investigation preceding the notice, thereby raising a pre-existing controversy.

Conclusion: The reply dated 15.06.2022 was a notice of dispute within section 9(5) of the Insolvency and Bankruptcy Code, 2016.

Issue (ii): whether the defence raised by the corporate debtor in that reply and in its response to the section 9 application was spurious or moonshine.

Analysis: The applicable test is whether the dispute is a plausible contention requiring further investigation and not a patently feeble, hypothetical, or illusory plea. The materials relied upon included the internal audit commenced in December 2021, the contemporaneous email admitting rejection/return of certain goods, the absence of post-December 2021 payments to the operational creditor, and the detailed invoice-wise denial in the section 9 reply. These circumstances showed a real dispute existing before the demand notice and not a mere bluster.

Conclusion: The defence was not spurious or moonshine, and the section 9 application ought to have been rejected under section 9(5)(ii)(d) of the Insolvency and Bankruptcy Code, 2016.

Issue (iii): whether the GST assessment order dated 02.07.2025 was relevant and supported the corporate debtor's case.

Analysis: The assessment order was taken on record and addressed e-way bill movement, procurement source, duplicate invoices, and invoices raised without actual supply of goods. It recorded that several invoices lacked vehicle movement, some invoices were duplicates or replicas, and no input tax credit was claimed for certain invoices in the recipient's GST returns. These findings directly aligned with the corporate debtor's stand that the invoices were fictitious or unsupported by supply.

Conclusion: The GST assessment order dated 02.07.2025 was relevant and supported the corporate debtor's defence.

Final Conclusion: The admission order under section 9 could not be sustained because a pre-existing dispute was established on the record, and the operational creditor's insolvency application was liable to be rejected.

Ratio Decidendi: An operational creditor's section 9 application must be rejected where, before the demand notice, the corporate debtor raises a real and plausible dispute supported by material, and subsequent adjudicatory material may corroborate that the dispute was not spurious or illusory.

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