Plausible allegations of fraud and fictitious invoicing constitute a pre-existing dispute necessitating rejection of Section 9 applications.

The Appellant is the suspended director of KLSR Infratech Ltd ("Corporate Debtor" or "CD"), a profit-making company

The Respondent ("Operational Creditor" or "OC") supplied steel goods to the CD from 2019 to 2021

In December 2021, the CD initiated an internal audit upon discovering a multi-crore fraud involving its employees and vendors, leading to a cessation of all procurements and payments to the OC

On 31.05.2022, the OC issued a Demand Notice under Section 8 of the IBC for approximately ₹3.79 Crores

The CD replied on 15.06.2022, raising a "notice of dispute" by alleging that the invoices were fictitious, no materials were supplied, and certain employees (including a director, Allu Nagesh) had colluded with the OC

Subsequently, the CD filed an FIR on 30.06.2022, leading to the arrest of the colluding employees and OC officials

Despite this, the NCLT Hyderabad admitted the OC’s Section 9 petition on 14.07.2023, labeling the CD’s defense "spurious"

During the appeal, a GST Assessment Order dated 02.07.2025 was brought on record, confirming that the OC’s invoices were fraudulent and lacked actual movement of goods

1. Whether the Corporate Debtor’s reply dated 15.06.2022 constitutes a "notice of dispute" within the meaning of Section 9(5)(ii)(d) of the IBC

2. Whether the defense raised by the Corporate Debtor was a "spurious" or "moonshine" defense as determined by the Adjudicating Authority

3. Whether the subsequent GST Assessment Order (02.07.2025) and evidence of criminal collusion are relevant in determining the maintainability of the Section 9 application

The court applied the statutory framework of Sections 8 and 9 of the Insolvency and Bankruptcy Code, 2016, regarding the initiation of CIRP by an operational creditor

It relied heavily on the "plausible contention" test established in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which mandates the rejection of a Section 9 application if a dispute truly exists in fact and is not hypothetical or illusory

The court further applied the principles from K. Kishan v. M/s. Vijay Nirman Company Pvt. Ltd., asserting that the IBC cannot be used as a substitute for debt enforcement or for extraneous considerations

M/s. S.S. Engineers v. Hindustan Petroleum Corporation Ltd., which held that CIRP can only be triggered for undisputed debts

The Tribunal found that the NCLT erred in concluding there was no pre-existing dispute.

First, the CD’s reply to the Demand Notice was a detailed "notice of dispute" raising specific allegations of fraud and non-delivery

Second, the NCLT’s finding that the CD made payments post-December 2021 (indicating no dispute) was factually incorrect; these were payments made by the CD to its own bank to settle Letters of Credit, not direct payments to the OC

Third, the OC’s reliance on a "debt acknowledgment" from Director Allu Nagesh was invalid as Nagesh was an accused in the FIR for colluding with the OC to defraud the CD

Most significantly, the Tribunal analyzed the GST Assessment Order of 02.07.2025, which used vehicle tracking and e-way bill data to prove that the OC’s invoices were fictitious and no goods were ever delivered

The Tribunal concluded that the OC had initiated the Section 9 proceedings maliciously to shield itself from criminal prosecution and to pressure a solvent, profit-making company

The NCLAT set aside the NCLT’s admission order dated 14.07.2023 and dismissed the Section 9 application

Finding that the OC acted with malicious intent, the Tribunal imposed an exemplary cost of ₹10 Lakhs on the Respondent/OC

Additionally, the Tribunal directed that a copy of the order be forwarded to the Insolvency and Bankruptcy Board of India (IBBI) for further investigation into the OC’s conduct