After NCLAT Member Recuses Over 'Higher Judiciary' Influence, Tribunal Sets Aside CIRP Order, Imposes ₹10 Lakh Cost

In a case that was transferred to the Principal Bench after a controversy over alleged attempts to influence a judicial member, the National Company Law Appellate Tribunal (NCLAT) has set aside the admission of insolvency proceedings against KLSR Infratech Ltd and dismissed a Rs 3.79-crore claim filed by A.S. Met Corp Pvt Ltd, holding that a genuine dispute existed between the parties and imposing costs of Rs 10 lakh on the operational creditor.

The order was passed by the NCLAT Principal Bench by Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra in an appeal filed by Attluru Sreenivasulu Reddy, suspended director of KLSR Infratech Ltd., challenging the NCLT Hyderabad order dated July 14, 2023 admitting a petition under Section 9 of the Insolvency and Bankruptcy Code (IBC).

The appeal had originally been pending before the NCLAT Chennai Bench but was transferred to the Principal Bench by the Supreme Court while dealing with a writ petition arising out of an unusual disclosure made during the insolvency proceedings.

During the hearing before the Chennai Bench on August 13, 2025, NCLAT Judicial Member Justice Sharad Kumar Sharma stated in open court that he had received messages from “one of the most revered members of the higher judiciary” asking him to pass a favourable order in the appeal, following which he recused himself from the matter.

A writ petition was thereafter filed by A.S. Met Corp Pvt Ltd seeking a court-monitored probe into the incident. A bench of the Supreme Court comprising Justice Surya Kant and Justice Joymalya Bagchi disposed of the petition by directing that the allegations be treated as a representation to the Chief Justice of India on the administrative side and ordered that the insolvency appeal pending before the Chennai bench be transferred to the NCLAT Principal Bench at New Delhi.

The dispute arose from a demand notice dated 31 May 2022 issued by A.S. Met Corp Pvt Ltd claiming Rs 3,79,06,143 from KLSR Infratech Ltd on the basis of 15 invoices raised between July and December 2021.

In its reply dated June 15, 2022, the corporate debtor denied liability and alleged that the invoices were fictitious, raised without actual supply of goods, and part of a fraud committed in collusion with certain employees of the company.

It stated that irregularities were detected in December 2021, after which an internal audit was conducted and an FIR was lodged on 30 June 2022 against the operational creditor and some employees, leading to arrests and criminal proceedings.

Despite the reply, the NCLT Hyderabad admitted the Section 9 petition on 14 July 2023, prompting the present appeal. Before the appellate tribunal, the appellant argued that the reply to the demand notice itself constituted a notice of dispute under the Code and that there were serious discrepancies in the invoices, including mismatches in e-way bills and vehicle numbers allegedly used for transporting steel coils.

It was also contended that payments after December 2021 were only to banks under letters of credit and not to the operational creditor, and that an affidavit acknowledging debt had been signed by a director who was later named in the FIR.

Reliance was also placed on a GST assessment order dated 2 July 2025, which recorded that invoices had been raised without actual supply of goods. The order had been upheld by the Telangana High Court.

The operational creditor, on the other hand, argued that the FIR was lodged only after the demand notice and could not constitute a pre-existing dispute and that insolvency proceedings under Section 9 are summary in nature. It also contended that GST had been paid on the invoices and that the defence raised by the corporate debtor was illusory and a “moonshine” dispute.

Examining the scheme of Sections 8 and 9 of the IBC and the Supreme Court's rulings in Mobilox Innovations v. Kirusa Software, K. Kishan v. Vijay Nirman Company, and S.S. Engineers v. HPCL, the NCLAT held that once a plausible dispute exists, the adjudicating authority must reject a Section 9 application.

The tribunal noted that the corporate debtor had replied to the demand notice raising detailed allegations of fraud and fictitious invoices and held that the reply qualified as a valid notice of dispute.

Disagreeing with the NCLT's findings, the appellate tribunal held that the defence raised by the corporate debtor could not be brushed aside, observing that the “defence raised by the Corporate Debtor in reply to the demand notice as well as in reply to Section 9 application cannot be held spurious or moonshine defence,” and therefore the application under Section 9 “was required to be rejected under Section 9(5)(ii)(d) of the IBC.”

The NCLAT also took note of the GST assessment order placed on record and observed that the material produced showed that the dispute regarding the invoices required detailed examination, which could not be undertaken in summary insolvency proceedings.

Allowing the appeal, the tribunal set aside the NCLT Hyderabad order admitting the insolvency petition and dismissed the Section 9 application filed by A.S. Met Corp Pvt Ltd, directing the operational creditor to pay costs of Rs 10 lakh.