2018 (12) TMI 1376 - AT - Insolvency and Bankruptcy

Corporate insolvency process - pre-existing dispute in regard to quality and standard of goods supplied by the Operational Creditor - Held that - Raising of dispute in regard to quality of goods being inferior/substandard or defective for the first time in reply to demand notice or in response to notice served by the Adjudicating Authority would not constitute a prior and pre-existing dispute contemplated under law as a defence to the initiation of Corporate Insolvency Resolution Process more so when the contemporary record in regard to transactions between the Corporate Debtor and the Operational Creditor at the time of delivery of goods or immediately thereafter does not demonstrate raising of any dispute with respect to quality of goods supplied by the Operational Creditor. In view of the foregoing discussion it is of the considered opinion that the Corporate Debtor has failed to demonstrate that there was a pre-existing dispute in regard to quality and standard of goods supplied by the Operational Creditor rendering the impugned order unsustainable. I find no infirmity in the impugned order. The appeal deserves to be dismissed.

Summary

Issues:
1. Admission of petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 by the Adjudicating Authority.
2. Dispute regarding the quality of goods supplied by the Operational Creditor.
3. Failure to demonstrate a pre-existing dispute as a defense to the initiation of Corporate Insolvency Resolution Process.

Analysis:
1. The Appellant, a shareholder of the Corporate Debtor, challenged the order passed by the Adjudicating Authority admitting the petition filed by an Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016. The petition sought the initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor. The Appellant contested the order on specific grounds outlined in the appeal.

2. The factual background revealed that the Operational Creditor had supplied goods to the Corporate Debtor, resulting in an outstanding amount. Despite a demand notice for the unpaid amount, the Corporate Debtor failed to settle the dues, leading to the initiation of the insolvency proceedings by the Operational Creditor. The Appellant did not dispute the existence of the operational debt but raised concerns about the quality of the goods supplied.

3. The main contention raised by the Appellant was the alleged inferior quality of the goods supplied by the Operational Creditor. However, the Appellant failed to provide evidence or communication substantiating the claim that the goods were defective. The Adjudicating Authority noted the absence of any prior communication or dispute regarding the quality of goods before the demand notice was served. The court emphasized that raising such a dispute belatedly, without supporting evidence, does not constitute a valid defense under the law.

4. The judgment concluded that the Corporate Debtor could not establish a pre-existing dispute regarding the quality of goods supplied, making the challenge to the impugned order unsustainable. The court found no fault in the order and dismissed the appeal, with no costs imposed. The decision highlighted the importance of timely and substantiated disputes in the context of initiating Corporate Insolvency Resolution Processes under the Insolvency and Bankruptcy Code, 2016.