2020 (9) TMI 948 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - HELD THAT - All problems have started from June 2017 from the time the quality of material supplied in few lots were of inferior quality leading to production disruption to the Corporate Debtor. It is also clear that the dispute has been raised also against the reply to the demand notice and the demand notice was replied within due time as per the provisions of the Code. The Hon ble Apex Court has observed in Mobilox Innovative Private Limited Vs. Kirusa Software Private Limited 2017 (9) TMI 1270 - SUPREME COURT that It is clear, therefore that once the Operational Creditor has filed an application, which is otherwise complete, the Adjudicating Authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the Operational Creditor or there is a record of dispute in the information utility - In the present case, it is clear that such notice must bring to the notice of Operational Creditor the existence of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the Adjudicating Authority is to see at this stage is whether there is a plausible contention which required further investigation and that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. Section 9(5) (ii) (d) of the Code, specifically provides for considering Dispute by the Adjudicating Authority, empowering it to reject the Application and communicate the decision to the Operational Creditor and Corporate Debtor, if notice of dispute has been received by the Operational Creditor - IBC is not a recovery law . Its purpose is to save the companies and also to allow them to be going concern. Again, email dated 06.07.2017 does show pre-existing dispute regarding quality of supply. The impugned order dated 19.02.2020 passed by Adjudicating Authority ( National Company Law Tribunal, Ahmedabad Bench, Ahmedabad ) is set aside - appeal allowed.

Issues Involved:
1. Initiation of Corporate Insolvency Resolution Process (CIRP).
2. Allegations of inferior quality goods supplied.
3. Settlement proposal and its implications.
4. Pre-existing dispute and its impact on CIRP initiation.
5. Legal provisions under the Insolvency and Bankruptcy Code (IBC) and Sale of Goods Act, 1930.

Detailed Analysis:

1. Initiation of Corporate Insolvency Resolution Process (CIRP):
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, against the order dated 19.02.2020 by the National Company Law Tribunal (NCLT), Ahmedabad, which initiated CIRP against the Corporate Debtor and appointed an Interim Resolution Professional (IRP). The Adjudicating Authority observed that the petition was filed within the limitation period and established that the default of payment occurred, leading to the initiation of CIRP.

2. Allegations of Inferior Quality Goods Supplied:
The Appellant contended that the paper tubes supplied by the Operational Creditor were of inferior quality, causing significant production issues and financial losses. The Appellant provided evidence, including emails and a response to the demand notice, highlighting the defective goods and the resultant losses. The Respondent denied these allegations, arguing that the Corporate Debtor was using the quality issue as a pretext to delay payments.

3. Settlement Proposal and Its Implications:
The Appellant argued that the settlement proposal dated 05.07.2018 was made under duress after the case's admission before the Adjudicating Authority. They cited legal precedents to support the claim that admissions made during settlement negotiations should not be used against the party if the compromise fails. The Respondent, however, asserted that the settlement proposal was not made under duress and that the Corporate Debtor was trying to evade payment obligations.

4. Pre-existing Dispute and Its Impact on CIRP Initiation:
The Appellant maintained that there was a pre-existing dispute regarding the quality of goods supplied, which was communicated to the Operational Creditor. The existence of such a dispute is crucial as per Section 9(5)(ii)(d) of the IBC, which mandates the rejection of a CIRP application if a notice of dispute has been received. The Tribunal referred to the Supreme Court judgment in Mobilox Innovative Private Limited Vs. Kirusa Software Private Limited, emphasizing that the Adjudicating Authority must reject the application if there is a plausible contention requiring further investigation.

5. Legal Provisions Under the Insolvency and Bankruptcy Code (IBC) and Sale of Goods Act, 1930:
The Tribunal examined Sections 8 and 9 of the IBC, which outline the procedure for operational creditors to initiate CIRP. It also referred to Sections 13 and 59 of the Sale of Goods Act, 1930, which provide remedies for buyers in case of defective goods. The Appellant cited relevant case law to argue that they had the right to claim damages for the defective goods supplied, which constituted a legitimate dispute.

Conclusion:
The Tribunal concluded that there was a pre-existing dispute regarding the quality of goods supplied, as evidenced by the emails and the timely response to the demand notice. It emphasized that the IBC is not a recovery law but aims to save companies and allow them to continue as going concerns. Consequently, the appeal was allowed, and the impugned order dated 19.02.2020 was set aside. The Corporate Debtor was released from all CIRP-related actions and allowed to function independently through its Board of Directors. The Corporate Debtor was directed to bear the CIRP costs incurred by the IRP/RP initially and then recover them from the Operational Creditor. No order as to costs was made.

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