2022 (2) TMI 741 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - pre-existing dispute between the parties - HELD THAT - From the correspondence which took place between the parties it is noticed that before 20.05.2019 there is no iota of evidence at any point that Corporate Debtor informed about deficiency in goods or lack of quality. It has been emphasised by learned counsel for the Respondent that Credit Notes dated 01.08.2019, 26.07.2018, 28.07.2018 and 14.05.2018 were issued to the Buyers which have been brought on record alongwith the reply at page 33 to 38. According to the Respondent Credit Notes were issued to the buyers due to bad quality of goods which were supplied by the Appellant. It is noted that there is no communication to support that Credit Notes were issued due to bad quality of goods supplied by the Appellants to the Corporate Debtor - If the Credit Notes were issued due to bad quality of materials supplied by Appellant, there was no reason for the Corporate Debtor not to raise quality concerns from 01.08.2018 till 20.05.2019. No correlation between the quality of goods and Credit Notes have been established that the Credit Notes have been issued due to bad quality of goods supplied by the Appellant. In proceeding under Section 9, the Court has to satisfied that dispute truly exists in fact and is not spurious, hypothetical or illusory. The present is a case where we are satisfied that there is no dispute, in fact, prior to issuance of Section 8 notice. Appellant sent various communications to the Corporate Debtor for payments and stated that it will be compelled to go to NCLT for his claim, after which the Respondent first time on 20.05.2019 informed that there is deficiency in the goods supplied. There has been no communication regarding quality of goods after delivery of goods by invoices dated 09.01.2018, 16.04.2018, 24.05.2018 and 22.10.2018 and after more than six months period the Respondent sent communication regarding deficiency in quality of goods - If there was any deficiency in the quality of goods, Respondent ought to have brought it to the notice of the Appellant immediately after receipt of the goods, the email dated 20.05.2019 was sent when Appellant informed about taking legal remedy. Thus, present is a case where Corporate Debtor is trying to raise illusory dispute and in fact no dispute existed. The Corporate Debtor cannot be allowed to raise bogy of disputes to save it from its liabilities and the debt under Section 9 - the Adjudicating Authority committed error in rejecting Section 9 application on the ground of dispute - appeal allowed.

Summary

Issues:
- Rejection of application under Section 9 of the Insolvency and Bankruptcy Code, 2016 based on a pre-existing dispute between the parties.

Detailed Analysis:

Issue 1: Rejection of Section 9 Application
The Appellant filed an appeal against the order of the Adjudicating Authority rejecting the application under Section 9 of the Insolvency and Bankruptcy Code, 2016. The dispute arose from non-payment for goods supplied by the Appellant to the Corporate Debtor, based on four invoices. The Adjudicating Authority rejected the application citing a pre-existing dispute between the parties.

Issue 2: Arguments of Appellant and Respondent
The Appellant argued that the dispute raised by the Corporate Debtor was spurious and lacked material evidence. They highlighted the lack of quality concerns raised by the Corporate Debtor before a certain date. On the other hand, the Respondent contended that there was a genuine dispute regarding the quality of goods supplied, supported by the issuance of Credit Notes due to alleged deficiencies.

Issue 3: Legal Precedent and Adjudication
The Tribunal referred to the legal precedent set by the Supreme Court regarding the requirement for a genuine dispute under Section 9. The Adjudicating Authority was tasked with determining the existence of a factual dispute between the parties. The communication history between the parties was analyzed to ascertain the timeline of events leading to the dispute.

Issue 4: Evaluation of Communication and Quality Dispute
The correspondence between the parties revealed that the Corporate Debtor raised quality concerns only after the threat of legal action by the Appellant. The Tribunal noted the absence of quality-related discussions before a specific date, casting doubt on the credibility of the subsequent dispute claims. The issuance of Credit Notes was deemed insufficient to establish a direct link between quality issues and non-payment.

Issue 5: Conclusion and Decision
The Tribunal concluded that the Corporate Debtor's attempt to raise a dispute was illusory and lacked factual basis. The Adjudicating Authority erred in rejecting the Section 9 application based on a dispute that did not exist in reality. Consequently, the Tribunal set aside the previous order and directed the Adjudicating Authority to admit the Section 9 application, allowing for a settlement between the parties within a specified timeframe.

In summary, the judgment highlighted the importance of genuine disputes in insolvency proceedings, emphasizing the need for factual evidence to support claims. The decision underscored the obligation of the Adjudicating Authority to discern between valid disputes and attempts to evade liabilities through fabricated contentions.