2017 (6) TMI 1162 - AT - Companies Law

Adjudicating Authority violated natural justice, application under Section 9 deemed not maintainable. Order set aside.

P.K. Ores Private Limited Versus Tractors India Private Limited

The tribunal found that the Adjudicating Authority violated the rules of natural justice by admitting an application without notice to the Corporate ... Procedure under Insolvency & Bankruptcy code 2016 - nature of dispute - Adjudicating Authority not given any notice to the Corporate Debtor, prior to admitting the application under Section 9 of the I&B Code - Held that:- In the present case we find that the Corporate Debtor raised dispute about the quality of goods and brought the same to the notice of the Operational Creditor. The Corporate Debtor also claimed damage for inferior quality of goods and its loss much prior to receipt of notice under sub-section (1) of Section 8 of the I&B Code. In this background and in view of decision in “Kirusa Software Private Ltd. Vs Mobilox Innovations Private Ltd - 2017 (6) TMI 984 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, MUMBAI”, we hold that a dispute is existing about the quality of goods which is one of the clause of sub-section (6) of Section 5 of I&B Code. In this appeal as admittedly the Adjudicating Authority has passed the impugned order dated 3rd April 2017 without notice to the Appellant, in violation of rules of natural justice and there exists a dispute between the parties, we hold that the as impugned order dated 3rd April 2017 passed by Adjudicating Authority is not only in violation of rules of natural justice, the application under Section 9 was also not maintainable. For the reasons aforesaid, we set aside impugned order dated 3rd April 2017. In effect the order appointing an Interim Resolution Professional, order declaring moratorium, freezing of account and all other order passed by Adjudicating Authority pursuant to impugned order and action, if any, taken by the Interim Resolution Professional, including the advertisement published in the newspaper calling for applications are declared illegal. The Adjudicating Authority is directed to close the proceeding. The appellant company is released from the rigour of law. The appellant company is allowed to function independently through its Board of Directors from immediate effect. The Adjudicating Authority will fix the fee of Interim Resolution Professional and the Financial Creditor will pay the fees to the Interim Resolution Professional, for the period he has worked. Issues Involved:1. Violation of rules of natural justice.2. Existence of dispute regarding the quality of goods.3. Maintainability of the application under Section 9 of the I&B Code.Detailed Analysis:1. Violation of Rules of Natural Justice:The appellant argued that the order dated 3rd April 2017 was passed by the Adjudicating Authority without any notice and without giving any opportunity to the Corporate Debtor, thereby violating the rules of natural justice. The record shows that the Adjudicating Authority initially took up the matter on 17th March 2017 and again on 30th March 2017, but no notice was given to the Corporate Debtor. The matter was subsequently taken up on 3rd April 2017, and the application was admitted without the presence of the Corporate Debtor. The tribunal found that the Adjudicating Authority did not issue any notice to the Corporate Debtor before admitting the application, which is a violation of Section 424 of the Companies Act, 2013, which mandates following the rules of natural justice.2. Existence of Dispute Regarding the Quality of Goods:The appellant contended that there was an existing dispute which could have been brought to the notice of the Adjudicating Authority if given an opportunity. The Corporate Debtor had communicated to the Operational Creditor about the malfunctioning of a repaired engine and alleged negligence in supplying spare parts, causing a loss of Rs. 2 crores. The Operational Creditor, in response, denied these allegations and threatened legal proceedings. The tribunal referred to the case of 'Kirusa Software Private Ltd. Vs Mobilox Innovations Private Ltd,' which clarified that a dispute under the I&B Code must relate to the existence of debt, quality of goods or services, or breach of representation or warranty. The tribunal found that the Corporate Debtor had raised a dispute about the quality of goods before receiving the notice under Section 8 of the I&B Code, thus satisfying the conditions for an existing dispute under Section 5(6) of the I&B Code.3. Maintainability of the Application under Section 9 of the I&B Code:Given the violation of natural justice and the existence of a dispute regarding the quality of goods, the tribunal held that the application under Section 9 of the I&B Code was not maintainable. The impugned order dated 3rd April 2017 was set aside. Consequently, all orders passed by the Adjudicating Authority, including the appointment of an Interim Resolution Professional, declaration of moratorium, freezing of accounts, and any actions taken by the Interim Resolution Professional, were declared illegal. The Adjudicating Authority was directed to close the proceedings, and the appellant company was allowed to function independently through its Board of Directors.Conclusion:The appeal was allowed, the impugned order was set aside, and the appellant company was released from the rigour of law, with no order as to costs. The Adjudicating Authority was instructed to fix the fee for the Interim Resolution Professional, which would be paid by the Financial Creditor.