2022 (3) TMI 754 - Tri - Insolvency and Bankruptcy

Pre-existing dispute bars insolvency proceedings under Section 9 of IBC 2016

The Tribunal dismissed the application for initiation of CIRP under Section 9 of IBC 2016 due to the existence of a pre-existing dispute between the ... Pre-existing dispute - initiation of Corporate Insolvency Resolution Process under Section 9 of the Insolvency and Bankruptcy Code, 2016 - service of demand notice under Section 8 - quality defects as a basis for bona fide dispute - effect of debit note on existence of disputePre-existing dispute - quality defects as a basis for bona fide dispute - effect of debit note on existence of dispute - Whether a pre-existing bona fide dispute regarding quality of goods exists between the parties and whether that dispute precludes admission of the Section 9 petition. - HELD THAT: - The Tribunal found on the record that the corporate debtor had contemporaneously raised objections about the non-compliance of the goods with requirements of the Legal Metrology Act and about defects, as evidenced by an email dated 23.10.2020 and a debit note issued by the corporate debtor. The applicant did not deny the debit note and admitted that goods were re-supplied/replaced because of quality issues. The inability of the corporate debtor to resell goods due to lack of required markings was accepted on record. These materials established the existence of a bona fide, pre-existing dispute as to the quality and conformity of the supplied goods. In view of that established dispute, the statutory requirement for admission of an application under Section 9 was not satisfied, and the petition could not be admitted for initiation of CIRP. [Paras 4, 5]The Section 9 application is rejected and dismissed on the ground of a pre-existing bona fide dispute regarding quality of goods.Final Conclusion: The petition under Section 9 of the IBC, 2016 was dismissed because the corporate debtor proved a pre-existing bona fide dispute concerning the quality and statutory non-compliance of goods (supported by email correspondence and a debit note), which precluded admission of the insolvency application. Issues:Application for initiation of CIRP under Section 9 of IBC 2016 for alleged default by Corporate Debtor. Objections raised by Corporate Debtor regarding non-delivery of demand notice, pre-existing dispute on quality of goods, and inconsistencies in claimed amount.Analysis:1. The applicant, an operational creditor, sought to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor for an outstanding balance of Rs. 68,33,055 on account of supplying Dry Iron and Steam Iron. The applicant supplied goods through various invoices and made efforts to recover the dues, including sending a demand notice under Section 8 of the code. The Corporate Debtor admitted part of the debt but failed to pay the outstanding amount, leading to the application for CIRP.2. The Corporate Debtor raised objections, stating that the demand notice was not effectively delivered, and there was a pre-existing dispute regarding the quality of goods supplied. The Corporate Debtor alleged non-compliance with the Legal Metrology Act, 2009, resulting in the goods being unsellable. The Corporate Debtor also issued a debit note against the Operational Creditor, citing ongoing disputes and inconsistencies in the claimed amount.3. The applicant rebutted the objections, asserting proper service of the demand notice and refuting the claims of the Corporate Debtor regarding the quality of goods. The applicant highlighted returning goods as per agreed terms and settlement agreements, denying the allegations of defective products.4. After hearing arguments and examining the evidence, the Tribunal found that the Corporate Debtor established a pre-existing dispute on the quality of goods supplied. The Corporate Debtor provided email evidence and a debit note to support their claim. The Tribunal noted that the applicant did not contest the issuance of the debit note and acknowledged replacing goods due to quality issues, supporting the Corporate Debtor's position.5. Consequently, the Tribunal rejected and dismissed the application, emphasizing the existence of a pre-existing dispute between the parties regarding the quality of supplied goods.6. The Tribunal clarified that its decision should not prejudice the rights of the parties in any other forum, ensuring that the dismissal of the application does not impact the applicants' rights elsewhere.Overall, the judgment delves into the intricacies of the dispute, analyzing the contentions of both parties regarding the debt, quality of goods, and procedural aspects, ultimately leading to the rejection of the application based on the established pre-existing dispute between the parties.