2022 (10) TMI 525 - SC - Insolvency and Bankruptcy

Supreme Court overturns NCLAT decision, supports appellant in coal quality dispute

The Supreme Court set aside the NCLAT's order, ruling in favor of the appellant in a dispute over the quality of coal supplied. The Court found that the ... Existence of pre-existing dispute or not - Applicability of provision of Sales of Goods Act, 1930 - NCLT admitted the application - NCLAT confirmed the same - whether the appellant has raised a dispute which can be described as ‘a pre-existing dispute’ as understood by this Court in the decision in MOBILOX INNOVATIONS PRIVATE LIMITED VERSUS KIRUSA SOFTWARE PRIVATE LIMITED [2017 (9) TMI 1270 - SUPREME COURT]? - HELD THAT:- In this case, a perusal of the notice sent by first respondent and the application under Section 9 of the IBC would show that the case is premised on there being a sale, and there was a ‘debt’ owed by the second respondent under the sale. It means that the cause of action in general law would have been a suit for the price of the goods sold within the meaning of Section 55 of the Act. On 03.11.2016, undoubtedly, the second respondent in its own name has ventilated its complaint about the inferior and the poor quality of the Indonesian coal. The impact of using such coal on the boiler and about the damage being done to the boiler has been specifically articulated. Further, a request was made to stop delivery of the goods. - The supply was stopped on the basis of the communication dated 04.11.16. Pursuant to the purchase order, it is undoubtedly true, that 412 MT was delivered at the factory site of the second respondent. It is beyond challenge that no part of 412 MT has been returned by the second respondent to the first respondent - Section 59 of the Act contemplates a buyer ‘setting up’ a breach of a warranty to diminish or reduce the price or even extinguish it. If this line is accepted, it could indeed be said that the decks are not cleared for the first respondent-seller for its claim under Section 8. The factum of the filing of the suit, however, cannot be taken into consideration for the purpose of deciding whether there is a preexisting dispute under the IBC. This is for the simple reason that the suit was not filed before the receipt of the demand notice under Section 8 of the IBC. No doubt, the documentary evidence furnished by the first respondent, namely, the purchase order indicates that the price is to be paid within seven days of receipt of the goods. It is true that Section 55(2) of the Act speaks about a contract of sale where the price is payable on a day certain entitling the seller to sue for price. This is irrespective of the fact that the property in the goods has not passed and the goods have not been appropriated to the contract and whether delivery has been made or not Section 55(2) also contemplates that the buyer must wrongfully neglect or refuse to pay the price. Interestingly, it will be noticed that the law-giver has in Section 55(1) also used the words “and the buyer wrongfully neglects or refuses to pay for the goods” but the law-giver has further added the words “according to the terms of the contract” which words are not found in Section 55(2). Even proceeding on the basis that under Section 55(2) of the Act, this is a case where there is a certain day fixed for the payment of the price irrespective of the passing of the property inter alia, the law does clothe the buyer with the right to resist the suit on the basis that the refusal to pay the price is not wrongful. In other words, he can lean on Section 59 and set up a breach of warranty and seek at least the diminution of the price if not extinction of the same. That apart, he has a right to seek damages even on the same breach. The delivery of the goods and the acceptance of the goods by use of the goods by the corporate debtor being not in dispute, the impact of Section 13(2) read with Section 59 cannot at least for the purpose of determining whether there is a pre-existing dispute be ignored. The first respondent lays store by the purchase order requiring certificate of analysis in that in view of there being no challenge to the said certificate of analysis and there being no rejection of the goods which was contemplated under the purchase order at the ground site, it is contended that the dispute cannot be countenanced. The appellant would, on the other hand, seek to buttress his case with reference to the lab reports, no doubt, procured from the labs which the second respondent has set up - Overlooking the boundaries of the jurisdiction can cause a serious miscarriage of justice besides frustrating the object of the IBC. The NCLAT, has clearly erred in not appreciating the issue, bearing in mind the principles in the Act. The NCLAT has erred in its finding about the existence of a pre-existing dispute, the impugned order merits interference - Application dismissed - Appeal allowed. Issues Involved:1. Whether the appellant raised a 'pre-existing dispute' as defined by the Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited.2. Whether the quality of coal supplied met the contractual specifications.3. The implications of acceptance and use of goods on the buyer's rights under the Sale of Goods Act, 1930.4. The relevance of the timing and content of communications between the parties regarding the quality dispute.5. The application of Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) in the context of a pre-existing dispute.Detailed Analysis:1. Pre-Existing Dispute:The primary issue was whether the appellant had raised a dispute that could be considered 'pre-existing' as understood in the Mobilox case. The Supreme Court noted that the NCLT and NCLAT had dismissed the appellant's claim of a pre-existing dispute. However, the Court found that the appellant's communications, including emails dated 30.10.2016 and 03.11.2016, indicated a genuine dispute regarding the quality of coal supplied. The Court emphasized that the dispute must not be spurious, hypothetical, or illusory, and found the appellant's dispute to be plausible and supported by evidence.2. Quality of Coal:The appellant contended that the coal supplied did not meet the contractual specifications, leading to operational issues. The purchase order specified certain quality parameters for the coal, which the appellant claimed were not met. The appellant provided lab reports from its own labs to support this claim. The Court noted that the first respondent's response to the appellant's complaints did not conclusively refute the quality issues raised.3. Acceptance and Use of Goods:The Court examined the implications of the appellant's acceptance and use of the coal under the Sale of Goods Act, 1930. Section 42 of the Act deems goods as accepted if the buyer uses them in a manner inconsistent with the seller's ownership. However, Section 13(2) allows the buyer to treat a breach of condition as a breach of warranty, enabling the buyer to seek remedies such as price reduction or damages. The Court found that the appellant's acceptance and use of the coal did not preclude it from raising a dispute about the quality under Section 13(2).4. Timing and Content of Communications:The Court scrutinized the emails exchanged between the parties. The email dated 30.10.2016 from STDPL (a sister concern of the second respondent) and the email dated 03.11.2016 from the second respondent raised concerns about the quality of coal. The Court found that these communications were relevant and indicated a pre-existing dispute. The NCLAT's dismissal of these emails was found to be erroneous.5. Application of Section 9 of IBC:The Court reiterated the principles laid down in Mobilox, emphasizing that the existence of a dispute should be determined based on whether there is a plausible contention that requires further investigation. The Court found that the appellant's dispute was not a patently feeble legal argument and thus constituted a pre-existing dispute under the IBC. Consequently, the application under Section 9 of the IBC filed by the first respondent was rejected.Conclusion:The Supreme Court set aside the NCLAT's order, finding that the appellant had successfully demonstrated the existence of a pre-existing dispute regarding the quality of coal supplied. The application under Section 9 of the IBC was rejected, and the Court left open all remedies and contentions available to the first respondent in law. The judgment emphasized the importance of examining the evidence and communications between parties to determine the existence of a genuine dispute.