2024 (7) TMI 319 - AT - Insolvency and Bankruptcy

NCLAT upholds dismissal of Section 9 IBC application due to pre-existing dispute over defective machine performance

UNI CREDIT S.P.A. EUROPEAN COMMERCIAL BANK Versus IR EXPORTS PRIVATE LIMITED (FORMERLY KNOWN AS JR APPAREL & ACCESSORIES PRIVATE LIMITED) (FORMERLY KNOWN AS IR ACCESSORIES PRIVATE LIMITED)

NCLAT Principal Bench dismissed appellant's appeal challenging NCLT's rejection of Section 9 IBC application. The tribunal found sufficient evidence of ... Dismissal of application of the Appellant under Section 9 of the Code - pre-existing dispute regarding the machine's performance before service of demand notice - Supplier's breach of contract - delayed delivery and defective machine. Whether a pre-existing dispute, as argued by the Respondent, existed between the parties before the demand notice was served; basis which the NCLT dismissed the application under Section 9 of the IBC? HELD THAT:- The Respondent has provided sufficient evidence of this dispute, including documented communication with the Supplier about the machine's defects and delayed delivery. The documented communication between the Respondent and the Supplier shows that the Respondent had consistently raised concerns about the machine’s performance well before the Appellant served the demand notice. It is clear that there was in fact a genuine and bona-fide pre-existing dispute before the (defective/improper) service of the demand notice dated 19.05.2021. The existence of these disputes is substantiated by emails, requests for returns, and settlement discussions. Significant weight is put on the documented communication between the Respondent and the Supplier concerning the machine's performance issues. These communications, predating the demand notice, demonstrate a genuine dispute regarding the functionality of the machine. In light of the documented pre-existing dispute concerning the machine's performance, the Adjudicating Authority's decision to dismiss the application is upheld. The Appellant's arguments regarding service of the demand notice and the arbitration clause are immaterial given the presence of a pre-existing dispute. Appeal dismissed. Issues Involved:1. Service of Demand Notice2. Acceptance of the Machine and Absence of Pre-existing Dispute3. Independence of Arbitration Clause from IBC Remedies4. Respondent's Claim of Pre-existing Dispute and Improper Service of Demand NoticeDetailed Analysis:1. Service of Demand Notice:The Appellant argued that the demand notice dated 19th May 2021 under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC) was properly served upon the Corporate Debtor through email. They contended that since no delivery failure notification was received, the service was valid. The Operational Creditor's Affidavit of No Dispute dated 23rd August 2021 stated that the demand notice was received by the Corporate Debtor's email addresses and no failure notification was received, indicating successful delivery.2. Acceptance of the Machine and Absence of Pre-existing Dispute:The Appellant maintained that the Corporate Debtor accepted the machine without objection via an acceptance certificate dated 28th August 2017, negating claims of a pre-existing dispute regarding the machine's performance. They argued that the Corporate Debtor's subsequent claims of non-performance were unsupported by evidence and did not constitute a pre-existing dispute as defined under the IBC. The Supplier’s support rendered as a goodwill gesture was misused by the Corporate Debtor to allege a purported dispute, which does not meet the criteria under the Act.3. Independence of Arbitration Clause from IBC Remedies:The Appellant argued that the existence of an arbitration clause in the sales contract did not preclude their right to pursue a remedy under the IBC. They asserted that these remedies are independent of each other, and the mere existence of an arbitration clause cannot deprive the Operational Creditor of its statutory rights under the IBC.4. Respondent's Claim of Pre-existing Dispute and Improper Service of Demand Notice:The Respondent contended that the Supplier materially breached the sales contract by delaying the delivery of the machine and delivering a defective machine with substantial performance issues. They provided evidence of documented delays, emails outlining performance issues, and the Supplier's attempt to rectify the problems by sending a technician. The Respondent argued that a genuine dispute regarding the machine's performance existed well before the Appellant served the demand notice for non-payment. This pre-existing dispute disallows the application filed under the IBC. Additionally, the Respondent argued that the demand notice was never properly served, and the NCLT order acknowledged the improper service.Appraisal:The Tribunal reviewed the facts and circumstances of the case, including the documented communication between the Respondent and the Supplier about the machine's defects and delayed delivery. The Tribunal found that the Respondent had consistently raised concerns about the machine’s performance well before the Appellant served the demand notice. The existence of these disputes was substantiated by emails, requests for returns, and settlement discussions. The Tribunal acknowledged the arguments presented by both parties but placed significant weight on the documented communication between the Respondent and the Supplier concerning the machine's performance issues.Reasoning:The Tribunal concluded that there was a genuine and bona-fide pre-existing dispute before the service of the demand notice dated 19th May 2021. The existence of these disputes was substantiated by emails, requests for returns, and settlement discussions. The Tribunal cited relevant case laws to support its decision, including:- Mobilox Innovative Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353: Clarified that the Adjudicating Authority must reject an application if a pre-existing dispute exists.- Innoventive Industries v. ICICI Bank and Anr (2018) 1 SCC 407: Reinforced the concept of a pre-existing dispute as a bar to initiating IBC proceedings.- Ahluwalia Contracts (India) Limited v. Raheja Developers Limited: Emphasized the need for a pre-existing dispute to be present before the demand notice is served.- Rajratan Babulal Agarwal v. Solartex India (P) Ltd. (2023) 1 SCC 115: Clarified that the court does not need to be convinced of the defense's ultimate success; the existence of a plausible dispute is sufficient.- Deepak Modi versus Shalfeyo Industries Pvt. Ltd (2023 SCC OnLine NCLAT 169): Reiterated the concept of a genuine pre-existing dispute as a reason to reject an application under Section 9 of the IBC.Decision:The Tribunal upheld the Adjudicating Authority's decision to dismiss the application due to the documented pre-existing dispute concerning the machine's performance. The Appellant's arguments regarding the service of the demand notice and the arbitration clause were deemed immaterial given the presence of a pre-existing dispute.Order:The appeal filed by UniCredit S.P.A. was dismissed, and the order passed by the NCLT dated July 6, 2023, was upheld. No orders as to costs.