2024 (9) TMI 1305 - AT - IBC

NCLAT upholds rejection of insolvency application due to pre-existing dispute over goods quality under Section 9

Tamra Dhatu Udyog Private Limited Versus Eastern Copper Manufacturing Company Private Limited

NCLAT Principal Bench dismissed appeal challenging rejection of Section 9 IBC application. Operational creditor claimed debt on five invoices from 2019 ... Maintainability of application u/s 9 of the IBC - initiation of CIRP - pre-existing dispute between the parties - whether there existed a ‘pre-existing dispute’ at the time of filing the Section 9 Application, thereby rendering the dismissal of the Application by the Adjudicating Authority proper and valid? - whether the Appeal is maintainable on any other ground? - HELD THAT:- The Appellant had provided the particulars of operational debt for five invoices only for the year 2019 but while producing records of outstanding it has produced ledgers starting from 2016. The Respondent has contested the Appellant’s Application of the FIFO method for adjusting payments, and there is no evidence to suggest that this method was mutually agreed upon. Moreover, the claim in the Section 9 Application concerns five invoices only and not for past invoices. In fact for establishing the payment made, the Respondent has filed the statement of account from the Federal Bank for each of the five invoices from @329 to @379 in the APB, which clearly establish that payment was made without any doubt. The ledger of Operational Creditor/Tamra Dhatu also is very clear from @382 to @384 and establishes that instead Operational Creditor has to pay Rs 75,627/- to the Corporate Debtor. There is no question of any outstanding to be paid by the Corporate Debtor. This is a case wherein there is a clear case of pre-existing disputes with respect to the quality of goods which was supplied by the Operational Creditor. Therefore, we cannot find any infirmity in the Order of the Adjudicating Authority. Under Section 9 (5) (ii) (d) of the IBC, an Application for initiation of CIRP by an Operational Creditor must be rejected if a ‘pre-existing dispute’ is shown to exist prior to the issuance of the demand notice. The Hon’ble Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. [2017 (9) TMI 1270 - SUPREME COURT] held that the dispute need not be a meritorious one but must be real, substantial, and bona fide, and it must predate the demand notice. The Adjudicating Authority correctly dismissed the Section 9 Application. The Respondent has demonstrated the existence of a pre-existing dispute, as evidenced by the civil suit filed before the demand notice and the ongoing contentions regarding defective goods. The impugned order is upheld - appeal dismissed. Issues Involved:1. Pre-existing dispute2. Outstanding debt3. Quality of goods supplied4. Payment adjustments (FIFO method)5. Civil suit filed by RespondentDetailed Analysis:Pre-existing Dispute:The core issue for determination was whether a pre-existing dispute existed at the time of filing the Section 9 Application under the Insolvency and Bankruptcy Code (IBC). The Appellant argued that the Respondent had raised no specific disputes regarding the five invoices mentioned in the Section 9 Application. However, the Respondent contended that there was a longstanding dispute regarding defective goods supplied under earlier invoices (MF119-0375 and MF119-0377) issued on 08.01.2019. The Respondent had filed a civil suit (TS 1380/2021) on 24.12.2021, prior to the filing of the Section 9 Application, demonstrating a pre-existing dispute.Outstanding Debt:The Appellant claimed an outstanding debt of Rs. 1,39,41,382/- due to five unpaid invoices for the supply of 'Annealed Tinned Copper Conductor - Class 2' along with interest, making a total outstanding amount of Rs. 2,10,09,089.11/-. The Respondent argued that it had fully paid the invoices mentioned in the Section 9 Application and any outstanding amounts claimed by the Appellant were erroneous or had already been adjusted. The Respondent's statement of accounts confirmed that no amount was due at the time of the demand notice.Quality of Goods Supplied:The Respondent alleged that the goods supplied under two earlier invoices were defective, which affected its relationship with its client BHEL. The Respondent's reply to the demand notice indicated that the goods under invoices 355 and 357 did not conform to the ordered specifications. The Respondent had informed the Appellant about the defective goods, and the Appellant had admitted to the problem. The Adjudicating Authority found that the dispute concerning defective goods directly affected the overall relationship between the parties.Payment Adjustments (FIFO Method):The Appellant argued that it had adopted a 'first in, first out' (FIFO) method for adjusting the payments, which was not agreed upon by the parties. The Respondent contended that it had paid specific invoices in full, and the Appellant's reliance on the FIFO method was not justified. The Respondent's ledger statements and bank statements confirmed that the payments were made without any doubt, and the Appellant's claim of non-payment for the invoices was unfounded.Civil Suit Filed by Respondent:The Respondent had filed a civil suit (TS 1380/2021) before the Civil Court, Howrah, to demonstrate the existence of a pre-existing dispute. The Appellant argued that the suit was a tactical ploy to evade payment and did not constitute a genuine pre-existing dispute. However, the timing of the suit, coupled with the earlier correspondences and disputes over defective goods, demonstrated that the issue of defective supply was a matter of contention well before the Section 9 Application.Conclusion:The Adjudicating Authority dismissed the Section 9 Application based on the existence of a pre-existing dispute, as evidenced by the civil suit and the ongoing contentions regarding defective goods. The Authority found that the Respondent had demonstrated the existence of a pre-existing dispute, which barred the initiation of CIRP under Section 9 of the IBC. The Appeal was therefore dismissed, and the Impugned Order dated 01.05.2024 was upheld.