TaxTMI 
TaxTMI 
2022 (10) TMI 525
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....Bankruptcy Code, 2016 (hereinafter referred to as 'IBC') against the second respondent. The third respondent was appointed as the Interim Resolution Professional and a moratorium followed. The appellant is an ex-director of the second respondent. 2. The question which falls for decision is 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 v. Kirusa Software Private Limited (2018) 1 SCC 353. NCLT has rejected the version of the appellant that there exists a pre-existing dispute which stands affirmed by the NCLAT. 3. The facts necessary for resolution of the lis can be stated as follows: On 24.09.2016, there were two High Seas Sale Agreements. One was between respondent No. 2 and one Rawalwasia Textile Industries Private Limited. The other High Seas Sale agreement was between the same seller and one company, the name of which is shortened as STDPL. 4. STDPL, according to the appellant, is a sister concern of the second respondent. This arrangement, which was essentially made on the representation of one Mr. Sameer Agrawal, was not honoured. Mr. Sameer Agr....
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.... to that nozzle bent and boiler become damaged. This will occur heavy production losses. Hence, please stop delivery of the material/coal and advise us what to do this loss. If any more losses occurred due to poor/inferior quality of coal, we may debit the same amount in your account, which may please be noted. Thanking you, Yours faithfully, For Honest Derivativeds Pvt. Ltd. Ravi Jajodia Vice President (Operation)" 6. The first respondent responded to the communication dated 03.11.2016 by its email dated 04.11.2016. It reads as follows: "Dear Sir, It is not possible that the coal is off 4000 gcv, secondly from port it is possible that moisture can go upto 42 percent but not above that also because at port they are putting water on the coal as per GPCB guidelines of pollution. So please take a note regarding this. We have immediately stopped the delivery, but please inform your transporter. Regards, Samir Agarwal Rawalwasia Group 104, Raghuvir Textile Mall, Bh. DR world, 1 mata chock Poona Khumbhariya Road, Surat-India-395010 M - +91-9824102989, +91-9374538264 O - +91-261-2705000" 7. Pursuant to the same, further supply was stopped. The first respo....
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....that in the email dated 30.10.2016 sent by STDPL - sister concern of the corporate debtor, there is mention only of purchase order dated 27.10.2016. It is pointed out with reference to the email that the said email indeed contains reference to the supply of coal to HDPL-the second respondent-the corporate debtor in this case. Still further he drew our attention to para 22. Para 22 reads as follows: "Upon a bare reading of e-mail dated 03.11.2016, it is clear that the Corporate Debtor stated that the supplied coal is not as per specification and due to that nozzle bent and boiler has become damages which would led to heavy production losses. Hence, it was requested that delivery of the coal be stopped. It is also mentioned that if more losses occurred due to poor/inferior quality of coal they may debit the same amount in the account of the Operational Creditor. The Operation Creditor has sent a reply through e-mail dated 04.11.2016 and immediately stopped the delivery of coal. Thereafter, Corporate Debtor has neither issued any debit note nor has returned the supplied coal but consumed the same. It means that after receiving the e-mail dated 04.11.2016 the Corporate Debtor was sat....
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....the appellant that there was a dispute which was pre-existing and the institution of the suits following which in fact, a huge amount of Rs. 3 lakhs was paid as court fees would only point to the dispute not being a spurious adventure. He would also point out with reference to what happened in the NCLT that contrary to the mandate of Rule 150 of the NCLT Rules, 2016 which sets a time limit of 30 days from final hearing to pronounce the order, that the said rule being observed in its breach has resulted in patent mistakes creeping into the order and non-advertence to the vital issues which were agitated before the Tribunal. 17. Shri Manoj Harit, learned Counsel appearing on behalf of the first respondent, on the other hand, would point out that the only materials that existed prior to the date of the notice under the IBC even as per the case of the appellant are the three emails. The emails are dated 30.10.2016, 03.11.2016 and 04.11.2016. He would contend that the documents do not show that there is a dispute. Admittedly, there is no suit or arbitration proceeding initiated as contemplated for the purpose of Section 9 of the IBC. Here is a case where the second respondent consumed ....
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....ivered was 412 metric tonnes out of the total quantum agreed of 500 metric tonnes and that the manufacturing process is such wherein at one go large quantity can be put into the boiler) it is contended that it is not correct. He would further submit that the boilers would contain specific material indicating the total amount of raw materials which are put into it. In this regard, he would draw our attention to the findings of this Court in Mobilox Innovations Private Limited (supra) that a dispute which is raised must be supported with evidence. He would contend that there is no evidence which can be considered worthwhile so as to not treat the dispute as spurious. 21. The third respondent is the Interim Resolution Professional. He is represented before us by Shri Nakul Dewan, learned Senior Counsel. He would submit that he is making submissions on behalf of the corporate debtor. After referring to the facts, he would contend that the task cut out for the NCLT is not a mechanical one. While it is not required to establish the existence of a credible dispute, it is duty bound to ascertain whether there is a credible existence of a dispute. The questions which would arise, according....
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....nsumption may constitute acceptance of the goods within the meaning of Section 42. But the mere acceptance of the goods within the meaning of Section 41 would not deprive the buyer of the right which follows treating a condition as a warranty and seeking remedies as provided in Section 59 of the Act. Such remedies include the relief of the extinction of the price of the goods. The suit filed within the period of limitation cannot be brushed aside for the mere reason that it was not filed immediately or rather that the suit was not pending within the contemplation of Section 9 of the IBC. He would, in fact, point out that the corporate debtor was having a turnover of about Rs.314 crores in the previous year. He would ask the Court to bear in mind how unreasonable it would be to still postulate that for an amount of about Rs. 15 lakhs, a corporate body would risk its goodwill and very existence, unless the dispute projected was one which was genuine. He would further contend that all of these aspects must be considered in light of the limited scrutiny of the question as to whether there is a dispute. He would point out that a conspectus of the history of legislation as unravelled by ....
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....ulation may be a condition, though called a warranty in the contract." 25. Section 13 deals with when a condition is to be treated as a warranty. "13. When condition to be treated as warranty. - (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated. (2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, 1 *** the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect. (3) Nothing in this section shall affect the case of any condition or warranty fulfilment of which is excused by law by reason of impossibility or otherwise." 26. Section 14 provides for certain implied warranties and conditions and it reads as follows: 14. Implied undertaking as to title, etc.-In a contract of sale, unless the circumstances of the contract are such as t....
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.... for implied condition in the case of a sale by sample. Thus, it can be seen that the Act declares or provides for various implied conditions and warranties. 30. We may also notice Section 19, which deals with the aspect of passing of property in a contract of sale of goods. "19. Property passes when intended to pass. - (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to he transferred. (2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer." 31. Chapter IV deals with performance of the contract. Under Section 31, it is the duty of the seller to deliver the goods and of the buyer to accept and to pay for them in accordance with the terms of the contract of sale. Section 32 reads as follows: - "32. Payment and deliver....
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....rice is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract." 35. It may also be necessary to notice Section 59, which reads as follows: - "59. Remedy for breach of warranty. - (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may- (a) set up against the seller the breach of warranty in diminution or extinction of the price; or (b) sue the seller for damages for breach of warranty. (2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage." 36. An analysis of the provisions of the Act would reveal the following in a contract of sale of goods. A stipulation in regard to goods can be a condition or a warranty. A co....
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....ges only. The Law Commission also made a recommendation that in the case of sale of specific goods by sample it should be taken out of Section 13(2). Thus, the omission in Section 13(2) by the Amending Act 33 of 1963 confines the compelled treatment of a breach of a condition as a breach of a warranty to only cases where the contract is not severable and the buyer has accepted the goods or part thereof. No doubt, all of this is subject to a contract either expressly or impliedly otherwise. 37. Section 14 (a) of the Act provides for an implied condition, in the absence of circumstances indicating a different intention that the seller has a right to sell the goods. This is in a sale. In the case of the agreement to sell as would be the case of future goods, Section 14 (a) also provides that there is an implied condition that the seller 'will have' the right to sell the goods when the property is to pass. Section 14 (b) declares the existence of an implied warranty that the buyer will have and enjoy the right of quiet possession of the goods. Section 14 (c) provides for an implied warranty that the goods shall be free from any charge or encumbrance in favour of a third party not decl....
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....s separate conditions in section 16(2) and section 17." 39. Section 16 declares that subject to the other provisions of the Act and of any other law in force, there can be no implied warranty or condition as regards the quality or the fitness of the goods for any particular purpose. This is subject to two exceptions. The exception in Section 16 (1) applies when the buyer expressly or by implication reveals to the seller, the particular purpose for which the goods are required. Intimation of this information to the seller brings in the belief that the buyer relies on the seller's skill or judgement. Furthermore, the goods must be of the description which must be in the course of the seller's business to supply. In such a situation there is an implied condition that the goods are to be reasonably fit for the stated/particular purposes. An implied warranty or condition regarding the quality or fitness of the particular purpose can be established by the trade practice or usage of trade. However, if specified goods are sold under trade name or patent name, there is no such implied condition. In this regard we may notice that Section 16 (2) provides for an implied condition regarding th....
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....ession. Such matters can be regulated by the contract between the parties. When goods are delivered to the buyer it does not mean that he has accepted the goods if he has not previously examined the goods. In other words, if he (the buyer) has not previously examined the goods, the delivery of the goods to the buyer by itself will not be deemed to be acceptance of goods by him. He must be afforded an opportunity of examining the goods. The opportunity must be afforded for the purpose of finding out whether the goods are in conformity with the agreed terms. Section 41 (2) declares that the seller when he delivers goods is bound on request of the buyer a reasonable opportunity of examining the goods. This is again subject to a contract to the contrary. In other words, unless there is a contract to the contrary if a demand is made by the buyer for an opportunity to examine the goods, when delivery is given, the seller is duty bound to afford such an opportunity. Section 42 specifically deals with when the goods are to be treated as having being accepted. There are three circumstances in which the law treats the goods as having been accepted: (i) The buyer informs the seller that he ....
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....he payment of the price or both is immaterial to the passing of the property upon the making of the contract. Passing of property would lead to divesting of title of the seller and vesting the title with the buyer. The significance of the passing of the property is also that unless it is otherwise agreed the goods will remain at the seller's risk until the property is transferred. Equally, when the property is transferred, irrespective of whether delivery has been made to the buyer, the risk will be shouldered by the buyer. This is subject to the two provisos. On each we need not dilate. Section 55, which provides for an unpaid sellers' right to sue for the price also highlights the significance of the passing of property. Section 55(1) contemplates such a suit if property has passed. Section 55 of the Act provides for a right to sue with the seller of goods for the price of the goods. Section 55(1) contemplates that property in the goods has passed to the buyer. It further contemplates that the buyer has wrongfully neglected or refused, to pay for the goods, according to the terms of the contract. Section 55(2) clothes the seller with a right to sue for the price, if the price is....
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....urther proclaims that the buyer may sue the seller for damages for breach of warranty. Section 59(2) declares that with respect to the same breach of warranty which is projected as the foundation for seeking diminution or wiping out of the liability to pay the price, the buyer can also seek damages. 44. A question may arise as to whether after the delivery of the goods by the seller and what is more, even after acceptance of the goods by the buyer, whether the provisions of Section 59 can be invoked by the buyer? If the property has passed to the buyer within the meaning of Section 19 which on the one hand entitles the seller to sue for the price of the goods, in view of the word 'wrongfully' neglects or refuses to pay under Section 55 read with Section 59, cannot the buyer in a suit for the price filed by the seller, 'set up' a breach of warranty within the meaning of Section 59 and persuade the court to either decree a reduction in the price or extinguish the liability of the buyer to even pay any part of the price. To put it differently, if the goods are delivered and accepted within the meaning of Section 42 of the Act, will the right of the buyer arising out of breach of warr....
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.... acceptance, circumstances exist which justify the buyer in pleading a breach of a condition which is treated as a warranty or a breach of warranty which is found after acceptance. Take for example breach of a condition under Section 14 (a). In case where the price has not been paid and suit is brought under Section 55 (1), where the buyer has found that the seller has no right to sell the goods, can the buyer be robbed of his right to refuse to pay the price vouchsafed for a buyer under Section 59 of the Act? The answer would appear to us to be in the negative. No doubt in such a case it would be said that there is no passing of property or that the seller had no property to pass. Equally, if after acceptance of the goods, the quiet possession of the goods within the meaning of Section 14 (b) is thwarted by third party claims, the implied warranty for such possession would stand violated giving rise to the buyer a right under Section 59 to seek such diminution of the price or even extinction of the price. Even a claim for damages over and above the relief of diminution and even extinction of the price is permitted under Section 59 (2). 47. It is to be remembered, that under Secti....
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....ction 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act. xxx xxx xxx 38. It is, thus, clear that so far as an operational creditor is concerned, a demand notice of an unpaid operational debt or copy of an invoice demanding payment of the amount involved must be delivered in the prescribed form. The corporate debtor is then given a period of 10 days from the receipt of the demand notice or copy of the invoice to bring to the notice of the operational creditor the existence of a dispute, if any. We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which "the existence of a dispute" alone is mentioned. Even otherwise, the word "and" occurring in Section 8(2)(a) must be read as "or" keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as "or". If read as "and", disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that a dispute may arise a few days before triggering of the i....
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.... to support it seemed to be , there was just enough to make the principle work, namely, that it was right to have the matter tried out before the axe fell.' On the other hand, the court should be alert to detect wholly spurious claims merely being put forward by an unwilling debtor to raise what has been called "a cloud of objections" as I referred to earlier." xxx xxx xxx 51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is import....
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....IATE Guarantee : We will reserve the right to reject the material at our ground site towards any quality of manufacturing defect " 50. The purchase order is dated 27.10.2016. The quotation is described as telephonic and dated 27.10.2016. It is specifically mentioned as against the query where to be used as follows: FBC Boiler. The goods were described as imported coal. Apart from mentioning the quantity and the price, it is indicated that the coal must be of a certain quality in terms of its characteristics which we have already noticed. Under the terms and conditions with statutory details, Note 1 indicated that the material should be accompanied with a certificate of analysis. Payment terms provided that it was to be paid within seven days of the receipt of materials. Delivery must be immediate. Under the heading 'Guarantee', it is mentioned that the second respondent would reserve the right to reject the material at its ground site towards any quality of manufacturing defect. The supply commenced immediately as contemplated in the purchase order, namely, from 28.10.2016. Indisputably, the goods were imported coal. This could be treated as a sale of goods by description as the....
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....en advice was sought as to what is to be done about the loss. Thereafter, it is stated that for any more losses occurred due to the poor inferior quality of the coal, the second respondent may debit the same in the account of the first respondent. On the very next day, that is, 04.11.16, the first respondent wrote back by pointing to the improbability about the deviation from the quality of the coal but it was indicated that the further supply was being stopped. Thus, the supply was effected of 412 MT out of the contracted quantum of 500 MT. The supply was stopped on the basis of the communication dated 04.11.16. 55. This is a case where there was a contract for sale of goods. The contract as gleaned from the purchase order related to goods which were sold by description, namely, Indonesian coal. Parties clearly contemplated that the coal was to be a certain quality, the details of which are expressly enumerated in the purchase order. The purpose for which the coal was purchased was also indicated, namely, it was to be used in a boiler. Therefore, it formed a part of the raw material for the second respondent. Pursuant to the purchase order, it is undoubtedly true, that 412 MT was....
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..... We are not dealing with a suit under the Act either by the seller or the buyer. We are not oblivious to the fact that the suit has already been laid by the second respondent seeking damages. 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. We may notice, for the purpose of the limited inquiry we can do, for deciding, whether there was a pre-existing dispute, to apply Section 55(2) a certain day must be fixed for payment of price. In this c....
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....rongful having regard to the terms of the contract. As to when property passes and transforms a contract for sale into a sale is largely a matter of intention. The rules as contained in Sections 19 to 24 of the Act would be employed. The task, however, remains to find out the intention of the parties. We may notice that a Division Bench of the High Court of Nagpur in the judgment in Mangilal Karwa v. Shantibai AIR 1956 Nag 221 has made the following observations in an appeal by the defendant-buyer who had agreed to purchase 503 bags of Masur but found that the goods were not of merchantable quality and were rotten: "11. The question whether the Defendant-purchaser had an option to reject the goods because what he bargained for was masur and not some rotten stinking stuff which was once masur of that year's harvest does not arise for consideration in this case. For, even if there be a breach of a condition, the Defendant by taking delivery has, under Section 13 of the Act, elected to treat it as a breach of warranty which under Section 59 entitles him to a diminution or extinction of the price. It is settled law that even after the goods have been delivered into the actual p....
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....limited extent which we have undertaken which is to find that the case of the second respondent is not to be brushed aside as spurious, hypothetical or illusory. We cannot find that the dispute as projected by the appellant on behalf of the second respondent does not exist. In the teeth of the emails which we have adverted to, and the inference sought to be drawn in particular as also the Lab Reports produced, no doubt, from the second respondent's Labs, we cannot also find that the case of the corporate debtor is wholly unsupported by evidence. As to the acceptability of these materials and the weight to be attached to them, needless to say, we have not pronounced on the same. 60. When we speak about evidence, we must not overlook the law laid down in Mobilox (supra) that the court need not be satisfied that the defense is likely to succeed. The standard, in other words, with reference to which a case of a pre-existing dispute under the IBC must be employed cannot be equated with even the principle of preponderance of probability which guides a civil court at the stage of finally decreeing a suit. Once this subtle distinction is not overlooked, we would think that the NCLAT has c....