TaxTMI 
TaxTMI 
2022 (10) TMI 525
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....ection 9 of the Insolvency and 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 Ag....
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....ize is 5mm to 6 mm only and moisture is 48-50%. It seems if we receive such type of coal we are facing the cleaning problem of boiler and due 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,....
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....e to the earlier e-mail dated 30.10.2016. In such circumstances, we are of the view that the e-mail dated 30.10.2016 is not related to the transaction in question." 10. He would complain that NCLAT committed a clear mistake. The error lies in proceeding on the basis 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 ....
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.... extinction of the price. 16. He would point out that suits were filed within the period of limitation even if it may be that the filing of the suits may strictly not be a circumstance which is relevant in the scheme of the IBC. Nonetheless, it goes a long way to establish the case of 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 d....
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.... is inconceivable how the appellant without disputing the same could claim that the goods delivered fell short of the standards agreed to between the parties. As regards the claim by the appellant that the goods were consumed in large lots (the case of the appellant is that the total quantity delivered 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 r....
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....o the appellant. He would contend that Section 13 (2) would then apply in the facts. In other words, this is a case where, out of 500 Metric Tonnes, the Court can proceed on the basis that there was a delivery of 412 Metric Tonnes of coal and the same was consumed by the corporate debtor. The act of consumption 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 e....
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.... (3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. (4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation 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 e....
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....ded that, if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed. (3) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. (4) An express warranty or condition does not negative a warranty or condition implied by this Act unless inconsistent therewith." 29. Section 17 provides 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 i....
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....reunder, Section 54(2), inter alia, entitles the unpaid seller in the circumstances mentioned therein to resell the goods. Chapter VI deals with suits for breach of the contract. Section 55 reads as follows: "55. Suit for price. - (1) Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods. (2) Where under a contract of sale the price 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; bu....
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....r when the contract is made. When there is a contract for sale of specific goods by sample, Section 17(2) of the Act provides for an implied condition that the bulk should correspond to the sample in quality. It is further indicated in the objects and reasons that when in such a case property is delivered subsequently which does not correspond with the sample, Section 13(2) obliged the buyer to treat the implied condition under Section 17(2) as a warranty, thus, robbing the buyer of the right to reject the goods and entitling him to claim damages 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 r....
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....where the buyer buys the goods such as they are". Whether statements with reference to the goods amount to a description of them depends upon the terms of the contract, but in mercantile contracts they will usually amount to a part of the description." "Conditions as to Quality This section, it will be observed, deals only with the condition that the goods should correspond with the description. In the older cases stipulations, express or implied, as to the quality of the goods were treated as part of their description: the Act, however, deals with them as 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. Fur....
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....y of goods and payment of price are acts to be performed concurrently. In other words, the seller should be ready and willing to give possession of the goods to the buyer in exchange for the price and the buyer must be ready and willing to pay the price on receipt of the possession of the goods. It is significant, however, to notice that this obligation though ordinarily concurrent is subject to a contract to the contrary. In other words, there can be a condition for payment of the price before the delivery of the possession. Equally the payment of the price can be postponed to a point of time after the delivery of possession. 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....
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....erty would pass according to the intention of the parties. Section 19 (2) provides for three criteria to ascertain the intention of the parties as to when the property passes. The court must bear in mind the following criteria: the terms of the contract, the conduct of the parties and the circumstances of the case. 41. Section 20 which in terms of Section 19 (3) is one of the rules to ascertain the intention of the parties provides that in an unconditional contract for sale of specific goods in a deliverable state, the property passes when the contract is made. Section 20 further declares that the postponement of the delivery of the goods or the 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 ....
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....ely, on the footing that there is a breach of warranty. Thus, the word 'elects' in Section 59 is relatable to Section 13(1) whereas the words 'is compelled' in Section 59 is to be read with Section 13(2) of the Act. 43. It is clear that a breach of warranty does not entitle the buyer to reject the goods. The remedies which he can seek under Section 59 are as follows. He can seek the reduction (diminution) of the price. He may also seek to be freed from the liability to pay the price (extinction of the price). In other words, relying upon the breach of the warranty, he can refuse to pay the price or canvas for the reduction of the price. Section 59 further 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 ha....
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.... and seek extinction of the price apart from claiming damages? 46. Under the law, namely the Act, if a suit for price were brought in similar circumstances, the question would arise squarely, whether the second respondent as buyer could defend the action by 'setting up' diminution or extinction of the price. Could the second respondent as defendant seek to non-suit the first respondent by establishing a breach of a warranty. Undoubtedly, ordinarily acceptance of the goods by the buyer, a matter which falls to be decided with reference to Sections 41, 42 and 43 would conclude the matter in favor of the seller. What however would be the position where after 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 a....
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....onal debt" as defined exceeding Rs 1 lakh? (See Section 4 of the Act) (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and (iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute? If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 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 no....
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....t necessary, for the purposes of this appeal, to embark on a survey of the authorities as to precisely what is involved in a genuine and substantial cross-claim. It is clear that on the one hand, the court does not need to be satisfied that there is a good claim or even that it is a claim which is prima facie likely to succeed. In Bayoil S.A., In re [Bayoil S.A., In re, (1999) 1 WLR 147 (CA)] itself, Nourse, L.J. referred, at WLR p. 153, to what Harman, L.J. had said in L.H.F. Wools Ltd., In re [L.H.F. Wools Ltd., In re, 1970 Ch 27 : (1969) 3 WLR 100 (CA)] where Harman, L.J., having referred to a previous case, said: (Ch p. 36 E-F) '... The majority decided in that case that, shadowy as the cross-claim was and improbable as the events said 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 t....
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.... 31,400.00 Total 5,00,000 .00 Kgs INR 16,01,4 00.00 Amount Chargeable (in words): Indian Rupees Sixteen Lakh One Thousand Four Hundred Only Terms & Condition With Statutory Details Note: 1. Certificate of Analysis is required along with Material Note: 2. All necessary document should be mention our P.O. Number compulsory otherwise Material is not Unloading at our site Note: 3. Courier Name : - Professional Courier - Kindly Mention on your envolope - Delivered to Jamner Professional Courier Branch Office Price Basis : EX-HAZIRA Payment Terms : Receipt of material with in 7 days Freight : Transportation : JILANI LOGISTICS Insurance : NIL Delivery : IMMEDIATE 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 ag....
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....ed. We also notice that pictures were attached for the reference. 54. The further fact that there is no express reference to email dated 30.10.2016 in the reply notice given by the second respondent to the statutory notice under Section 8 of the IBC given by the first respondent will not, in our view, detract from the impact of the communication dated 30.12.2016. It is not as if there is a dispute about the sending and receipt of the communication dated 30.10.2016. Therefore, we are of the view that the NCLAT has clearly erred in refusing to lay store by the said communication. 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. Even 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 da....
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....inguish 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. 56. However, the objections of the first respondent may be noticed. Apart from supporting the order of the NCLAT with reference to its contents, it is pointed out that the case of the appellant is a mere ruse, and that no complaint was raised on the ground and though there was guarantee under the purchase order, nothing prevented the second respondent from rejecting the goods. The second respondent not only accepted the supply of the goods but proceeded to consume the goods. A huge quantum of 412 MT was supplied from 28.10.2016 to 03.11.2016. No debit was made in the accounts in keeping with the intimation in the email dated 03.11.2016. This rules out the case of any loss. There is no evidence of any loss. The case of the appellant would fall under a mere bluster. 57. 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 ....
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....he 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. 58. Section 4 of the Act, inter alia, contemplates that an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. As far as Section 55(1) of the Act, it clothes a seller with a right to sue for the price of the goods when a property in the goods has passed. The suit can be resisted by the buyer on the basis that the refusal to pay the price is not wrongful 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, remain....
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..... It is further declared that it is for this reason that it is enough that a dispute exists between the parties. It is further the law as declared in Mobilox (supra) that Section 5(6) of the IBC excludes the expression bona fide which qualified the words suit or arbitration proceedings in Section 5(4) under the Bankruptcy Law Reforms Committee Report. All that is required is to see whether there is a plausible contention which must be investigated. This Court has gone on to declare that a 'patently feeble' legal argument may not be a plausible dispute. We respectfully agree. We are unable to find that in the facts of this case, that the case set up by the second respondent was a patently feeble legal argument. Again, following what this Court held in Mobilox (supra), we do not have to go to the extent of finding that the second respondent is likely to succeed. Still further, finding guidance from Mobilox (supra), the examination of the merits need not transcend the 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 appell....
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....nt 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. The appellant, it must not be overlooked has a definite case that, only upon use of the goods, the defect in the goods came to be discovered. No doubt, the lab reports may support the appellant. It is not the case of either party that the quality of the coal as set out in the purchase order is something which could be established on mere physical examination. As far as the contention that no debit note was raised in respect of supplied goods and that the accounts may not bear out the case of the appellant about the alleged loss, as a result of the use of the goods in question, we feel that while they may indeed have lent assurance to the case of the corporate debtor, their absence may not clinchingly rule out the existence of a 'pre-existing dispute' under the IBC. Here, we must not be oblivious to the limited nature of examination of the case of the corporate debtor projecting a pre-existing dispute. Overlooking the boundaries of the jurisdiction can cause a serious miscarriage of justice besides frustrating the object o....