The Supreme Court Bench comprising Justices K.M. Joseph and Hrishikesh Roy was recently hearing an interesting Appeal and the question was whether the Appellant had raised a dispute which can be described as a 'pre-existing dispute’? The Supreme Court held that Acceptance of the goods under Section 42 may not detract from Section 13(2) of the Sale of Goods Act, 1930.
In the present case, by the impugned order, the National Company Law Appellate Tribunal dismissed the Appeal filed by the Appellant challenging the order passed by the National Company Law Tribunal. By the said order, the NCLT had admitted an application filed by the first respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016. The question which fell for a decision was whether the Appellant had raised a dispute which can be described as a ‘pre-existing dispute’ as understood by the Supreme Court in the decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, REED 2017 SC 09545. The NCLT rejected the version of the Appellant that there existed a pre-existing dispute which stands affirmed by the NCLAT.
Court’s Analysis:
In the present case, a perusal of the notice sent by the first respondent and the application under Section 9 of the IBC would show that the case was 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 30.10.2016, an email was indeed dispatched to the first respondent. The email was sent by STDPL, the sister concern of the second respondent. This email has been brushed aside by the NCLAT in the impugned order on two grounds. In the first place, the NCLAT has proceeded on the basis that there was no reference to the purchase order dated 27.10.2016 and the concern raised in the email was qua purchase order dated 11.10.2016 which related to the sister concern of the second respondent namely, STDPL. The second reason for refusing the appellant to draw support from the said email is that there is no reference to an e-mail dated 30.10.2016 in the reply to the statutory notice under the IBC.
The Supreme Court were of the view that the approach of the NCLAT cannot be sustained. A perusal of the email would clearly indicate that though it was sent by STDPL express reference is made to the second respondent also, and thereafter, the issues relating to the quality of the coal are articulated.
The further fact that there was no express reference to an e-mail 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 detract from the impact of the communication dated 30.12.2016. It was not as if there is a dispute about the sending and receipt of the communication dated 30.10.2016. Therefore, The Apex Court were 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 their own name ventilated their complaint about the inferior and 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 the delivery of the goods. Even advice was sought as to what was to be done about the loss. Thereafter, it is stated that for any more losses that 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 was, 04.11.16, the first respondent wrote back by pointing to the improbability of the deviation from the quality of the coal but it was indicated that the further supply was being stopped. Thus, the supply was affected by 412 MT out of the contracted quantum of 500 MT. The supply was stopped on the basis of the communication dated 04.11.16.
The Supreme Court noted that this was a case where there was a contract for the 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 of 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 was undoubtedly true, that 412 MT was delivered at the factory site of the second respondent. It was beyond challenge that no part of 412 MT has been returned by the second respondent to the first respondent. It would be safe to proceed on the basis that the goods so delivered may have been used or consumed. It may constitute acceptance of the goods within the meaning of Section 42 of the Act. But then the case of the Appellant was anchored in Section 13(2) of the Act. The case was that the characteristics of the coal or quality of the coal with reference to certain objective criteria were indeed specified and were understood as a condition to be fulfilled by the seller and that those conditions were not fulfilled by the first respondent-seller. It was, therefore, the case of the Appellant that the acceptance of the goods under Section 42 may not detract from Section 13(2) of the Sale of Goods Act, 1930. In other words, treating the quality of the coal with reference to certain standards as conditions to be fulfilled by the seller, the mere acceptance of the goods by the buyer may not prevent the buyer from still contending that there has been a breach of the condition, but since the law permits the buyer to treat a such breach of the condition when there is acceptance of the goods as only a breach of a warranty, Section 59 of the Act immediately gets attracted. 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 Supreme Court Bench observed that the Court was not dealing with a suit under the Act either by the seller or the buyer. The factum of the filing of the suit, however, cannot be taken into consideration for the purpose of deciding whether there is a pre-existing 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 in particular entitling the seller to sue for the price. This was 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.
In Mobilox, REED 2017 SC 09545, this Court took the view that one of the objects of the IBC in regard to operational debts is to ensure that the amount of such debts which is usually smaller than the financial debts does not enable the operational creditor to put the corporate debtor into the insolvency resolution process prematurely. 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, REED 2017 SC 09545, 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 was to see whether there was a plausible contention which must be investigated. The Supreme Court had gone on to declare that a ‘patently feeble’ legal argument may not be a plausible dispute. The Apex Court were unable to find that in the facts of this case, the case set up by the second respondent was a patently feeble legal argument. Again, following what the Supreme Court held in
Mobilox, REED 2017 SC 09545, the Bench did not have to go to the extent of finding that the second respondent was likely to succeed. Still further, finding guidance from Mobilox, REED 2017 SC 09545, the examination of the merits need not transcend the limited extent which was to find that the case of the second respondent was not to be brushed aside as spurious, hypothetical or illusory.
The Supreme Court Bench noted, ”When we speak about evidence, we must not overlook the law laid down in Mobilox, REED 2017 SC 09545, that the Court need not be satisfied that the defense was 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 clearly erred in finding that there was no dispute within the meaning of the IBC.”
The stand of the first respondent was that there was no material to justify such a claim. The Supreme Court were of the view that this would involve the court making a deeper foray into the merits and attempting to find whether the dispute was bona fide as against it being a plausible contention. 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 was a pre-existing dispute be ignored.
The Supreme Court observed that no doubt, the first respondent laid store by the purchase order requiring a 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 was 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. The appellant, it must not be overlooked as a definite case that, only upon the use of the goods, the defect in the goods came to be discovered. No doubt, the lab reports may support the Appellant. It was not the case of either party that the quality of the coal as set out in the purchase order was 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, the Supreme Court felt 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. 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 Supreme Court observed that the NCLAT has erred in its finding about the existence of a pre-existing dispute. The appeal was allowed.
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