In CIVIL APPEAL NO. 2199 OF 2021-SC- Factum of filing of suit cannot be taken into consideration for purpose of deciding whether there is pre existing dispute under IBC: Supreme Court
Justices K.M.Joseph & Hrishikesh Roy [13-10-2022]

Read Judgment RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. LTD. & ORS 

Mansimran Kaur

New Delhi, October 14, 2022:  Overlooking the boundaries of the jurisdiction can cause a serious miscarriage of justice besides frustrating the object of the Insolvency and Bankruptcy Code, the Supreme Court has observed.

In a case where the NCLT had admitted an application filed by the first respondent under Section 9 of the Insolvency and Bankruptcy Code, 2016  against the second respondent, the Division bench of Justice K.M.Joseph and Justice Hrishikesh Roy allowed the appeal preferred by the appellant by observing  that  NCLAT, clearly erred in not appreciating the issue raised  bearing in mind the principles in the Sale of Goods Act, 1930.

The third respondent was appointed as the Interim Resolution Professional and a moratorium followed. The appellant was an ex-director of the second respondent.

The question which fell for decision was whether the appellant 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. NCLT rejected the version of the appellant that there exists a pre-existing dispute which stood affirmed by the NCLAT.

Relevant facts for resolution of the lis were such that in the year 2016 there were two High Seas Sale Agreements. One was between the second respondent and one Rawalwasia Textile Industries Private Limited. The other High Seas Sale agreement was between the same seller and one company-STDPL.STDPL, according to the appellant, was a sister concern of the second respondent.

This arrangement, which was essentially made on the representation of one Mr. Sameer Agrawal, was not honored. Mr. Sameer Agrawal offered to supply 500 Metric Tonnes of coal each to the second respondent and its sister concern through the first respondent. However, the appellant laid stress on certain lab reports of tests, which were actually conducted allegedly at its own labs indicating that the quality of coal did not conform to what was promised and what was more, allegedly it led to the malfunctioning of the boiler. Subsequently, further supply was stopped. 

Thereafter, the first respondent,   issued the requisite notice under the IBC and raised a claim for Rs 21,57,700.38. The second respondent furnished a reply wherein it demanded a total amount of Rs 4.44 crore consequent on the coal not being of the quality promised. The second Respondent also has filed two civil suits, one against Rawalwasia Textile Industries Private Limited and the other, against the first respondent claiming damages. 

A reply was filed by the second respondent pointing out that there was a pre-existing dispute and seeking dismissal of the application under Section 9. The application came to be admitted but the constitution of the Committee was stayed by the NCLAT. With the filing of the appeal against the order passed by the NCLAT an order of status quo was passed.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 dated May 28, 2020. 

The Court noted, “The factum of the filing of the suit, however, cannot be taken into consideration for the purpose of deciding whether there was 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.”

It is true that Section 55(2) of the Act speaks about a contract of sale where the price is payable on a certain day 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, the Court further noted. 

 In this case, Section 55(2) spoke about a certain date which must be fixed in the contract. The clause in the purchase order refers to payment of the price being effected within seven days of delivery. It could, no doubt, be said that the date of payment cannot go beyond a period of seven days at any rate of the delivery, and therefore, the seventh day could be treated as a day which was certain. 

The Court opined that it need not explore the matter further particularly having regard to the pendency of the suit, and also, the nature of the limited inquiry to be conducted under the IBC. 

Even proceeding on the basis that under Section 55(2) of the Act, this was a case where there was a certain day fixed for the payment of the price irrespective of the passing of the property inter alia, the law does clothes the buyer with the right to resist the suit on the basis that the refusal to pay the price was not wrongful, the Court observed. 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, the Court further noted.  

As per the Bench, he had a right to seek damages even on the same breach. 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, remains to find out the intention of the parties, the Court stated. 

Referrign to the observations in Mobilox Case(Supra), the Bench said, “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…This Court has gone on to declare that a patently feeble legal argument may not be a plausible dispute. We respectfully agree.”

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 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. 

Here, the Court stated that it  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 of the IBC, the Bench further remarked.  The NCLAT clearly erred in not appreciating the issue, bearing in mind the principles in the Act, the Court thus observed. 

The Court further clarified that since Section 13 of the Act permits the buyer to waive a condition and so it will be open to the first respondent to canvass that at any rate the second respondent had waived the alleged condition. In light of the above stated observations, the appeal was allowed and the  impugned order was set aside.