Dispute raised for first time in reply about quality of goods will not constitute preexisting dispute about operational debt under Insolvency and Bankruptcy Code, 2016

The National Company Law Appellate Tribunal has held that a dispute raised for the first time in reply to demand notice or in response to Adjudicating Authority regarding quality of goods will not amount to pre-existing dispute about operational debt.

The said ruling was held in the matter of Rajeev K. Aggarwal Vs. Panipat Texo Fabs Pvt. Ltd. & Ors. (Company Appeal [AT] [Insolvency] No. 715 of 2018), decided on 27.11.2018.

Challenge

The Tribunal was dealing with an appeal filed by share holder of a company challenging order passed by Adjudicating Authority admitting an application filed under Section 9 of the Code by an Operational Creditor. The Authority imposed morotorium and appointed a resolution professional.

The application was filed claiming that the Operational Creditor supplied polyester staple fibre to the Corporate Debtor and an amount of Rs.4 lakhs was outstanding on that account. Though a demand notice  under Section 8(1) of the I&B Code was served on the Corporate Debtor demanding the outstanding amount of Rs.4 lakhs together with interest, the company did not comply with it.

In appeal, the corporate debtor contended that there was a dispute that the goods supplied by the Operational Creditor were of inferior quality. Hence, it was argued that there existed a pre-existing dispute and the petition should not have been admitted, as per the law laid down by Supreme Court in Innoventive Industries Ltd. Vs. ICICI Bank and Ors (2018)1 SCC 407.

Held

The Tribunal noted that there was nothing on record to suggest that a claim regarding inferior quality of goods supplied were raised at any stage prior to reply to demand notice.

In absence of even a whisper from the Corporate Debtor suggesting that the goods supplied were defective or did not conform to the agreed standard and the failure to show any communication emanated from his side intimating the Operational Creditor that the goods supplied were defective or substandard, it should not lie in his mouth that he had raised a dispute which did not warrant admission of the Operational Creditors petition under Section 9 of the I&B Code.

It was finally held that raising of dispute in regard to quality of goods being inferior/substandard or defective for the first time in reply to demand notice or in response to notice served by the Adjudicating Authority would not constitute a prior and pre-existing dispute contemplated under law as a defence to the initiation of Corporate Insolvency Resolution Process, more so when the contemporary record in regard to transactions between the Corporate Debtor and the Operational Creditor at the time of delivery of goods or immediately thereafter does not demonstrate raising of any dispute with respect to quality of goods supplied by the Operational Creditor.