NCLT: Debtors rendered remediless on application by operational creditors? Chandigarh Bench takes different view

In a significant departure from the ruling passed by the Mumbai Bench of the NCLT, the Chandigarh Bench while admitting an insolvency petition has observed that the definition of a ‘dispute’ under Section 5(6) of the Insolvency and Bankruptcy Code, 2016 (IBC) shall also include, disputes relating to the quality of goods or services even if no suit or arbitration proceedings have been filed in this regard..In the instant case, an application u/s 9(1) of the Code was filed by Surbhi Body Products Limited (Creditor) against Meyer Apparel Limited (Debtor) for an unpaid sum of ₹11,68,834 (plus interest), for purchase orders issued between 11.3.2014 to 19.9.2014. The Debtor hadn’t raised any dispute or returned the goods as per the terms stipulated in the contract, and had also made partial payment for the goods delivered..The first time the plea of ‘bad quality’ was raised by the Debtor, was after a winding up petition was filed by the Creditor in 2015 in the Punjab and Haryana High Court. This was nearly 1.5 years from the date of receipt of the goods..In the given context, a notice u/s 8(1) of the Code was issued by the Creditor which provided the Debtor with a ten-day period to pay the debt, before an application is filed by the creditor u/s 9(1) of the Code..During the course of the Section 8(1) notice, a debtor has the right to ‘dispute’ the debt claimed by the way of a ‘pending suit or arbitration proceeding’, which was initiated ‘prior to’ the serving of the notice under Section 8(1)..The Debtor claims to have raised such a dispute ‘twice’. First was, having filed a civil suit for recovery. This suit, however, was filed only after the demand- notice u/s 8(1) had been issued, and thus dismissed. The second dispute which the Debtor chose to rely on was the legal notice issued following initiation of winding up proceedings in 2015..Therefore, the question that arose before the Chandigarh Bench was whether this legal notice would be considered as a ‘dispute’ raised, thus qualifying the condition of a ‘pending suit or arbitration proceeding’ which will stall the initiation of a corporate insolvency resolution process..The Chandigarh bench observed that, given that certain payments were made prior to the issuance of such a dispute, this was merely a defence to the winding up petition and nothing more than an afterthought, and thus admitted the application..Interestingly though, while admitting the application, the Chandigarh Bench also interpreted the existence of an ‘arbitration proceeding’ or a ‘suit’ to include ‘any prior dispute raised’ for at least one of three criteria laid down in the definition of ‘dispute’ in Section 5(6) i.e. a) the existence of the amount of debit; b) the quality of goods or service or; c) the breach of representation or warranty..The stance taken by the Chandigarh bench is different from the Mumbai Bench inasmuch as the Mumbai bench had expressly held in the case of Essar Projects vs. MCL Steels that a ‘prior proceeding’ must have been initiated for a debtor to claim defence under Section 9 of the Code..The Chandigarh Bench, however, has given a liberal view and decided that a ‘legal proceeding’ is not necessary considering the absurdity that it will lead to..Rishabh Jetley and Isha Aggarwal were advocates for the Creditor, while Atul V. Sood was the adovcate for the respondent..(Read the order)