Principle of ‘Preponderance of Probability’ inequitable to the norm of Pre-Existing Disputes under IBC, 2016

The Supreme Court in Civil Appeal No. 2199 of 2021 filed by Rajratan Agarwal (“Rajratan/Appellant”) against Solartex India Private Limited (“Respondent No.1/ the Operational Creditor”) and others reiterated what amounts to “pre-existing dispute”. The Operational Creditor had filed a Company Petition bearing no. CP (IB)/393/9/NCLT/AHM/2018 under Section 9 of Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Honest Derivatives Pvt. Ltd. (“Respondent No.2/ the Corporate Debtor”). By an order dated 28^th May 2020, the NCLT admitted the petition filed under section 9 of IBC and initiated CIRP in the Corporate Debtor upon the premise that there was no pre-existing dispute. Pursuant thereto, the ex-Director of the Corporate Debtor Mr. Rajratan went in appeal before the NCLAT contending that there was a pre-existing dispute, wherein the appeal was dismissed vide order dated 27^th May 2021 (“Impugned Order”). Against the Impugned Order, Rajratan preferred second Appeal before the Supreme Court.

Agreements were entered between the Operational Creditor and the Corporate Debtor for the purpose of supply of coal, which was to be used in boilers that manufacture starch and allied products. As the coal did not conform the terms of the purchase order, the Corporate Debtor directed the Operational Creditor to discontinue the supply of coal.

On 03^rd February 2018, Operational Creditor issued a demand notice to the Corporate Debtor under the IBC and raised a claim for Rs 21,57,700.38/- inclusive of interest. The Corporate Debtor responded to the Demand Notice, and in turn demanded a total amount of Rs.4.44 crores from the Operational Creditor, as damages towards the supplied coal not being of the promised quality. Thereafter, the Corporate Debtor also filed a civil suit against the Operational Creditor claiming damages.

Issue(s):

• Whether the Corporate Debtor and/or ex-director Mr. Rajratan has raised a dispute which can be described as “a pre-existing dispute” as understood by the Supreme Court in the decision in Mobilox Innovations (P) Ltd. versus Kirusa Software (P) Ltd.? 

Counsel for Rajratan argued that in a contract of sale of goods, a term may be a condition or a warranty. The Appellant had elected to treat the condition relating to the quality of the goods as a warranty.

On the other hand, the Operational Creditor contended that the Appellant had written merely three emails before issuing the Demand Notice and none of those emails raised any dispute. Further, the Corporate Debtor continued to consume the goods supplied even after the alleged deficiency continued to exist.

In the present matter, Section 55(2) of the Sale of Goods Act, 1930 (“the Act”) spoke about a certain date which must be fixed in the contract. Under the purchase order, the payment was to be paid within a period of 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 Supreme Court opined that the buyer could lean on Section 59 of the Act and set up a breach of warranty and seek at least the diminution of the price if not extinction of the same.

The Supreme Court observed that on 30^th October 2016 an email was sent to the Operational Creditor by STDPL, which is a sister-concern of the Corporate Debtor, by making express reference to Corporate Debtor. The said email raised issues relating to the quality of the coal including pictures for reference. The Supreme Court opined that the NCLT had erred in not taking the said email into consideration while determining the existence of dispute.

While placing reliance on the Mobilox judgment (2018) 1 SCC 353, it was observed that IBC does not enable the Operational Creditor to put the Corporate Debtor into insolvency resolution process prematurely over small amounts of default. It is for this reason that it is enough that a dispute exists between the parties.

The Supreme Court opined that, “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 NCLT has clearly erred in finding that there was no dispute within the meaning of the IBC.”

The Supreme Court further observed that it cannot 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.

Shrikant Pillai is a Senior Associate at Naik Naik & Co.