Standard of pre-existing dispute under IBC cannot be equated with principle of preponderance of probabilities: Supreme Court

The Supreme Court recently held that the standard to determine a pre-existing dispute under the Insolvency and Bankruptcy Code (IBC) could not be equated with the principle of preponderance of probabilities, which guides a civil court while finally decreeing a suit [Rajratan Babulal Agarwal v. Solartex India Pvt Ltd]..A Bench of Justices KM Joseph and Hrishikesh Roy reiterated the law laid down in the case of Mobilox Innovations v. Kirusa Software to say that the court need not be satisfied that the defence is likely to succeed.“Here, we 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 Court said..The Bench was hearing a second appeal challenging the order of the National Company Law Appellate Tribunal (NCLAT) which upheld an order of the National Company Law Tribunal (NCLT) allowing an application by the respondent for initiation of the corporate insolvency resolution process (CIRP) against the appellant’s company.The top court was to determine whether the appellant had raised a “pre-existing dispute” as understood in the Mobilox case. The NCLT and NCLAT both refused to accept that there existed a pre-existing dispute between the parties..The agreements between the parties related to supply of coal for use in boilers to manufacture goods. The appellant had moved the application contending that there was a pre-existing dispute between the parties. It was submitted that immediately on discovering that the goods delivered were not in conformity with the terms of the purchase order, the appellant had registered its protest. Therefore, the case was not a spurious one.The appellant also contended that as per Section 12 of the Sales of Goods Act, in a contract of sale of goods, a term may be a condition or a warranty. It was submitted that in this case the company elected to treat the condition relating to the quality of the goods as a warranty..The respondent, on the other hand, submitted that prior to the notice under the IBC, there were only three emails from the appellant, none of which reflected a dispute. It was argued that this was a case where the second respondent consumed the goods supplied even after the alleged deficiency continued to exist..The bench said that the fact that a suit seeking damages was filed by the respondent could not 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.”.However, the Court took into consideration the email sent by a sister concern of the respondent while finding that it had been “brushed aside” by the NCLAT on two grounds. Both grounds were rejected by the Court, which noted that the email clearly revealed that the issues relating to the quality of the coal were articulated and pictures were attached.“Therefore, we are of the view that the NCLAT has clearly erred in refusing to lay store by the said communication.”It was also noted that the impact of using such coal on the boiler and the damage done to the boiler was specifically articulated, and further delivery of goods was sought to be stopped..The Court opined that the impact of the Sales of Goods Act, at least for the purpose of determining whether there was a pre-existing dispute, could not be ignored.The bench discussed at length the provisions of the Act and stated that a stipulation with regard to goods could be a condition or warranty and a condition was put on a higher pedestal than a warranty..In response to the submission of the respondent that there was no rejection of goods, it was noted by the the Court that the appellant's argument that only on use of the goods, the defect in the goods came to be discovered could not be overlooked.Further, the argument that no debit note was raised in respect of supplied goods and the accounts of the appellant did not bear out their case of the alleged loss rejected."Their absence may not clinchingly rule out the existence of a ‘pre-existing dispute’ under the IBC," the Court reasoned..Therefore, it was concluded that the NCLAT erred in its finding about the existence of a pre-existing dispute..Senior Advocate Kavin Gulati and Advocates Avi Tandon, Anish Agarwal, Tejas Agarwal, Meghna Tandon, Mayur K, Vanshika Gupta and Ami Tandon appeared for the appellants.The respondents were represented by Senior Advocate Nakul Dewan and Advocates Jaimin Dave, Aastha Mehta, Nooreen Sarna, Vishakha, Prerna Mohapatra, Nishant Rao, Deepanwita Priyanka, Manoj Harit and Vikram Hegde..[Read Judgment]