Standard Of Pre-Existing Dispute Under IBC Is Not Equivalent To Principle Of 'Preponderance Of Probability': Supreme Court

Background Facts

Agreements were entered between Solartex India Pvt. Ltd. ("Respondent No. 1/Operational Creditor") and Honest Derivatives Pvt. Ltd. ("Respondent No. 2/Corporate Debtor") for the purpose of supply of coal, which was to be used in boilers that manufacture starch and allied products. After sometime, Corporate Debtor had directed the Operational Creditor to discontinue the supply of coal, as the coal did not conform to the terms of the purchase order. On 03.02.2018, the Operational Creditor issued a demand notice to Corporate Debtor under 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 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.

The Operational Creditor had filed a petition under Section 9 of Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. The NCLT initiated CIRP against the Corporate Debtor on 28.05.2020 upon the premise that there was no pre-existing dispute. When the ex-Director of Corporate Debtor namely Mr. Rajratan Babulal Agarwal ("Appellant") went in appeal before the NCLAT contending that there was a 'pre-existing dispute', the appeal was dismissed. Thereafter, the Appellant had filed a second appeal before the Supreme Court.

Contentions Of The Parties

The Appellant 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. 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.

Issue

Whether the Appellant has raised a dispute which can be described as 'a pre-existing dispute' as understood in Mobilox Innovations Private Limited v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353?

Decision Of The Bench

The Bench observed that on 30.10.2016 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 and pictures were attached for reference. The Bench opined that the NCLAT had erred in not taking the said email into consideration while determining existence of dispute.

While placing reliance on the Mobilox judgment, 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 Bench 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 NCLAT has clearly erred in finding that there was no dispute within the meaning of the IBC."

The Bench 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.

It was held that NCLAT had erred in its finding that there was no pre-existing dispute. The appeal was allowed and the NCLAT judgment was set aside. Accordingly, the petition under Section 9 of IBC was rejected.

Case Title: Rajratan Babulal Agarwal v Solartex India Pvt. Ltd. & Ors.

Case No.: Civil Appeal No. 2199 of 2021

Counsel for Appellant: Sr. Adv. Kavin Gulati.

Counsel for Respondents: Adv. Shri Manoj Harit and Sr. Adv. Nakul Dewan.

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