Rajratan Babulal Agarwal vs Solartex India Pvt. Ltd.

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2199 OF 2021

RAJRATAN BABULAL AGARWAL ...APPELLANT(S)

VERSUS

SOLARTEX INDIA PVT. LTD. & ORS. ...RESPONDENT(S)

JUDGMENT

K. M. JOSEPH, J.

1. By the impugned order, the National Company Law

Appellate Tribunal (hereinafter referred to as ‘NCLAT’

for brevity) has dismissed the appeal filed by the

appellant challenging the order passed by the National

Company Law Tribunal (hereinafter referred to as ‘NCLT’

for brevity) dated 28.05.2020. By the said order, the

NCLT admitted an application filed by the first

respondent Signature Not Verified under Section 9 of the Insolvency and Digitally signed by SNEHA

Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) Date: 2022.10.13 15:20:37 IST Reason:

1 CA NO. 2199/ 2021

against the second respondent. The third respondent was

appointed as the Interim Resolution Professional and a

moratorium followed. The appellant is an ex-director of

the second respondent.

2. The question which falls for decision is whether the

appellant has raised a dispute which can be described as

‘a pre-existing dispute’ as understood by this Court in

the decision in Mobilox Innovations Private Limited v.

Kirusa Software Private Limited1. NCLT has rejected the

version of the appellant that there exists a pre-existing

dispute which stands affirmed by the NCLAT.

3. The facts necessary for resolution of the lis can be

stated as follows:

On 24.09.2016, there were two High Seas Sale

Agreements. One was between respondent No. 2 and one

Rawalwasia Textile Industries Private Limited. The other

High Seas Sale agreement was between the same seller and

one company, the name of which is shortened as STDPL.

4. STDPL, according to the appellant, is a sister

concern of the second respondent. This arrangement, which

1 (2018) 1 SCC 353 2 CA NO. 2199/ 2021

was essentially made on the representation of one Mr.

Sameer Agrawal, was not honoured. Mr. Sameer Agrawal

offered to supply 500 Metric Tonnes of coal each to the

second respondent and its sister concern through the

first respondent. The purchase order in respect of STDPL

was dated 11.10.2016. The purchase order in respect of

second respondent is dated 27.10.2016. The purchase order

contemplated Gross Calorific Value of 5400. The total

moisture content was put as less than 40% +/- 2%. Out of

500 Metric Tonnes, the second respondent was supplied

412 Metric Tonnes. The supply began from 28.10.2016 and

ended on 02.11.2016. According to the appellant, the coal

was to be used in boilers which manufactures starch and

allied products. The coal is placed over the boilers in

silos which are nearly 15 feet in height and hold upwards

of 200 metric tonnes of coal at once. The appellant lays

stress on certain lab reports of tests, which were

actually conducted allegedly at its own labs indicating

that the quality of coal did not conform to what was

promised and what was more, allegedly it led to the

malfunctioning of the boiler. On 30.10.2016, an e-mail

was sent to the first respondent. It reads as follows: 3 CA NO. 2199/ 2021

“Dear sir,

With reference to 5400 gcv imp coal supply to (stdpl) dhule and (Hdpl) jammer, following issues are to be shared.

For dhule plant: high moisture and powder percentage is to be found, already discussed to you.

For jammer plant: recently supply include high level of powder percentage and moisture too. Kindly consider the issues and please make us assure about quality of coal should not be down the level. Pics attached for your reference.”

Hdpl referred to in the communication is the second

respondent.

5. The next correspondence to notice is e-mail dated

03.11.2016. It is addressed to the first respondent by

the second respondent. It reads as follows:

“M/s. Sortex India Pvt. Ltd.

105, Raghuvir Textile Mall, Aai Mata Chowk, Dumbhal Parvat Patiya, SURAT . 395010

Kind Attn: Mr. Samirji

Sub: Inferior/poor quality of Indonesian Coal.

Dear Sir, We have placed an order for 500 MT Indonesian Coal to you vide our P.O. No. HDPL/2016-17/586 dated 27.10.2016 for 5400 GCV and Moisture condition is 38-40%. But, on receiving the coal we found that GCV less than 4000 and size of 4 CA NO. 2199/ 2021

coal is 0mm 50% and maximum size is 5mm to 6 mm only and moisture is 48-50%. It seems if we receive such type of coal we are facing the cleaning problem of boiler and due to that nozzle bent and boiler become damaged. This will occur heavy production losses. Hence, please stop delivery of the material/coal and advise us what to do this loss. If any more losses occurred due to poor/inferior quality of coal, we may debit the same amount in your account, which may please be noted.

Thanking you,

Yours faithfully, For Honest Derivativeds Pvt. Ltd.

Ravi Jajodia Vice President (Operation)”

6. The first respondent responded to the communication

dated 03.11.2016 by its email dated 04.11.2016. It reads

as follows:

“Dear Sir,

It is not possible that the coal is off 4000 gcv, secondly from port it is possible that moisture can go upto 42 percent but not above that also because at port they are putting water on the coal as per GPCB guidelines of pollution.

So please take a note regarding this. We have immediately stopped the delivery, but please inform your transporter.

Regards,

Samir Agarwal 5 CA NO. 2199/ 2021

Rawalwasia Group 104, Raghuvir Textile Mall, Bh. DR world, 1 mata chock Poona Khumbhariya Road, Surat-India-395010 M - +91-9824102989, +91-9374538264 O - +91-261-2705000”

7. Pursuant to the same, further supply was stopped.

The first respondent, on 03.02.2018 issued the requisite

notice under the IBC and raised a claim for Rs.1573279 +

30 per cent interest totaling to Rs. 21,57,700.38. The

second respondent furnished a reply on 17.02.2018. Under

the reply, it demanded a total amount of Rs.4.44 crores

consequent on the coal not being of the quality promised.

Respondent No. 2 also has filed two civil suits, one

against Rawalwasia Textile Industries Private Limited and

the other, against the first respondent claiming damages.

It is pointed out that court fee of Rs. 3 lakhs was

deposited. After exchange of the notices as mentioned in

the IBC, an application under Section 9 was filed on

30.04.2018 by respondent No. 1 against respondent No. 2.

A reply was filed by respondent No. 2 pointing out that

there was a pre-existing dispute and seeking dismissal

of the application under Section 9. The judgment was

reserved on 20.11.2019. The application came to be 6 CA NO. 2199/ 2021

admitted as already noted by the order passed on

28.05.2020. The constitution of Committee was stayed by

the NCLAT. With the filing of the appeal against the

order passed by the NCLAT an order of status quo was

passed.

8. We have heard Mr. Kavin Gulati, learned Senior

Counsel appearing on behalf of the appellant. We further

heard Shri Manoj Harit, learned Counsel appearing on

behalf of respondent No. 1. We also have heard

Mr. Nakul Dewan, learned Senior Counsel appearing for

the IRP.

9. Shri Kavin Gulati, learned Senior Counsel would draw

our attention to the following paragraph in the impugned

order:

“19. With the above admission in the affidavit, it is apparent that on 30.10.2016, STDPL, a sister concern of the Corporate Debtor has sent an e-mail to Group Concern of the Operational Creditor in regard to the Purchase Order dated 11.01.2016 whereas, the present claim is in regard to the Purchase Order dated 27.10.2016. It is also to be seen that there is no reference of this e-mail in the reply to the statutory notice. In the said e-mail it is not mentioned that it is in relation to the Purchase Order dated 27.10.2016. In the subsequent e-mail dated 03.11.2016, there is no reference to the

7 CA NO. 2199/ 2021

earlier e-mail dated 30.10.2016. In such circumstances, we are of the view that the e-

mail dated 30.10.2016 is not related to the transaction in question.“

10. He would complain that NCLAT committed a clear

mistake. The error lies in proceeding on the basis that

in the email dated 30.10.2016 sent by STDPL – sister

concern of the corporate debtor, there is mention only

of purchase order dated 27.10.2016. It is pointed out

with reference to the email that the said email indeed

contains reference to the supply of coal to HDPL-the

second respondent-the corporate debtor in this case.

Still further he drew our attention to para 22. Para 22

reads as follows:

“Upon a bare reading of e-mail dated 03.11.2016, it is clear that the Corporate Debtor stated that the supplied coal is not as per specification and due to that nozzle bent and boiler has become damages which would led to heavy production losses. Hence, it was requested that delivery of the coal be stopped. It is also mentioned that if more losses occurred due to poor/inferior quality of coal they may debit the same amount in the account of the Operational Creditor. The Operation Creditor has sent a reply through e-mail dated 04.11.2016 and immediately stopped the delivery of coal. Thereafter, Corporate Debtor has neither issued any debit note nor has returned the supplied coal but consumed the same. It means that after 8 CA NO. 2199/ 2021

receiving the e-mail dated 04.11.2016 the Corporate Debtor was satisfied and kept quiet for about 15 months. It is only when they received a statutory notice that they filed a Civil Suit against the Operational Creditor.”

11. It is on the basis of the said discussion that the

NCLAT found that there was no dispute in regard to the

transaction in question and that it was to avoid the

liability that corporate debtor through its reply to the

notice tried to impress that there was a pre-existing

dispute. He next drew our attention to the purchase

order.

12. He would point out therefrom that under the terms

and conditions with statutory details, Note 1 provided

that a certificate of analysis is required along with

the material.

13. He drew our attention to Section 12 of the Sales of

Goods Act, 1930 (hereinafter referred to as ‘Act’). He

would contend that under the said provision in a contract

of sale of goods, a term may be a condition or a warranty.

He would proceed on the basis that this case involves

the appellant having elected to treat the condition

relating to the quality of the goods as a warranty. The

9 CA NO. 2199/ 2021

goods in question are raw materials. The goods were

supplied in between 28.10.2016 to 03.11.2016.

14. He drew our attention to Section 41 of the Act and

contended that a buyer must have the right to examine

the goods. He next drew our attention to Section 42 of

the Act.

15. Immediately upon discovery of the fact that the goods

delivered were not in conformity with the terms of the

purchase order, the appellant had registered its protest

as it were on 30.10.2016. This was again taken up on

03.11.2016 and the communication which is addressed by

the first respondent on 04.11.2016 also would fortify

appellant’s case that the complaint of the appellant was

not a spurious one. The first respondent is found making

an attempt at justifying the moisture content of coal

not being in terms of the purchase order. He would contend

that Section 59 of the Act declares the remedies open to

a buyer who has elected to treat the breach of a condition

as a warranty and the said provision contemplates a suit

for damages and what is more, even setting up the

extinction of the price.

10 CA NO. 2199/ 2021

16. He would point out that suits were filed within the

period of limitation even if it may be that the filing

of the suits may strictly not be a circumstance which is

relevant in the scheme of the IBC. Nonetheless, it goes

a long way to establish the case of the appellant that

there was a dispute which was pre-existing and the

institution of the suits following which in fact, a huge

amount of Rs. 3 lakhs was paid as court fees would only

point to the dispute not being a spurious adventure. He

would also point out with reference to what happened in

the NCLT that contrary to the mandate of Rule 150 of the

NCLT Rules, 2016 which sets a time limit of 30 days from

final hearing to pronounce the order, that the said rule

being observed in its breach has resulted in patent

mistakes creeping into the order and non-advertence to

the vital issues which were agitated before the Tribunal.

17. Shri Manoj Harit, learned Counsel appearing on behalf

of the first respondent, on the other hand, would point

out that the only materials that existed prior to the

date of the notice under the IBC even as per the case of

the appellant are the three emails. The emails are dated

11 CA NO. 2199/ 2021

30.10.2016, 03.11.2016 and 04.11.2016. He would contend

that the documents do not show that there is a dispute.

Admittedly, there is no suit or arbitration proceeding

initiated as contemplated for the purpose of Section 9

of the IBC. Here is a case where the second respondent

consumed the goods supplied even after the alleged

deficiency continued to exist. The alleged variations do

not constitute a dispute. The conduct of the second

respondent would show that the claim of dispute is a

sham. It is contended that in the email dated 03.11.2016,

it is stated that in the event of any further damage,

the same would be debited in the account of the first

respondent. This circumstance is seized upon to contend

that no damage had occurred till 03.11.2016 which was

sufficiently serious to warrant a debit to the account

of the first respondent. Till 03.11.2016, the appellant

continued to consume the coal. In this regard, reference

is placed on the words ‘any more damage’. No debit note

was raised after 03.11.2016. This shows there was no

further damage.

18. Even after the email dated 03.11.2016, the appellant

continued to use the coal. The argument based on a period 12 CA NO. 2199/ 2021

of 3 years being available to file a suit close to Rs. 4

crores as against the amount of approximately Rs.15 lakhs

which is the subject matter of the application under

Section 9 is sought to be brushed aside as indicative of

the dispute not being a genuine one. If the claim was

genuine, it would have been reflected in its book of

accounts. The claim that the suit can be filed within

the period of limitation does not fit in with the scheme

of Section 9 of the IBC.

19. The purchase order contemplated payment within 7 days

of delivery. There is no denial of liability to pay before

12.11.2016 which is the last day by which the account

became payable. The analysis reports relied on by the

appellant are sought to be painted as concoctions. Rule

150 of the NCLT Rules, it is pointed out is only directory

and not mandatory.

20. Learned Counsel would contend that the emails relied

upon by the appellant must not be seen as anything more

than an effort by the buyer to wriggle out of its

obligation to make payment for goods which were received.

He would further contend that the purchase order

13 CA NO. 2199/ 2021

contemplated production of the certificate of analysis.

Therefore, when the certificate of analysis was present,

it is inconceivable how the appellant without disputing

the same could claim that the goods delivered fell short

of the standards agreed to between the parties. As

regards the claim by the appellant that the goods were

consumed in large lots (the case of the appellant is that

the total quantity delivered was 412 metric tonnes out

of the total quantum agreed of 500 metric tonnes and that

the manufacturing process is such wherein at one go large

quantity can be put into the boiler) it is contended that

it is not correct. He would further submit that the

boilers would contain specific material indicating the

total amount of raw materials which are put into it. In

this regard, he would draw our attention to the findings

of this Court in Mobilox Innovations Private Limited

(supra) that a dispute which is raised must be supported

with evidence. He would contend that there is no evidence

which can be considered worthwhile so as to not treat

the dispute as spurious.

21. The third respondent is the Interim Resolution

Professional. He is represented before us by Shri Nakul 14 CA NO. 2199/ 2021

Dewan, learned Senior Counsel. He would submit that he

is making submissions on behalf of the corporate debtor.

After referring to the facts, he would contend that the

task cut out for the NCLT is not a mechanical one. While

it is not required to establish the existence of a

credible dispute, it is duty bound to ascertain whether

there is a credible existence of a dispute. The questions

which would arise, according to him, are, whether the

consumption of the coal by the corporate debtor

constituted acceptance of the goods and obliged it to

make payment. The argument is to be based on a prima

facie test. He would further pose the question as to

whether the emails dated 30.10.2016 and 03.11.2016

evidenced or any other contemporaneous document evidenced

deficiency in the quality of coal supplied or the coal

resulted in damage to the corporate debtor. He also would

draw our attention to Sections 41 and 42 of the Act. He

would point out that there is a purchase order which sets

out a guarantee. This constituted the reservation of the

right to reject the material on the ground. There is no

evidence, it is pointed out, that the right to reject

was exercised when delivery was effected of 412 Metric 15 CA NO. 2199/ 2021

Tonnes of the coal. The corporate debtor has accepted

and consumed the delivered coal. As far as Rule 150 of

the NCLT Rules is concerned, it is described as a

directory provision. The consequence of non-compliance

is not set out. The principle laid down by this Court in

Balwant Singh and others v. Anand Kumar Sharma and others2

is enlisted in support to contend that the results urged

by the appellant cannot follow. He would also submit that

the perusal of the accounts does not establish the case

that a loss ensued to the corporate debtor, in that,

accounts do not show that the coal in question was not

used.

22. In response, Shri Kavin Gulati, learned Senior

Counsel would invite the Court to undertake a more

exhaustive survey of the Act. He drew our attention to

Section 13 besides Section 63 and the substance of his

argument is as follows:

He would contend that the law provides that if the

buyer treats the contravention of a condition as a

violation of a warranty, the rights declared in Section

2 2003 (3) SCC 433 16 CA NO. 2199/ 2021

59 come into play. The right includes a right to sue not

merely for damages but also to extinguish even the price

of the goods. He would submit that proceeding on the

basis that the appellant has accepted the goods, in view

of Section 42 of the 1930 Act, it would not be fatal to

the appellant. He would contend that Section 13 (2) would

then apply in the facts. In other words, this is a case

where, out of 500 Metric Tonnes, the Court can proceed

on the basis that there was a delivery of 412 Metric

Tonnes of coal and the same was consumed by the corporate

debtor. The act of consumption may constitute acceptance

of the goods within the meaning of Section 42. But the

mere acceptance of the goods within the meaning of

Section 41 would not deprive the buyer of the right which

follows treating a condition as a warranty and seeking

remedies as provided in Section 59 of the Act. Such

remedies include the relief of the extinction of the

price of the goods. The suit filed within the period of

limitation cannot be brushed aside for the mere reason

that it was not filed immediately or rather that the suit

was not pending within the contemplation of Section 9 of

the IBC. He would, in fact, point out that the corporate 17 CA NO. 2199/ 2021

debtor was having a turnover of about Rs.314 crores in

the previous year. He would ask the Court to bear in mind

how unreasonable it would be to still postulate that for

an amount of about Rs. 15 lakhs, a corporate body would

risk its goodwill and very existence, unless the dispute

projected was one which was genuine. He would further

contend that all of these aspects must be considered in

light of the limited scrutiny of the question as to

whether there is a dispute. He would point out that a

conspectus of the history of legislation as unravelled

by this Court in Mobilox Innovations Private Limited

(supra), would show the following:

Under Section 433 of the Companies Act, 1956, while

a dispute could be raised to resist an order of winding

up, the Court had to consider whether the dispute was a

bona fide one. The legislature was perfectly aware of

the law in this regard. The law does not require the

existence of a bona fide dispute to defend an application

under Section 9 of the IBC. All that is required is that

the dispute must not be got up and spurious. In this

regard, he drew our attention to the exposition of the

law in Mobilox Innovations Private Limited (supra).

18 CA NO. 2199/ 2021 ANALYSIS : THE ACT

23. We may notice the relevant provisions of the Act.

Sections 4 deals with sale and agreement to sell:

“4. Sale and agreement to sell.— (1) A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.

xxx xxx xxx (3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.”

Thus, till the property passes, there is no

sale. Property has been defined in Section 2(11) as

the general property in goods, and not merely a

special property.

24. Section 12 deals with Condition and warranty.

“12. Condition and warranty. — (1) A stipulation in a contract of sale with 19 CA NO. 2199/ 2021

reference to goods which are the subject thereof may be a condition or a warranty. (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract.”

25. Section 13 deals with when a condition is to be

treated as a warranty.

“13. When condition to be treated as warranty. — (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.

(2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, 1 *** the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect.

(3) Nothing in this section shall affect the 20 CA NO. 2199/ 2021

case of any condition or warranty fulfilment of which is excused by law by reason of impossibility or otherwise.”

26. Section 14 provides for certain implied warranties

and conditions and it reads as follows:

14. Implied undertaking as to title, etc.—In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is—

(a) an implied condition on the part of the seller that, in the case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass;

(b) an implied warranty that the buyer shall have and enjoy quiet possession of the goods;

(c) an implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.

27. Section 15, inter alia, provides for an implied

condition in a sale of goods by description that the

goods must conform with the description.

28. Section 16 is also relied upon by the appellant and

it reads as follows: -

“16. Implied conditions as to quality or fitness.—Subject to the provisions of this Act and of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any

21 CA NO. 2199/ 2021

particular purpose of goods supplied under a contract of sale, except as follows:— (1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description which it is in the course of the seller’s business to supply (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be reasonably fit for such purpose: Provided that, in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose.

(2) Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality: Provided that, if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed. (3) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. (4) An express warranty or condition does not negative a warranty or condition implied by this Act unless inconsistent therewith.”

29. Section 17 provides for implied condition in the case

of a sale by sample. Thus, it can be seen that the Act

22 CA NO. 2199/ 2021

declares or provides for various implied conditions and

warranties.

30. We may also notice Section 19, which deals with the

aspect of passing of property in a contract of sale of

goods.

“19. Property passes when intended to pass. — (1) Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to he transferred.

(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. (3) Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer.”

31. Chapter IV deals with performance of the contract.

Under Section 31, it is the duty of the seller to deliver

the goods and of the buyer to accept and to pay for them

in accordance with the terms of the contract of sale.

Section 32 reads as follows: -

“32. Payment and delivery are concurrent conditions. — Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the 23 CA NO. 2199/ 2021

seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods.”

32. It is necessary to notice Section 41 and still

further Section 42.

“41. Buyer’s right of examining the goods. — (1) Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract.

(2) Unless otherwise agreed, when the seller tender’s delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract.”

“42. Acceptance. —The buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them, or when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has rejected them.”

33. It is apposite also to look into Section 43.

“43. Buyer not bound to return rejected goods. — Unless otherwise agreed, where goods are delivered to the buyer and he refuses to 24 CA NO. 2199/ 2021

accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them.”

34. Chapter V deals with the rights of the unpaid seller

against the goods. Apart from exercising the right of

lien thereunder, Section 54(2), inter alia, entitles the

unpaid seller in the circumstances mentioned therein to

resell the goods. Chapter VI deals with suits for breach

of the contract. Section 55 reads as follows:

“55. Suit for price. — (1) Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods. (2) Where under a contract of sale the price is payable on a day certain irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.”

35. It may also be necessary to notice Section 59, which

reads as follows: -

“59. Remedy for breach of warranty. — (1) Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition

25 CA NO. 2199/ 2021

on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods; but he may— (a) set up against the seller the breach of warranty in diminution or extinction of the price; or (b) sue the seller for damages for breach of warranty. (2) The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he has suffered further damage.”

36. An analysis of the provisions of the Act would reveal

the following in a contract of sale of goods. A

stipulation in regard to goods can be a condition or a

warranty. A condition is put on a higher pedestal than a

warranty. A condition is treated as essential to the main

purpose of the contract. The breach of a condition gives

rise to the right with the party to treat the contract

as repudiated. In the case of the breach of a warranty

which is a stipulation in a contract collateral to the

main purpose of the contract, the party (buyer) cannot

reject the goods. He cannot repudiate the contract. Under

Section 12(3), on the breach of the warranty, the buyer

can sue for damages. As to whether a stipulation is a

warranty or a condition is a matter to be decided on the

26 CA NO. 2199/ 2021

facts of each case. The nomenclature ‘warranty’ cannot

conclude the question as to whether in fact it is a

‘condition’. Even though the breach of a condition

entitles the buyer to repudiate the contract it is open

to the buyer to treat the breach of the condition as a

breach of warranty. [See Section 13 (1)]. Section 13 (2)

then provides that the breach of any condition by the

seller can be treated as only a breach of warranty and

not a ground for repudiating the contract or rejecting

the goods. This is in situations where the contract is

not severable. Still further, for Section 13(2) to apply,

the buyer must have accepted all or even part of the

goods. This however is again made subject to an express

or implied contract providing otherwise. Section 13(2)

of the Act suffered an amendment by the Amending Act 33

of 1963. By the said amendment, the words “or where the

contract is for specific goods the property in which has

passed to the buyer” came to be omitted. Going by the

objects and reasons of the Amending Act, it is found that

the said words gave rise to some difficulty. It is, inter

alia, stated in the objects and reasons that under

Section 20 of the Act, property in specific goods in a 27 CA NO. 2199/ 2021

deliverable state passes to the buyer when the contract

is made. When there is a contract for sale of specific

goods by sample, Section 17(2) of the Act provides for

an implied condition that the bulk should correspond to

the sample in quality. It is further indicated in the

objects and reasons that when in such a case property is

delivered subsequently which does not correspond with the

sample, Section 13(2) obliged the buyer to treat the

implied condition under Section 17(2) as a warranty,

thus, robbing the buyer of the right to reject the goods

and entitling him to claim damages only. The Law

Commission also made a recommendation that in the case

of sale of specific goods by sample it should be taken

out of Section 13(2). Thus, the omission in Section 13(2)

by the Amending Act 33 of 1963 confines the compelled

treatment of a breach of a condition as a breach of a

warranty to only cases where the contract is not

severable and the buyer has accepted the goods or part

thereof. No doubt, all of this is subject to a contract

either expressly or impliedly otherwise.

37. Section 14 (a) of the Act provides for an implied

condition, in the absence of circumstances indicating a 28 CA NO. 2199/ 2021

different intention that the seller has a right to sell

the goods. This is in a sale. In the case of the agreement

to sell as would be the case of future goods, Section 14

(a) also provides that there is an implied condition that

the seller ‘will have’ the right to sell the goods when

the property is to pass. Section 14 (b) declares the

existence of an implied warranty that the buyer will have

and enjoy the right of quiet possession of the goods.

Section 14 (c) provides for an implied warranty that the

goods shall be free from any charge or encumbrance in

favour of a third party not declared or known to the

buyer before or at the time of the contract.

38. Section 15 creates an implied condition in the case

of a sale by description interalia that the goods must

correspond with the description. We may notice the

following statements relating to ‘Sale of Specific Goods

by Description’ and ‘Conditions as to Quality’ in The

Sale of Goods Act by Pollock and Mulla [11th Edition]:

“Sale of Specific Goods by Description It will be observed that the section applies where there is a “contract for the sale of goods by description”, that is to say where the goods are described by the contract. This

29 CA NO. 2199/ 2021

usually applies to a contract for the sale of unascertained or future goods, but it may apply to the sale of specific goods also, if the buyer contracts in reliance on that description. This may well occur in a case where the buyer has never seen the goods and may also occur where he has seen them, but in the latter case it is more difficult for the buyer to show that the sale was a sale by description, for usually the contract for the sale of a specific article is a contract for the article as it is and any description of it at the most amounts to a warranty, for the breach of which the buyer can only recover damages. Occasionally, where goods are sold over the counter to a customer who asks for the goods by their name, the sale may be a sale by description, but in general a customer who buys goods in a shop across the counter is not buying by description. It would appear that the only sales not by description are sales of specific goods as such. “Specific goods may be sold as such when they are sold without any description, express or implied; or where any statement made about them is not essential to their identity; or where though the goods are described, the description is not relied upon, as where the buyer buys the goods such as they are”.

Whether statements with reference to the goods amount to a description of them depends upon the terms of the contract, but in mercantile contracts they will usually amount to a part of the description.”

“Conditions as to Quality This section, it will be observed, deals only with the condition that the goods should correspond with the description. In the older cases stipulations, express or implied, as to the quality of the goods were treated as part 30 CA NO. 2199/ 2021

of their description: the Act, however, deals with them as separate conditions in section 16(2) and section 17.”

39. Section 16 declares that subject to the other

provisions of the Act and of any other law in force,

there can be no implied warranty or condition as regards

the quality or the fitness of the goods for any particular

purpose. This is subject to two exceptions. The exception

in Section 16 (1) applies when the buyer expressly or by

implication reveals to the seller, the particular purpose

for which the goods are required. Intimation of this

information to the seller brings in the belief that the

buyer relies on the seller’s skill or judgement.

Furthermore, the goods must be of the description which

must be in the course of the seller’s business to supply.

In such a situation there is an implied condition that

the goods are to be reasonably fit for the

stated/particular purposes. An implied warranty or

condition regarding the quality or fitness of the

particular purpose can be established by the trade

practice or usage of trade. However, if specified goods

are sold under trade name or patent name, there is no

31 CA NO. 2199/ 2021

such implied condition. In this regard we may notice that

Section 16 (2) provides for an implied condition

regarding the goods being merchantable. The cardinal

requirement to be satisfied in this regard is as follows.

The goods must be bought by ‘description’ from a seller.

The seller may be a manufacturer or a producer. He may

not be either. In both of the cases, the only requirement

for an implied condition to arise is that the seller must

be one who deals in goods of ‘that description’. This is

made subject to the exception in the proviso namely that

if the buyer has examined the goods, there shall be no

implied condition as regards defects which the inspection

should have revealed. This necessarily means that the

proviso would not apply where the defects are latent. In

other words, even in a case where goods are purchased

after actual inspection of the goods if defects are not

discovered then the implied condition would apply in the

circumstances mentioned in Section 16 (2). Section 17

deals with sale by sample. Section 17(2) reads as

follows:

17. Sale by sample:

(2) In the case of a contract for sale by sample there is an implied condition— 32 CA NO. 2199/ 2021

(a) that the bulk shall correspond with the sample in quality;

(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

(c) that the goods shall be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample.

Thus, the Act provides for certain implied conditions

and warranties. The parties may further also provide for

express conditions and warranties. Section 31 proclaims

that it is the duty of the seller to deliver goods in

accordance with the terms of the contract of sale.

Equally, it is the duty of the buyer to accept the goods

and to pay for them in accordance with the terms of the

contract of sale. Delivery of goods and payment of price

are acts to be performed concurrently. In other words,

the seller should be ready and willing to give possession

of the goods to the buyer in exchange for the price and

the buyer must be ready and willing to pay the price on

receipt of the possession of the goods. It is

significant, however, to notice that this obligation

though ordinarily concurrent is subject to a contract to

the contrary. In other words, there can be a condition

33 CA NO. 2199/ 2021

for payment of the price before the delivery of the

possession. Equally the payment of the price can be

postponed to a point of time after the delivery of

possession. Such matters can be regulated by the contract

between the parties. When goods are delivered to the

buyer it does not mean that he has accepted the goods if

he has not previously examined the goods. In other words,

if he (the buyer) has not previously examined the goods,

the delivery of the goods to the buyer by itself will not

be deemed to be acceptance of goods by him. He must be

afforded an opportunity of examining the goods. The

opportunity must be afforded for the purpose of finding

out whether the goods are in conformity with the agreed

terms. Section 41 (2) declares that the seller when he

delivers goods is bound on request of the buyer a

reasonable opportunity of examining the goods. This is

again subject to a contract to the contrary. In other

words, unless there is a contract to the contrary if a

demand is made by the buyer for an opportunity to examine

the goods, when delivery is given, the seller is duty

bound to afford such an opportunity. Section 42

specifically deals with when the goods are to be treated 34 CA NO. 2199/ 2021

as having being accepted. There are three circumstances

in which the law treats the goods as having been accepted:

(i) The buyer informs the seller that he has accepted

the goods.

(ii) When after the delivery of the goods to the

buyer, he does any act which is not consistent

with the ownership of the seller. It includes a

sale made by the buyer of the goods. It may

include any other form of transfer of the goods.

It may also include the consumption of the goods

by the buyer. It may embrace the destruction of

the goods.

(iii) The buyer retains the goods, even after a lapse

of a reasonable time of the delivery of the goods

and furthermore does not inform the seller that

he has rejected the goods. As to what is

reasonable time is a matter which is to be

determined on the facts.

Section 63 of the Act provides that when the Act

refers to reasonable time, it is a question of fact.

35 CA NO. 2199/ 2021

40. If any of these three circumstances exist, then, the

law provides that the buyer has accepted the goods.

Section 43 deals with a situation where a buyer who is

delivered the goods refuses to accept them. The law

contemplates that if the buyer upon being delivered the

goods ascertains and finds that the goods are not in

conformity with the contract, then he is not duty bound

to accept the goods. On the other hand, he is entitled

to reject the goods. In such circumstances, subject to a

contract to the contrary, the buyer who is entitled to

reject the goods need not return the goods to the seller.

The principle underlying Section 43 is that the buyer

need not be saddled with the liability of expense to be

incurred for returning of the goods. This is, however the

case only when the buyer acquires a right to refuse to

accept the goods. As we have noticed, Section 19 deals

with the question as to when the property in the goods

passes in a contract of sale of specific or ascertained

goods. The property would pass according to the intention

of the parties. Section 19 (2) provides for three

criteria to ascertain the intention of the parties as to

when the property passes. The court must bear in mind the 36 CA NO. 2199/ 2021

following criteria: the terms of the contract, the

conduct of the parties and the circumstances of the case.

41. Section 20 which in terms of Section 19 (3) is one

of the rules to ascertain the intention of the parties

provides that in an unconditional contract for sale of

specific goods in a deliverable state, the property

passes when the contract is made. Section 20 further

declares that the postponement of the delivery of the

goods or the payment of the price or both is immaterial

to the passing of the property upon the making of the

contract. Passing of property would lead to divesting of

title of the seller and vesting the title with the buyer.

The significance of the passing of the property is also

that unless it is otherwise agreed the goods will remain

at the seller’s risk until the property is transferred.

Equally, when the property is transferred, irrespective

of whether delivery has been made to the buyer, the risk

will be shouldered by the buyer. This is subject to the

two provisos. On each we need not dilate. Section 55,

which provides for an unpaid sellers’ right to sue for

the price also highlights the significance of the passing

37 CA NO. 2199/ 2021

of property. Section 55(1) contemplates such a suit if

property has passed.

Section 55 of the Act provides for a right to sue

with the seller of goods for the price of the goods.

Section 55(1) contemplates that property in the goods has

passed to the buyer. It further contemplates that the

buyer has wrongfully neglected or refused, to pay for the

goods, according to the terms of the contract. Section

55(2) clothes the seller with a right to sue for the

price, if the price is payable on a certain date. This

right inheres in the seller, irrespective of the fact

that delivery has not taken place, and what is more, the

property in the goods has not passed. Even the

appropriation of the goods to the contract is not

necessary in such a case. The Section reaffirms the

principle that the property can pass without there being

delivery. Delivery of goods need not always result in

passing of the property. However, what is important is

dehors any of the aspects mentioned in Section 55(2),

viz., delivery of goods, passing of property in the goods

or appropriation of goods to the contract, the agreement

between the parties, by which the buyer is obliged to pay 38 CA NO. 2199/ 2021

the price on a certain date, would entitle the seller to

sue for the price of the goods.

42. Section 59 of the Act deals with the remedies open

to the buyer upon there being a breach of warranty. We

have already noticed that a breach of warranty gives rise

to a claim for damages. (See Section 12 (3)). Section 13

as noticed by us entitles the buyer to waive a condition

or to elect or treat the breach of the condition as a

breach of the warranty. Section 13 (2) as noticed by us

subject to a contract otherwise limits the right of the

buyer even when there is a breach of condition to sue

only for breach of warranty. Section 59, accordingly,

applies in all the three situations, which are as

follows. There occurs a breach of the warranty. Secondly,

a condition is violated by the seller, but the buyer

elects to treat the breach of the condition as a breach

of the warranty. Thirdly, under Section 13 (2), in view

of the buyer having accepted the goods, in circumstances

described in Section 13 (2), the buyer is compelled to

sue under Section 59, namely, on the footing that there

is a breach of warranty. Thus, the word ‘elects’ in

Section 59 is relatable to Section 13(1) whereas the 39 CA NO. 2199/ 2021

words ‘is compelled’ in Section 59 is to be read with

Section 13(2) of the Act.

43. It is clear that a breach of warranty does not

entitle the buyer to reject the goods. The remedies which

he can seek under Section 59 are as follows. He can seek

the reduction (diminution) of the price. He may also seek

to be freed from the liability to pay the price

(extinction of the price). In other words, relying upon

the breach of the warranty, he can refuse to pay the

price or canvas for the reduction of the price. Section

59 further proclaims that the buyer may sue the seller

for damages for breach of warranty. Section 59(2)

declares that with respect to the same breach of warranty

which is projected as the foundation for seeking

diminution or wiping out of the liability to pay the

price, the buyer can also seek damages.

44. A question may arise as to whether after the delivery

of the goods by the seller and what is more, even after

acceptance of the goods by the buyer, whether the

provisions of Section 59 can be invoked by the buyer? If

the property has passed to the buyer within the meaning

40 CA NO. 2199/ 2021

of Section 19 which on the one hand entitles the seller

to sue for the price of the goods, in view of the word

‘wrongfully’ neglects or refuses to pay under Section 55

read with Section 59, cannot the buyer in a suit for the

price filed by the seller, ‘set up’ a breach of warranty

within the meaning of Section 59 and persuade the court

to either decree a reduction in the price or extinguish

the liability of the buyer to even pay any part of the

price. To put it differently, if the goods are delivered

and accepted within the meaning of Section 42 of the Act,

will the right of the buyer arising out of breach of

warranty under Section 59 be extinguished? If the mere

acceptance of the goods results in depriving the right

of the buyer to invoke Section 59 of the Act, then,

undoubtedly, the buyer would be liable to pay the price.

Let us assume that there is delivery and acceptance in a

given case. If parties intended that the property in the

goods would pass only after delivery is effected and

acceptance is made and if the case falls under Section

13 (2) of the Act and the buyer sets up a compelled breach

of warranty though in fact a condition was violated, it

may not be legal to deny the benefit of the range of 41 CA NO. 2199/ 2021

remedies open to a buyer under Section 59. Acceptance

of goods at any rate within the meaning of Section 13(2),

if it does not constitute passing of property would not

also deprive the buyer of the right under Section 59 of

the Act. As long as a condition is violated, be it implied

or express, and it is not waived, then, present other

elements of Section 13(2), Section 59 applies.

45. What would be the position if, after there is

acceptance of the goods, under Section 42 even if it be

a case of express intimation of acceptance, that events

occur which lead to the creation of circumstances

attracting Section 14? As for instance, the buyer is

confronted with a situation where he finds that the goods

were in fact stolen and the seller had no right to sell

the goods. A third party comes forward and substantiates

his case that the goods were never the property of the

seller. Would it not be a condition under Section 14 (a)

which has been observed in its breach by the seller? Let

us further assume that the buyer has not yet paid the

price. Can he not despite having accepted the goods

exercise his right under Section 59 and seek extinction

of the price apart from claiming damages? 42 CA NO. 2199/ 2021

46. Under the law, namely the Act, if a suit for price

were brought in similar circumstances, the question would

arise squarely, whether the second respondent as buyer

could defend the action by ‘setting up’ diminution or

extinction of the price. Could the second respondent as

defendant seek to non-suit the first respondent by

establishing a breach of a warranty. Undoubtedly,

ordinarily acceptance of the goods by the buyer, a matter

which falls to be decided with reference to Sections 41,

42 and 43 would conclude the matter in favor of the

seller. What however would be the position where after

acceptance, circumstances exist which justify the buyer

in pleading a breach of a condition which is treated as

a warranty or a breach of warranty which is found after

acceptance. Take for example breach of a condition under

Section 14 (a). In case where the price has not been paid

and suit is brought under Section 55 (1), where the buyer

has found that the seller has no right to sell the goods,

can the buyer be robbed of his right to refuse to pay the

price vouchsafed for a buyer under Section 59 of the Act?

The answer would appear to us to be in the negative. No

doubt in such a case it would be said that there is no 43 CA NO. 2199/ 2021

passing of property or that the seller had no property

to pass. Equally, if after acceptance of the goods, the

quiet possession of the goods within the meaning of

Section 14 (b) is thwarted by third party claims, the

implied warranty for such possession would stand violated

giving rise to the buyer a right under Section 59 to seek

such diminution of the price or even extinction of the

price. Even a claim for damages over and above the relief

of diminution and even extinction of the price is

permitted under Section 59 (2).

47. It is to be remembered, that under Section 31 of the

Act it is the duty of the buyer to pay for the goods in

terms of the contract. Delivery and payment of price are

made concurrent conditions, unless otherwise agreed. This

means with possession of the goods being obtained, the

buyer becomes obliged to pay the price. [See Section 32].

In this case, the contract obliged the second respondent

to pay the price within seven days, according to the

first respondent as per the purchase order.

44 CA NO. 2199/ 2021

THE DECISION IN MOBILOX

48. After an exhaustive survey of the legislative history

of the IBC, and case law, this Court, speaking through

R.F. Nariman J., held inter alia:

“32. In the passage of the Bills which ultimately became the Code, various important changes have taken place. The original definition of “dispute” has now become an inclusive definition, the words “bona fide” before “suit or arbitration proceedings” being deleted. In Section 8(1), the words “through an information utility, wherever applicable, or by registered post or courier or by any electronic communication” have been deleted. Likewise, in Section 8(2), the period of “at least 60 days … through an info rmation utility or by registered post or courier or by any electronic communication” has also been deleted. In Section 9(5), the absence of a proviso similar to the proviso occurring in Section 7(5) was also rectified. Further, the time periods of 2 and 3 days were uniformly substituted, as has been seen above, by 7 days, so that a sufficiently long period is given to do the needful.

xxx xxx xxx

34. Therefore, the adjudicating authority, when examining an application under Section 9 of the Act will have to determine:

(i) Whether there is an “operational debt” as defined exceeding Rs 1 lakh? (See Section 4 of the Act) 45 CA NO. 2199/ 2021

(ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceed ing filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factor s mentioned in Section 9(5) of the Act.

xxx xxx xxx

38. It is, thus, clear that so far as an operational creditor is concerned, a demand notice of an unpaid operational debt or copy of an invoice demanding payment of the amount involved must be delivered in the prescribed form. The corporate debtor is then given a period of 10 days from the receipt of the demand notice or copy of the invoice to bring to the notice of the operational creditor the existence of a dispute, if any. We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which “the existence of a dispute” alone is mentioned. Even otherwise, the word “and” occurring in Section 8(2)(a) must be read as

46 CA NO. 2199/ 2021

“or” keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as “or”. If read as “and”, disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an Arbitral Tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an Arbitral Tribunal or a court for up to three years, such persons would be outside the purview of Section 8(2) leading to bankruptcy proceedings commencing against them. Such an anomaly cannot possibly have been intended by the legislature nor has it so been intended. We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the parties.

xxx xxx xxx

44. We have already noticed that in the first Insolvency and Bankruptcy Bill, 2015 that was annexed to the Bankruptcy Law Reforms

47 CA NO. 2199/ 2021

Committee Report, Section 5(4) defined “dispute” as meaning a “bona fide suit or arbitration proceedings…”. In its present avatar, Section 5(6) excludes the expression “bona fide” which is of significance.

Therefore, it is difficult to import the expression “bona fide” into Section 8(2)(a) in order to judge whether a dispute exists or not.

xxx xxx xxx

48. To similar effect is the judgment of the Chancery Division in Hayes v. Hayes [Hayes v . Hayes, 2014 EWHC 2694 (Ch)] under the UK Insolvency Rules. The Chancery Division held:

“I do not think it necessary, for the purposes of this appeal, to embark on a survey of the authorities as to precisely what is involved in a genuine and substantial cross-claim. It is clear that on the one hand , the court does not need to be satisfied that there is a good claim or even that it is a claim which is prima facie likely to succeed. In Bayoil S.A., In re [Bayoil S.A., In re, (1999) 1 WLR 147 (CA)] itself, Nourse, L.J. referred, at WLR p. 153, to what Harman, L.J. had said in L.H.F. Wools Ltd., In re [L. H.F. Wools Ltd., In re, 1970 Ch 27 : (1969) 3 WLR 100 (CA)] where Harman, L.J., having referred to a previous case, said: (Ch p. 36 E-F) ‘… The majority decided in that case that, shadowy as the cross-claim was and improbable as the events said to support it seemed to be , there was just enough to make the principle

48 CA NO. 2199/ 2021

work, namely, that it was right to have the matter tried out before the axe fell.’ On the other hand, the court should be alert to detect wholly spurious claims merely being put forward by an unwilling debtor to raise what has been called “a cloud of object ions” as I referred to earlier.”

xxx xxx xxx

51. It is clear, therefore, that once the operational creditor has filed an application , which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “exist ence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above.

So long as a dispute truly exists in fact and

49 CA NO. 2199/ 2021

is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.” (Emphasis supplied)

THE PURCHASE ORDER

49. The purchase order dated 27.10.2016 reads, inter

alia, as follows:

“PURCHASE ORDER xxx xxx xxx Dear Sir, This has reference to you offer and subsequent discussion had with you, we are pleased to place our purchase order no. the following terms and conditions.

SL. Description Quantity Rate Per Disc. Amount NO. of Goods %

50 CA NO. 2199/ 2021

1. Imp.Coal 5,00,000 3.14 Kgs 15,70,0 .00 Kgs 00.00 GCV (ADB) - 5400 KCAL TOTAL MOISTURE (ARB) -40% BY WT (+-2%) Inherent Moisture (ADB) 12%by W (+/-2%) Volatile Matter (ADB) -38-40% ASH (ADB) 5- 7% BY WT Sulfur (ADB) 1% by Wt. Fix Carbon - by Difference Size-0-50 MM Shortage Allowed - 1% INPUT CST @ 2% AGST C- 2 % 31,400.00 FORM

Total 5,00,000 INR .00 Kgs 16,01,4 00.00

Amount Chargeable (in words): Indian Rupees Sixteen Lakh One Thousand Four Hundred Only Terms & Condition With Statutory Details Note: 1. Certificate of Analysis is required along with Material Note: 2. All necessary document should be mention our P.O. Number compulsory otherwise Material is not Unloading at our site Note: 3. Courier Name : - Professional Courier - Kindly Mention on your envolope - Delivered to Jamner Professional Courier Branch Office Price Basis : EX-HAZIRA

51 CA NO. 2199/ 2021

Payment Terms : Receipt of material with in 7 days Freight :

Transportation : JILANI LOGISTICS Insurance : NIL Delivery : IMMEDIATE Guarantee : We will reserve the right to reject the

material at our ground site towards any quality of manufacturing defect ”

50. The purchase order is dated 27.10.2016. The quotation

is described as telephonic and dated 27.10.2016. It is

specifically mentioned as against the query where to be

used as follows: FBC Boiler. The goods were described as

imported coal. Apart from mentioning the quantity and the

price, it is indicated that the coal must be of a certain

quality in terms of its characteristics which we have

already noticed. Under the terms and conditions with

statutory details, Note 1 indicated that the material

should be accompanied with a certificate of analysis.

Payment terms provided that it was to be paid within

seven days of the receipt of materials. Delivery must be

immediate. Under the heading ‘Guarantee’, it is mentioned

that the second respondent would reserve the right to

reject the material at its ground site towards any

quality of manufacturing defect. The supply commenced

immediately as contemplated in the purchase order,

52 CA NO. 2199/ 2021

namely, from 28.10.2016. Indisputably, the goods were

imported coal. This could be treated as a sale of goods

by description as the contract for sale related to 500

MT of Indonesian coal.

51. In this case, a perusal of the notice sent by first

respondent and the application under Section 9 of the IBC

would show that the case is premised on there being a

sale, and there was a ‘debt’ owed by the second respondent

under the sale. It means that the cause of action in

general law would have been a suit for the price of the

goods sold within the meaning of Section 55 of the Act.

52. On 30.10.2016, an email was indeed dispatched to the

first respondent [See paragraph 4 of this Judgment]. The

email was sent by STDPL, the sister concern of the second

respondent. This email has been brushed aside by the

NCLAT in the impugned order on two grounds. In the first

place, the NCLAT has proceeded on the basis that there

was no reference to purchase order dated 27.10.2016 and

the concern raised in the email was qua purchase order

dated 11.10.2016 which related to the sister concern of

the second respondent namely, STDPL. The second reason

53 CA NO. 2199/ 2021

for refusing the appellant to draw support from the said

email is that there is no reference to email dated

30.10.2016 in the reply to the statutory notice under the

IBC.

53. We are of the view that the approach of the NCLAT

cannot be sustained. A perusal of the email would clearly

indicate that though it was sent by STDPL express

reference is made to the second respondent also, and

thereafter, the issues relating to the quality of the

coal are articulated. We also notice that pictures were

attached for the reference.

54. The further fact that there is no express reference

to email dated 30.10.2016 in the reply notice given by

the second respondent to the statutory notice under

Section 8 of the IBC given by the first respondent will

not, in our view, detract from the impact of the

communication dated 30.12.2016. It is not as if there is

a dispute about the sending and receipt of the

communication dated 30.10.2016. Therefore, we are of the

view that the NCLAT has clearly erred in refusing to lay

store by the said communication. On 03.11.2016,

54 CA NO. 2199/ 2021

undoubtedly, the second respondent in its own name has

ventilated its complaint about the inferior and the poor

quality of the Indonesian coal. The impact of using such

coal on the boiler and about the damage being done to the

boiler has been specifically articulated. Further, a

request was made to stop delivery of the goods. Even

advice was sought as to what is to be done about the

loss. Thereafter, it is stated that for any more losses

occurred due to the poor inferior quality of the coal,

the second respondent may debit the same in the account

of the first respondent. On the very next day, that is,

04.11.16, the first respondent wrote back by pointing to

the improbability about the deviation from the quality

of the coal but it was indicated that the further supply

was being stopped. Thus, the supply was effected of 412

MT out of the contracted quantum of 500 MT. The supply

was stopped on the basis of the communication dated

04.11.16.

55. This is a case where there was a contract for sale

of goods. The contract as gleaned from the purchase order

related to goods which were sold by description, namely,

Indonesian coal. Parties clearly contemplated that the 55 CA NO. 2199/ 2021

coal was to be a certain quality, the details of which

are expressly enumerated in the purchase order. The

purpose for which the coal was purchased was also

indicated, namely, it was to be used in a boiler.

Therefore, it formed a part of the raw material for the

second respondent. Pursuant to the purchase order, it is

undoubtedly true, that 412 MT was delivered at the

factory site of the second respondent. It is beyond

challenge that no part of 412 MT has been returned by the

second respondent to the first respondent. It would be

safe to proceed on the basis that the goods so delivered

may have been used or consumed. It may constitute

acceptance of the goods within the meaning of Section 42

of the Act. But then the case of the appellant is anchored

in Section 13(2) of the Act. The case is that the

characteristics of the coal or quality of the coal with

reference to certain objective criteria were indeed

specified and was understood as a condition to be

fulfilled by the seller and that those conditions were

not fulfilled by the first respondent-seller. It is,

therefore, the case of the appellant that the acceptance

of the goods under Section 42 may not detract from Section 56 CA NO. 2199/ 2021

13(2) of the Act applying to the facts. In other words,

treating the quality of the coal with reference to

certain standards as conditions to be fulfilled by the

seller, the mere acceptance of the goods by the buyer may

not prevent the buyer from still contending that there

has been a breach of the condition, but since the law

permits the buyer to treat such breach of the condition

when there is acceptance of the goods as only a breach

of a warranty, Section 59 of the Act immediately gets

attracted. Section 59 of the Act contemplates a buyer

‘setting up’ a breach of a warranty to diminish or reduce

the price or even extinguish it. If this line is accepted,

it could indeed be said that the decks are not cleared

for the first respondent-seller for its claim under

Section 8.

56. However, the objections of the first respondent may

be noticed. Apart from supporting the order of the NCLAT

with reference to its contents, it is pointed out that

the case of the appellant is a mere ruse, and that no

complaint was raised on the ground and though there was

guarantee under the purchase order, nothing prevented the

second respondent from rejecting the goods. The second 57 CA NO. 2199/ 2021

respondent not only accepted the supply of the goods but

proceeded to consume the goods. A huge quantum of 412 MT

was supplied from 28.10.2016 to 03.11.2016. No debit was

made in the accounts in keeping with the intimation in

the email dated 03.11.2016. This rules out the case of

any loss. There is no evidence of any loss. The case of

the appellant would fall under a mere bluster.

57. We are not dealing with a suit under the Act either

by the seller or the buyer. We are not oblivious to the

fact that the suit has already been laid by the second

respondent seeking damages. The factum of the filing of

the suit, however, cannot be taken into consideration for

the purpose of deciding whether there is a preexisting

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. No doubt, the

documentary evidence furnished by the first respondent,

namely, the purchase order indicates that the price is

to be paid within seven days of receipt of the goods. It

is true that Section 55(2) of the Act speaks about a

contract of sale where the price is payable on a day

certain entitling the seller to sue for price. This is 58 CA NO. 2199/ 2021

irrespective of the fact that the property in the goods

has not passed and the goods have not been appropriated

to the contract and whether delivery has been made or

not. We may notice, for the purpose of the limited inquiry

we can do, for deciding, whether there was a pre-existing

dispute, to apply Section 55(2) a certain day must be

fixed for payment of price. In this case, the payment

terms speak about ‘within seven days of delivery’. We may

incidentally notice that though in the context of Article

54 of the Indian Limitation Act, 1963, a bench of three

learned Judges in Ahmadsahab Abdul Mulla (2) (dead) v.

Bibijan and others3 has with reference to the requirement

in Article 54 held that the date for performance which

is refused must be a fixed date. In this case, Section

55(2) speaks about a certain date which must be fixed in

the contract. The clause in the purchase order refers to

payment of the price being effected within 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

3 (2009) 5 SCC 462 59 CA NO. 2199/ 2021

could be treated as a day which is certain. We need not

explore the matter further particularly having regard to

the pendency of the suit, and also, the nature of the

limited inquiry to be conducted under the IBC. We may

further note, however, that Section 55(2) also

contemplates that the buyer must wrongfully neglect or

refuse to pay the price. Interestingly, it will be

noticed that the law-giver has in Section 55(1) also used

the words “and the buyer wrongfully neglects or refuses

to pay for the goods” but the law-giver has further added

the words “according to the terms of the contract” which

words are not found in Section 55(2). Even proceeding on

the basis that under Section 55(2) of the Act, this is a

case where there is a certain day fixed for the payment

of the price irrespective of the passing of the property

inter alia, the law does clothe the buyer with the right

to resist the suit on the basis that the refusal to pay

the price is not wrongful. In other words, he can lean

on Section 59 and set up a breach of warranty and seek

at least the diminution of the price if not extinction

of the same. That apart, he has a right to seek damages

even on the same breach.

60 CA NO. 2199/ 2021

58. Section 4 of the Act, inter alia, contemplates that

an agreement to sell becomes a sale when the time elapses

or the conditions are fulfilled subject to which the

property in the goods is to be transferred. As far as

Section 55(1) of the Act, it clothes a seller with a

right to sue for the price of the goods when a property

in the goods has passed. The suit can be resisted by the

buyer on the basis that the refusal to pay the price is

not wrongful having regard to the terms of the contract.

As to when property passes and transforms a contract for

sale into a sale is largely a matter of intention. The

rules as contained in Sections 19 to 24 of the Act would

be employed. The task, however, remains to find out the

intention of the parties. We may notice that a Division

Bench of the High Court of Nagpur in the judgment in

Mangilal Karwa v. Shantibai4 has made the following

observations in an appeal by the defendant-buyer who had

agreed to purchase 503 bags of Masur but found that the

goods were not of merchantable quality and were rotten:

“11. The question whether the Defendant- purchaser had an option to reject the goods because what he bargained for was masur and 4 AIR 1956 Nag 221.

61 CA NO. 2199/ 2021 not some rotten stinking stuff which was once masur of that year's harvest does not arise for consideration in this case. For, even if there be a breach of a condition, the Defendant by taking delivery has, under Section 13 of the Act, elected to treat it as a breach of warranty which under Section

59 entitles him to a diminution or extinction of the price.

It is settled law that even after the goods have been delivered into the actual possession of the buyer, the performance of the seller's duties may still be incomplete by reason of the breach of some of the conditions or warranties - express or implied - whether as to title, or quality, or fitness to Which he has bound himself by the contract: (Benjamin on Sale, Page 984).

The question then is what is the diminution in price to which the Defendant is entitled under Section 59 of the Act?

xxx xxx xxx

In the instant case the Defendant has set up the breach of warranty of quality in order to claim a diminution of price under Clause

(a) of Sub-section (1). He is therefore entitled to such damages as are available to him under Clause (a) which would be all damages resulting as a natural and ordinary consequence of his breach of contract in supplying a damaged article or an article of an inferior quality than the one contracted for.”

No doubt, the Court found, in the facts therein, that

the property had not passed. For the purpose of this case,

we may not have to adjudicate and find that the property 62 CA NO. 2199/ 2021

has passed in the goods to the second respondent.

59. In Mobilox (supra), this Court took the view that

one of the objects of the IBC in regard to operational

debts is to ensure that the amount of such debts which

is usually smaller than the financial debts does not

enable the operational creditor to put the corporate

debtor into the insolvency resolution process

prematurely. It is further declared that it is for this

reason that it is enough that a dispute exists between

the parties. It is further the law as declared in Mobilox

(supra) that Section 5(6) of the IBC excludes the

expression bona fide which qualified the words suit or

arbitration proceedings in Section 5(4) under the

Bankruptcy Law Reforms Committee Report. All that is

required is to see whether there is a plausible

contention which must be investigated. This Court has

gone on to declare that a ‘patently feeble’ legal

argument may not be a plausible dispute. We respectfully

agree. We are unable to find that in the facts of this

case, that the case set up by the second respondent was

a patently feeble legal argument. Again, following what

this Court held in Mobilox (supra), we do not have to go 63 CA NO. 2199/ 2021

to the extent of finding that the second respondent is

likely to succeed. Still further, finding guidance from

Mobilox (supra), the examination of the merits need not

transcend the limited extent which we have undertaken

which is to find that the case of the second respondent

is not to be brushed aside as spurious, hypothetical or

illusory. We cannot find that the dispute as projected

by the appellant on behalf of the second respondent does

not exist. In the teeth of the emails which we have

adverted to, and the inference sought to be drawn in

particular as also the Lab Reports produced, no doubt,

from the second respondent’s Labs, we cannot also find

that the case of the corporate debtor is wholly

unsupported by evidence. As to the acceptability of these

materials and the weight to be attached to them, needless

to say, we have not pronounced on the same.

60. When we speak about evidence, we must not overlook

the law laid down in Mobilox (supra) that the court need

not be satisfied that the defense is likely to succeed.

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 64 CA NO. 2199/ 2021

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.

61. On the one hand the case of the appellant appears to

be that the boiler can be used by putting in large

quantities of raw material (300 MT approximately) and

this justified the consumption of the supplied goods over

a period of a few days, and yet, justifying the complaint

about the quality of the raw material and its impact on

the boiler. The stand of the first respondent is that

there is no material to justify such a claim. We are of

the view that this would involve the court making a deeper

foray into the merits and attempting to find whether the

dispute is bona fide as against it being a plausible

contention. We cannot be unmindful about the impact of

Section 13(2). In other words, the delivery of the goods

and the acceptance of the goods by use of the goods by

the corporate debtor being not in dispute, the impact of

Section 13(2) read with Section 59 cannot at least for

65 CA NO. 2199/ 2021

the purpose of determining whether there is a pre-

existing dispute be ignored.

62. No doubt, the first respondent lays store by the

purchase order requiring certificate of analysis in that

in view of there being no challenge to the said

certificate of analysis and there being no rejection of

the goods which was contemplated under the purchase order

at the ground site, it is contended that the dispute

cannot be countenanced. The appellant would, on the other

hand, seek to buttress his case with reference to the lab

reports, no doubt, procured from the labs which the

second respondent has set up. The appellant, it must not

be overlooked has a definite case that, only upon use of

the goods, the defect in the goods came to be discovered.

No doubt, the lab reports may support the appellant. It

is not the case of either party that the quality of the

coal as set out in the purchase order is something which

could be established on mere physical examination. As far

as the contention that no debit note was raised in respect

of supplied goods and that the accounts may not bear out

the case of the appellant about the alleged loss, as a

result of the use of the goods in question, we feel that 66 CA NO. 2199/ 2021

while they may indeed have lent assurance to the case of

the corporate debtor, their absence may not clinchingly

rule out the existence of a ‘pre-existing dispute’ under

the IBC. 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 NCLAT, has clearly erred in not appreciating

the issue, bearing in mind the principles in the Act.

63. In view of our finding that the NCLAT has erred in

its finding about the existence of a pre-existing

dispute, the impugned order merits interference. In the

said view, we need not pronounce on the aspect about the

effect of Rule 150 being breached by the NCLT.

64. We make it clear, however, that as far as the suits

filed by the second respondent are concerned, we must not

be treated as having pronounced on any factual issues and

observations made in this regard must be treated as

having been made for the purpose of deciding this appeal.

We also make it clear that since Section 13 of the Act

67 CA NO. 2199/ 2021

permits the buyer to waive a condition, it will be open

to the first respondent to canvass that at any rate the

second respondent has waived the alleged condition.

65. The appeal is allowed. The impugned order will stand

set aside. The application filed by the first respondent

against the second respondent under Section 9 will stand

rejected. In view of the fact that the appellant succeeds

on the basis that there is a pre-existing dispute within

the meaning of IBC, we leave open all the remedies and

contentions available to the first respondent in law.

Parties are left to bear their respective costs.

…………………………………………………………………J. [ K.M. JOSEPH ]

…………………………………………………………………J. [ HRISHIKESH ROY ]

New Delhi;

October 13, 2022.

68