Rajratan Babulal Agarwal vs Sonal Trading Company And Ors

[Arising out of the Impugned Order dated 16.12.2022 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench in C.P. (IB) No. 2616/MB/2019] In the matter of: RAJRATAN BABULAL AGARWAL Gokul- Flat No. 4, Geet Gopal Apartment, Opp. Laxmi Process, Ichalkaranji- 416115 Dist- Kolhapur, Maharastra.

Office: 10/868, Vardhaman Chowk, Ichalkaranji, Dist. Kolhapur 416115 Maharashtra. Mobile No 9822044737. .... Appellant Versus

1. SONAL TRADING COMPANY Singhania and Co. 83-C, Mittal Towers, Nariman Point, Mumbai- 400021

2. SHRI TRADCO INDIA PRIVATE LIMITED 26, Anantwadi, 4th Floor, Bhuleshwar, Mumbai 400002

Mr. Rajendra Kishanrao Joshi Interim Resolution Professional, Registration No: IBBI/IPA002/IP-N01205/2021- 2022/14020, Sanjana B 10, Flat No 7 Behind Madhukar Hospital, Hinghnekhurd Sinhagad Road Anand Nagar, Pune-411051.

.... Respondents Present: For Appellant : Mr. Krishnendu Dutta & Mr. Abhijeet Sinha, Sr. Advocates with Mr. Anish Agarwal, Mr. Pratik, Mr. Tejas Agarwal, Ms. Natasha Bagga, Mr. Abhinav Maurya, Mr. Harsh Gurbani, Advocates.

For Respondent : Mr. Aslam Ahmed Mr. Abhishek Dwivedi, Advocates for R1. Mr. Sanjiv Sen, Sr. Advocate with Ms. R. Sampat, Mr. Prahalad Balaji, Mr. Jharna Singh, Mr. Parimal Rai, Mr. Karan Shamra, Ms. Simran Gupta and Mr. Aniket Rohan, Advocates for SBI/ Intervener.

JUDGMENT

(Hybrid Mode)

Per: Barun Mitra, Member (Technical)

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated

16.12.2022 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-III) in

C.P. (IB) No. 2616/MB/2019. By the impugned order, the Adjudicating Authority

has admitted Section 9 application filed by the Respondent-Operational Creditor

for initiation of CIRP against the Corporate Debtor-Tradco India Private Limited.

Aggrieved by the impugned order, the present appeal has been preferred by the

Appellant who is the suspended Director of Corporate Debtor.

2. Coming to the factual matrix of the case at hand, there was a business

arrangement between Sonal Trading Company-Operational Creditor and the

Corporate Debtor-Tradco India Pvt. Ltd. by which the Operational Creditor

supplied maize through two brokering entities to Yashwant Glucose Karkhana Page 2 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 ("YGK" in short) on the directions of the Corporate Debtor who in turn got the

maize processed to make forward supply of the maize and its derivatives to other

end users/customers. As per this business relationship the Corporate Debtor

had issued five purchase orders during the period 16.07.2017 to 19.08.2017 to

the Operational Creditor for supply of maize and the Operational Creditor had

delivered the products to the Corporate Debtor. While it is contended by the

Operational Creditor that the Corporate Debtor had accepted the supply without

demur or protest on the quality of goods supplied, it is alleged by the Corporate

Debtor that the delivery against the fifth supply order was discontinued by them

midway as there was a pre-existing dispute between the parties with regard to

quality of maize supplied. The Operational Creditor however raised invoices for

a total amount of Rs 3.14 Cr. against which payments had been received from

the Corporate Debtor of only Rs 2.01 Cr. with an outstanding unpaid amount of

Rs 1.13 Cr. Since no payment was forthcoming from the Corporate Debtor

despite issue of reminders, Section 8 Demand Notice was issued by the

Operational Creditor on 20.06.2019. The Corporate Debtor replied to the Section

8 Demand Notice on 01.07.2019 and in their Notice of Dispute, the Corporate

Debtor disputed the invoices; denied the dues claimed and also raised pre-

existing disputes. The Operational Creditor thereafter filed the Section 9

application against the Corporate Debtor which was admitted by the

Adjudicating Authority vide impugned order dated 16.12.2022 on the ground

that debt and default stood proven and that the pre-existing disputes raised by

Corporate Debtor being spurious did not merit cognisance.

Page 3 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022

3. Making submissions on behalf of the Appellant, Shri Krishnendu Dutta

and Shri Abhijeet Sinha, Ld. Senior Counsels belaboured to explain the

prevailing industry practice and how the business transaction was structured

between the Corporate Debtor; Operational Creditor; intermediaries/brokers and

end- users/customers to submit that the Corporate Debtor had purchased the

cattle-feed not from the Operational Creditor directly but through two

intermediary brokering entities of the Operational Creditor, namely, Dinesh

Trading Company ("DTC" in short) and Swastik Corporation ("Swastik" in

short). The maize supplied by the agent-DTC was in turn directly sent to

Yashwant Glucose Karkhana who in turn manufactured and sold fibre and husk

out of the raw maize through a broker, namely M/s Kadam Enterprises and

delivered the same to Chitale Dairy. This husk and fibre was utilized by Chitale

Dairy for consumption by the cattle in their dairy farm. Several cattle in Chitale

Dairy died because the husk and fibre delivered by YGK was contaminated. Due

to this mishappening in Chitale Dairy, YGK had issued a debit note to the

Appellant-Corporate Debtor. The Corporate Debtor thereafter aborted the fifth

purchase order of 500 MT midway and the delivery was limited to 273 MT with

further supplies stopped. It was vehemently contended that the very fact that

the delivery against the fifth supply order was discontinued by them midway

substantiates pre-existing dispute between the parties. Submission was also

pressed by the Appellant that due to this defective supply, a debit note had been

issued to them by YGK on 25.10.2017 and in turn they had issued a debit note

on 31.03.2018 to the Operational Creditor which again clearly signified pre-

Page 4 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 existing dispute. To further buttress their argument that the debit note had

actually been issued, it was added that these debit notes were also reflected in

the income tax returns of the Corporate Debtor well before the Section 8 Demand

Notice. Reliance was placed on the judgement of the Hon'ble Supreme Court in

Mobilox Innovations Vs Kirusa Software Ltd. (2018) 1 SCC 353 to contend

that the Adjudicating Authority is only required to see whether a plausible

dispute has been raised which requires further investigation and whether the

assertion of dispute is supported by evidence or not. The threshold in deciding

the admission of a Section 9 application being much below the preponderance

of probability, the Adjudicating Authority was not required to evaluate whether

the defence raised is likely to succeed or not. However, the Adjudicating

Authority while ignoring the notice of dispute raised by them in their reply to the

Section 8 Demand Notice ended up wrongfully holding the disputes raised to be

spurious and moonshine.

4. Assertion was also made that the industry practice in this sector was that

the operations of the principal are conducted through agents. It was contended

by the Appellant that since DTC was the agent of the Operational Creditor and

DTC had confirmed the receipt of the debit note, this debit note acknowledgment

by DTC implied that the Operational Creditor also had prior knowledge of the

debit note. Contending that any action on the part of DTC was binding on the

Operational Creditor, reliance has been placed on the judgment of the Hon'ble

Delhi High Court in M/s Civtech Engineers Pvt. Ltd. Vs M.N. Securities Pvt.

Ltd. 2010 SCC Online Del 2973 and judgement of the Hon'ble High Court of

Page 5 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 Madras in M. Masilamani Vs M. Veeramani 2017 SCC Online Mad 4978. It

was also added that in terms of Section 229 of the Indian Contract Act, the debit

notice sent to the DTC being the agent had the same legal consequences as a

notice being sent to their Principal which in the present case happened to be the

Operational Creditor.

5. To substantiate that the pre-existing dispute was genuine, attention was

also adverted to certain communications exchanged prior to the issue of Section

8 Demand Notice between the Corporate Debtor, their broker and end-

user/customer with regard to supply of contaminated goods and that these

communications. One such communication was from YGK enclosing a debit note

of Rs 2 Cr. against the Corporate Debtor. Another communication was one issued

by Chitale Dairy to M/s Kadam Enterprises which had brokered the deal for sale

of fibre and husk between YGK and Chitale Dairy. The third communication

adverting attention to pre-existing dispute was a letter from Chitale Dairy to YGK

wherein it was stated that the cattle faced medical issues because of

consumption of contaminated corn husk supplied by them through M/s Kadam

Enterprises. Reliance has also been placed on certain notarised affidavits issued

by various entities also show that pre-existing disputes existed between the

parties. DTC in their affidavit mentions the issue of debit note and settlement

talks between the Operational Creditor and the Corporate Debtor. Another

affidavit was by a relative of the Operational Creditor, namely, Shri Sanjay Patni

which mentions about settlement talks between the Operational Creditor and

Corporate Debtor. The third affidavit by an employee of the Corporate Debtor

Page 6 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 attested that the lab test reports showed contamination of fibre and husk

causing sickness of the cattle at Chitale Dairy. Another affidavit by one Mr. Vikas

Chowgule testified that the Operational Creditor had visited the factory of YGK

and Chitale Dairy alongwith DTC in view of the cattle sickness caused by the

supply received. The veracity of the contents of these affidavits would entail the

need to forward evidence in a trial in a civil suit which lay beyond the remit of

the Adjudicating Authority.

6. Refuting the contentions made by the Appellant-Corporate Debtor, Shri

Aslam Ahmed, Ld. Counsel for Respondent No.1-Operational Creditor submitted

that the Operational Creditor had fulfilled the mandate of the purchase orders

placed on them and that the goods had been received by the Corporate Debtor

without any demur or protest. No contemporaneous communication has been

placed on record which points out towards any dispute with regard to quality or

quantity of goods delivered to and received by the Corporate Debtor. Nor is there

any evidence to show that the damaged stock was returned which would have

been the normal recourse taken by any purchaser who is not satisfied with the

material supplied. It is the contention of the Respondent that the debit-note

purportedly raised by the Appellant was never served upon or e-mailed to the

Operational Creditor. Further, the allegations with regard to quality issues raised

by Chitale Dairy are also not a relevant ground of dispute since there was no

privity of contract between the Operational Creditor and other third-party

entities like Chitale Dairy. Further, there is nothing to establish co-relation

between the maize which had been supplied to the YGK by the agent of the

Page 7 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 Operational Creditor and the fibre and husk which was finally delivered to

Chitale Dairy by YGK. Hence the debit-note raised by YGK lacked nexus with the

maize supplied by the Operational Creditor through DTC. Even the disputes

raised by the Corporate Debtor on the basis of affidavits sworn by other third-

party entities also have no bearing as these affidavits were filed much after the

Section 8 Demand Notice. It was strenuously contended that the debit note

raised were an illusionary and spurious defence which did not constitute a pre-

existing dispute in terms of the Mobilox judgment supra. The entire narrative

of pre-existing dispute has been fabricated by the Corporate Debtor as an

afterthought post the issue of Section 8 Demand Notice dated 20.06.2019.

Further keeping in mind that the Corporate Debtor made payments to the

Operational Creditor even after having raised the issue of disputes including the

incidence of cattle-deaths shows that there was no real or genuine dispute

existing between the parties. There was no FIR, Lab Report or any expert

evidence which linked the cattle deaths to the maize supplied by the Operational

Creditor. Thus, the dispute raised with regard to supply of substandard material

was clearly an after-thought which lacked credibility. It is therefore contended

by the Operational Creditor that the said dispute having been contrived with a

view to resist the insolvency resolution proceedings, the Adjudicating Authority

for good reasons has admitted the Section 9 application.

7. We have also heard Shri Sanjiv Sen, Ld. Sr. Counsel for the Intervenor-

SBI. It was submitted that the Corporate Debtor was indebted to SBI and that in

case the impugned order is upheld, they would like to file their claims before the

Page 8 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 Resolution Professional and in case the impugned order is set aside, they would

like to initiate CIRP proceedings against the Corporate Debtor as they are liable

for financial debt qua SBI.

8. We have duly considered the arguments advanced by the Learned Counsel

for the parties and perused the records carefully.

9. The short question which needs to be answered is whether there was any

pre-existing dispute between the parties within the meaning of Sections 8 and 9

of the IBC and whether the Adjudicating Authority had committed any infirmity

in passing the impugned order admitting the Section 9 application filed by the

Operational Creditor. In this endeavour, we will be guided by the well settled

proposition of law laid down by the Hon'ble Supreme Court in Mobilox

Innovations (P) Ltd. v. Kirusa Software (P) Ltd. (2018) 1 SCC 353 wherein it

is held:

"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 "existence" 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 is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

Page 9 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 ****** ***** *****

"56. Going by the aforesaid test of "existence of a dispute", it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability."

10. It is the case of the Appellant that merely because goods had been supplied

by the Operational Creditor and delivery of part goods had been accepted by the

Corporate Debtor in pursuance of the purchase orders placed by them, that did

not preclude them from raising claims in relation to breach of conditions. It was

contended that that out of the total quantity contracted in the five purchase

orders for 2100 MT, only 1873 MT had been delivered and the remainder supply

was stopped because of sub-standard and contaminated material supplied by

the Operational Creditor. It is also the contention of the Appellant that they had

never taken direct physical delivery of the maize from the Operational Creditor.

The maize was to be supplied by DTC, an agent of the Operational Creditor with

the delivery address of the supply being that of YGK and the invoices clearly

depicted this position as placed at pages 89 to 121 of APB. In turn, YGK acting

as the agent of the Appellant supplied the maize as cattle feed to Chitale Dairy.

Since several cattle in Chitale Dairy had died because the husk and fibre

delivered by YGK was contaminated, YGK had issued a debit note to the

Appellant-Corporate Debtor and the latter had in turn issued a debit note to the

Operational Creditor and also put a stop to the fifth purchase order midway. The Page 10 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 fact that the delivery against the fifth supply order was discontinued midway by

them besides issue of a debit note clearly evidenced pre-existing dispute between

the parties.

11. Per contra, it is the case of the Operational Creditor that the Corporate

Debtor had at no stage controverted the fact that maize was not delivered to them

against the purchase order placed by them. Further there is no communication

by which any dispute was raised by the Corporate Debtor with the Operational

Creditor regarding quality of maize supplied by the Operational Creditor. Besides

the absence of any contemporaneous communication about damaged or

substandard material having been received, nor is there any evidence to show

that any damaged stock was returned by them which ought to have been the

normal recourse taken by any dissatisfied purchaser. What was still more

baffling is why the Corporate Debtor still made payments to the Operational

Creditor as late as on 04.12.2017 even after the purported death of cattle

reported by Chitale Dairy. It was therefore asserted that there was no real or

genuine dispute existing between the parties. It is the contention of the

Operational Creditor that even if it is admitted that a debit note had been raised

by YGK to the Corporate Debtor, there is nothing to establish co-relation between

that debit note and the maize supplied to the YGK by the Operational Creditor

since the Operational Creditor was not the only supplier of maize in the market

for YGK. Moreover, the maize which had been received by YGK on behalf of the

Corporate Debtor was in turn processed into other forms by Kadam Enterprises

and thereafter distributed by them to other entities. Thus, what was consumed

Page 11 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 by the cattle was the processed form of maize provided by Kadam Enterprises

and hence the blame for cattle death cannot be attributed to the Operational

Creditor. There is no FIR, Lab Report or any expert evidence which linked the

cattle deaths to the maize supplied by the Operational Creditor. Since there was

no privity of contract between the Operational Creditor and these third-party

entities, the allegations raised by Chitale Dairy or YGK with regard to quality

issues are irrelevant and untenable. It is therefore contended by the Operational

Creditor that the said dispute has been contrived with a view to resist the

insolvency resolution proceedings and the Adjudicating Authority had correctly

noticed at para 8 of the impugned order that the conduct of the Corporate Debtor

evidenced from making of payments even after cattle deaths in August 2017

demonstrated that there was no dispute between the parties and the subsequent

narrative raised with regard to supply of substandard material therefore did not

carry credibility.

12. Coming to our analysis and findings, when we look at the material placed

on record, we find that a debit-note had been issued to the Corporate Debtor by

YGK on 25.10.2017 as placed at page 193 of Appeal Paper Book ("APB" in short).

In turn the Corporate Debtor had issued a debit-note on 31.03.2018 to the

Operational Creditor for Rs 2 Cr. which is placed at page 202 of APB. This entry

clearly depicts that the amount was debited against the party as "Quality

Compensation" deduction. The same is also reflected in the ledger account of the

Operational Creditor maintained by the Corporate Debtor as may be seen at

pages 233-234 of the APB. That the debit note had actually been issued is also

Page 12 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 evidenced by the fact that the Corporate Debtor had reflected the debit-note in

their income tax returns as is placed at page 209 of the APB. The income tax

returns had been filed by the Corporate Debtor on 29.10.2018 which was well

before the Section 8 Demand Notice. That the Corporate Debtor paid higher

income tax on account of income enhancement as a result of the debit-note also

lends credence to the contention of the Corporate Debtor that debit note was not

contrived since no Corporate Debtor in its right sense would needlessly subject

themselves to higher tax liability. This validates that fact that the debit notes

were actually issued prior to Section 8 Demand Notice which thus clearly

signified pre-existing dispute between the parties but we do not find the

impugned order dealing with the debit-note and this is a critical miss on the part

of the Adjudicating Authority.

13. As regards the contention of the Operational Creditor that payments were

made to them by the Appellant even after the alleged debit note, we notice that

in their defence, it is clarified by the Appellant that these payments related to

purchase order No. 3 which was an entirely separate transaction brokered by a

different agent Swastik. In support of their contention, it was submitted that the

ledger account of the Operational Creditor as placed at page 207 clearly show

that these payments were made for a purchase order which was undisputed. The

entire supply had been made by Swastik and their entire payment had been

settled. We are inclined to agree with the Appellant that payments made by them

in respect of purchase order No.3 was a self-contained transaction insulated

from purchase order No.5 payments for which had been disputed and debit notes

Page 13 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 issued. Further the decision of the Corporate Debtor to put a stop to the supply

of goods under the fifth purchase order also evidences clear dispute for which no

CIRP can be initiated.

14. We next shift our focus on certain communications exchanged between

the Corporate Debtor; DTC as the broker of the Operational Creditor and Chitale

Dairy as end-user/customer. One such relevant communication relied upon by

the Appellant is a letter dated 23.09.2017 from Chitale Dairy to YGK wherein it

was stated that their cattle faced medical issues because of consumption of

contaminated corn husk supplied by YGK. This e-mail is placed at page 187-A

of the APB and reads as follows:

Date: 23.9.2017

To Shri Randhir Naik, Chairman and Executive Director, Yashwant Sahakari Glucose Karkhana Limited, Shirola, Dist. Sangli.

Sub: Regarding supply of bad Cattle Feed (Corn Husk) held.

Sir, There is several years' relation of Chitale Industries group and Yashwant Industries. Due to the same, since we use to get quality corn husk from you, we started to use the same in our Cattle Farm.

On 19.8.17 and 20.8.17, your corn husk is supplied through Kadam Enterprises, Nadivans Mali Galli, Miraj. As there is defect in both these supplies, all the animals of our Farm suffered trouble of the same and in this, 7 buffaloes are died. Similarly, 8 buffaloes and 4 he buffaloes are not giving response to medicines. Possibility of their recovery is less.

At the same time while this incident was on, when we sent a letter to your supplier Kadam Enterprises' Proprietor Shri Vikas Kadam and

Page 14 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 Shri Rahul Dange (copy of the same is attached for your information), both of them had personally come to our Farm on 2.9.17. They have personally seen that one buffalo is died on that day also. Still the series of animal death is continued.

In consideration of our business relation of several years, we have not taken any action. But, we have suffered and are still suffering loss of cattle wealth of lakhs of rupees, the expenditure of more than lakh incurred on medicine and treatment and the loss of lakhs of rupees of Chitale Dairy due to decrease in milk. We hope, you will inform us as to what decision is being taken by you in this regard and how the reimbursement of the same will be made, at the earliest.

The several farmers who continue to supply milk to us, who have also suffered due to decrease in milk and death of animals by eating your corn husk supplied at that time. They are also making repeated enquiry with us, you may take the same also into consideration.

For the purpose of taking all these information in detail, your Officers Shri Deore Saheb and Shri Chaugule, visited our Dairy Farm on 9.917 and made inspection of all information, Laboratory Reports, Post Mortem report of the died animals etc. and have informed that we will be informed about the compensation within two days after having discussion with you in this regard. Such discussion was held. But, since no decision is known, we inform you the same. We hope that you will treat this matter as urgent and will inform us at the earliest.

Thanking you,

For M/s. B.G. CHITALE

15. A plain reading of the above letter shows that this was a contemporaneous

correspondence between Chitale Dairy as the end customer with YGK who was

understandably the agent of the Corporate Debtor who had directly received

supply of corn husk on behalf of the Corporate Debtor from DTC as the agent of

the Operational Creditor. This letter was undisputedly issued prior to the issue

of Section 8 Demand Notice. As a sequel, we find that another communication

was sent by YGK to the Corporate Debtor dated 25.10.2017 debiting the amount Page 15 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 for which bad corn was supplied to them leading to cattle disease and deaths as

placed at page 187-A of the APB. In another e-mail dated 29.03.2018 from YGK

to the Corporate Debtor, reference is made to the debit note of Rs 2 Cr. as can

be seen at page 188 of the APB. Keeping in view the industry practice of

employing agents was being followed by both the Corporate Debtor and the

Operational Creditor, the communications relating to supply of contaminated

goods exchanged between the agents and their principals and consequential

issue of debit-notes which all happened prior to issue of Section 8 Demand

Notice did constitute critical communications showing pre-existing disputes but

these communications have not been dealt by the Adjudicating Authority in the

impugned order.

16. It is also a well settled legal proposition that for pre-existing dispute to be

a valid ground to nullify an application under Section 9, the dispute raised must

be truly existing at the time of filing a reply to the notice of demand as

contemplated by Section 8(2) of IBC or at the time of filing the Section 9

application. In the present case, we notice that reply was furnished on

01.07.2019 by the Corporate Debtor in response to the Section 8 Demand Notice

dated 20.06.2019. The relevant excerpts of the said Notice of Dispute are as

extracted below:

"Date: 1st July, 2019

Re: Demand Notice dated 20th June, 2019 issued by you on behalf of Sonal Trading Company.

.....

2. At the further outset, Tradco states that no amount is due or payable by Tradco to your client Sonal Trading Company ("Sonal"). On Page 16 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 the contrary Sonal is liable to pay a sum of Rs.96,71,081/-(Rupees Ninety Six Lacs Seventy One Thousand Eighty One Only) and other amounts to Tradco, for the losses and damages suffered by Tradco on account of supply of inferior quality of U.P. Crop Maize Grain by Sonal as against the agreed High Grade Maharashtra- Maize Grain, which Sonal had not only accepted and acknowledged but also offered to pay a sum of Rs.50,00,000/-(Rupees Fifty Lacs Only) to Tradco as compensation to Tradco for damages and losses suffered by Tradco, as more particularly set out hereunder.

...

4. The relevant facts are briefly stated hereinafter:

....

e) Tradco in turn sold the said maize grains to Yashwant Glucose Sahakari Karkhana Limited ("Yashwant") who is engaged in the business of production of starch and other products by processing the maize grain. For the sake of ease, the maize was physically sent directly from Sonal's warehouse to Yashwant's factory/ manufacturing unit.

......

j) However, the maize grain supplied by Sonal was not as per the agreed and specified quality and also not of High Grade Maharashtra - Maize Grain. On learning of the same, Tradco immediately informed and communicated to Sonal directly and through Mr. Mohan of Dinesh. Infact, after the said Fibre and Husk was fed to the cattle in Chitale Dairy, the cattle had fallen seriously ill and suffered from various diseases and poisoning and eventually a led to loss of life of such cattle due to consumption of such Fibre and Husk. Yashwant also informed Tradco that such major complaints had also been received from every cattle farms/dairies to whom Yashwant had supplied the said Fibre and Husk.

k) Owing to Sonal's failures and neglects by Sonal, Tradco and Yashwant faced humungous losses and damages, especially considering the fact that the suffering and deaths of the cattle was well published in newspapers and local journal/ editorials. Constrained by the aforesaid, Yashwant had to shut down its factory and entire production operations for nearly 40 days. Yashwant was constrained to de-toxicate and washout its entire factory and clear off Page 17 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 the entire factory of all the harmful and poisonous toxins, left behind by the maize grain supplied by Sonal and Yashwant also disposed off all its harmful and bad materials/ stock.

.....

m) Owing to the failures and neglects of Sonal and the aforementioned events, Yashwant had immediately stopped the supply, and in turn Tradco stopped the supply of maize grains from Sonal. The aforesaid facts were well communicated by Tradco and are well within the knowledge of Mr. Mohan of Dinesh and your client i.e. Sonal, whose Mr. Rajendra Baijatia, proprietor of Sonal, had also visited Yashwant's factory at Sirala alongwith with Mr. Mohan of Dinesh, in light of the aforesaid events.

n) Yashwant addressed various letters/notices to Tradco and issued a Debit Note of Rs.2,00,00,000/-(Rupees Two Crores Only) and deducted the said -amount of Rs.2,00,00,000/-(Rupees Two Cores Only) from the amount payable by Yashwant to Tradco owing to losses and damages suffered by Yashwant, copies of which have been forwarded to Mr. Mohan of Dinesh and Mr.Rajendra Barjatia of Sonal. A copy of the Debit Note of Rs.2,00,00,000/-(Rupees Two Crores Only) issued by Yashwant to Tradco is enclosed herewith and marked as Annexure "A" and a copy of one of the letters sent by email i.e. letter dated 25th October, 2017 addressed by Yashwant to Tradco is enclosed herewith and marked as Annexure "B".

....

q) Tradco has already debited a sum of Rs.1,03,28,919/-(Rupees One Crore Three Lacs Twenty Thousand Nine Hundred and Nineteen Only) out of the sum of Rs.2,00,00,000/-(Rupees Two Crores Only), and Sonal is bound and liable to make payment of the balance sum of Rs.96,71,081/-(Rupees Ninety Six Lacs Seventy One Thousand Eighty One Only). These losses and damages are already been reflected in the Profit and Loss Statement and Books of Accounts of Tradco for the accounting year commencing from 1st April, 2017 and ending on 31st March, 2018......"

(Emphasis supplied)

Page 18 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022

17. When we look into the above reply to the Section 8 Demand Notice, the

said reply is clearly a notice of dispute sent by the Corporate Debtor. The

Corporate Debtor has raised the issue of losses and damages suffered on

account of supply of inferior quality of goods supplied causing cattle deaths

leading to attendant losses and damages suffered and raising of debit notes

besides denial of any outstanding dues. Section 9(5)(ii)(d) of IBC expressly

provides that Adjudicating Authority shall reject the Section 9 application if

notice of dispute has been received by the Operational Creditor. The above reply

to demand notice is clearly a notice of dispute within the meaning of Section

9(5)(ii)(d). The statutory stipulations as contained in Section 9(5)(ii)(d)

having been met, the Adjudicating Authority had to reject the application.

18. For such disputed operational debt, Section 9 proceeding under IBC

cannot be initiated at the instance of the Operational Creditor. The legal tenets

laid down by the Hon'ble Supreme Court in the Mobilox judgement as reiterated

in Kay Bouvet Engineering Ltd. vs. Overseas Infrastructure Alliance (2021)

10 SCC 483 is equally applicable to the present factual matrix:

"21. .....All that the adjudicating authority is required 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 a mere bluster. It has been held that however, at this stage, the Court is not required to be satisfied as to whether the defence is likely to succeed or not. The Court also cannot go into the merits of the dispute except to the extent indicated hereinabove. It has been held that so long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has no other option but to reject the application."

Page 19 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 The Adjudicating Authority has failed to appreciate the facts of the case in its

entirety having not examined the due applicability of Section 9(5)(ii)(d) to the

facts of the present case and instead proceeded to observe that defence of pre-

existing dispute raised by the Corporate Debtor is a spurious defence. If we apply

the above-cited test laid down by the Hon'ble Supreme Court to the facts of the

present case, it is clear that the defence which was raised by the Corporate

Debtor in its reply to Demand Notice as well as in their detailed reply filed in

Section 9 application cannot be said to be unsupported by evidence. The defence

raised by the Corporate Debtor is prima facie plausible and cannot be outrightly

rejected as spurious, hypothetical or illusory. We are satisfied that the Section 9

application filed by the Operational Creditor did not deserve admission and was

liable to be rejected as required by Section 9(5)(ii)(d) of the IBC. The Adjudicating

Authority committed an error in admitting the Section 9 application and we,

therefore, hold that the impugned order passed is unsustainable.

19. In result, we are of the considered view that the Adjudicating Authority

has erroneously admitted the application under Section 9 of the IBC. We allow

the Appeal and set aside the impugned order. The orders passed by the

Adjudicating Authority initiating CIRP against the Corporate Debtor and

appointing Interim Resolution Professional and all other orders pursuant to

impugned order are set aside. The Corporate Debtor company is released from

the rigours of CIRP and is allowed to function independently through its board

of directors with immediate effect. The amount of Rs 2 lakh directed by the

Adjudicating Authority to be paid by the Operational Creditor to the Resolution Page 20 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022 Professional, if not yet paid, be paid within two weeks from the date of this order.

We however add that the Appellant can pursue its remedies before an

appropriate forum of law. We also observe that it will remain open for the

Intervenor-SBI to exercise its liberty to initiate proceedings against the Corporate

Debtor under the statutory provisions of IBC. All I.As stand closed. No order as

to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 28.01.2026

Abdul

Page 21 of 21 Company Appeal (AT) (Insolvency) No. 1543 of 2022