Tamra Dhatu Udyog Pvt Ltd vs Eastern Copper Manufacturing Company ...

IN THE MATTER OF: Tamra Dhatu Udyog Private Limited Through its Authorised Representative Having its Registered Office at: 7th Floor, Sagar Estate, 2, N.C. Dutta Sarani, Kolkata - 700001 ...Appellant

Versus

Eastern Copper Manufacturing Company Private Limited 27, Weston Street, Room No. 601E, 6th Floor, P.S. Bowbazar Kolkata - 700012 ...Respondent

Present: For Appellant : Mr. Vibhor Kappor, Mr. Sujoy Datta, Ms. Mahima Shekhawat and Ms. Avani Sharma, Advocates

For Respondent : Ms. Neha Somani, Pr. C.S. Mr. Shashank Agarwal, Advocate

JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)]

This Appeal is filed under Section 61(1) of the Insolvency and

Bankruptcy Code, 2016 ("IBC"), challenging the Impugned Order dated

01.05.2024, passed by the Learned Adjudicating Authority, National

Company Law Tribunal, Kolkata Bench ("Adjudicating Authority") in CP (IB)

No. 160/KB/2022. In the Impugned Order, the Adjudicating Authority

dismissed the Company Petition filed by the Appellant/Operational Creditor under Section 9 of the IBC, which sought to initiate the Corporate Insolvency

Resolution Process ("CIRP") against the Respondent/Corporate Debtor, on the

grounds of a pre-existing dispute between the parties.

Submissions of the Appellant

2. The Appellant, engaged in the business of supplying "Annealed Tinned

Copper Conductor - Class 2," had a longstanding business relationship with

the Respondent/Corporate Debtor dating back to May 2007. The Respondent

would issue purchase orders to the Appellant, and the Appellant would

supply the ordered goods and raise invoices accordingly.

3. In November 2009, a third-party entity, Sumo Metallic Private Limited

("Sumo Metallic"), began a similar business arrangement with the

Respondent. Notably, the management of both Sumo Metallic and the

Appellant was the same. On 30.11.2015, Sumo Metallic merged with the

Appellant as per an Order by the Hon'ble High Court of Calcutta. After the

merger, no further business transactions occurred between the Appellant and

the Respondent until 11.08.2018.

4. However, an outstanding debt amounting to ₹90,16,311.65/- (rupees

ninety lakhs, sixteen thousand, three hundred and eleven and sixty-five paise

only) remained unpaid by the Respondent as of 21.06.2018. This comprised

₹47,26,700.65/- (rupees forty-seven lakhs, twenty-six thousand, seven

hundred and sixty-five paise only) due from Sumo Metallic and ₹42,89,611/-

(rupees forty-two lakhs, eighty-nine thousand, six hundred and eleven only)

due from the Appellant. In an email dated 08.10.2018, the Respondent

Company Appeal (AT) (Insolvency) No. 1392 of 2024 2 of 19 admitted to owing the ₹47,26,700.65/- (rupees forty-seven lakhs, twenty-six

thousand, seven hundred and sixty-five paise only) to Sumo Metallic. The

Respondent maintained separate ledgers for Sumo Metallic, highlighting its

internal documentation procedures.

5. The Respondent made two payments ₹5,00,000/- (rupees five lakhs

only) on 21.06.2018 and ₹10,00,000/- (rupees ten lakhs only) on 04.08.2018

towards the outstanding dues. On 09.08.2018, a further payment of

₹50,00,000/- (rupees fifty lakhs only) was made, which was partially adjusted

against both the Appellant's and Sumo Metallic's outstanding amounts. The

Appellant was operating from two units one in Pathredi, Rajasthan, and

another in Sankrail, West Bengal and adopted a 'first in, first out' method for

adjusting the payments.

6. Between May and September 2019, the Respondent issued several

purchase orders to the Appellant for the supply of "Annealed Tinned Copper

Conductor - Class 2." The purchase orders were as follows:

1. Purchase Order No. ECM/WORKS 6/19-20 dated 03.05.2019 for 11.500 MT.

2. Purchase Order No. ECM/WORKS 7/18-19 dated 27.06.2019 for 7 MT.

3. Purchase Order No. ECM/WORKS 8/19-20 dated 03.07.2019 for 14 MT.

4. Purchase Order No. ECM/WORKS 9/19-20 dated 05.09.2019 for 10.500 MT.

5. Purchase Order No. ECM/WORKS 10/19-20 dated 27.09.2019 for 9 MT.

The Appellant duly supplied the goods as per the purchase orders,

which were accepted by the Respondent without protest. Corresponding

invoices were raised by the Appellant for the materials supplied, as detailed

below:

1. Invoice MF108-0379/192 dated 20.06.2019 for ₹42,25,886/-.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 3 of 19

2. Invoice MF108-0478/1920 dated 10.07.2019 for ₹49,51,281/-.

3. Invoice MF108-0688/1920 dated 31.08.2019 for ₹56,26,373/-.

4. Invoice MF108-0773/1920 dated 19.09.2019 for ₹42,28,248/-.

5. Invoice MF108-0904/1920 dated 24.10.2019 for ₹34,36,125/-.

The total amount raised through these invoices aggregated to

₹2,24,67,913/- (rupees two crores, twenty-four lakhs, sixty-seven thousand,

nine hundred and thirteen only) out of which the Respondent made partial

payments totalling ₹85,26,531/- (rupees eighty-five lakhs, twenty-six

thousand, five hundred and thirty-one only), leaving an outstanding amount

of ₹1,39,41,382/- (rupees one crore, thirty-nine lakhs, forty-one thousand,

three hundred and eighty-two only).

7. On 07.12.2021, the Appellant issued a demand notice to the

Respondent for the outstanding amount, including interest, which by then

amounted to ₹2,10,09,089.11/- (rupees two crores, ten lakhs, nine thousand,

eighty-nine and eleven paise).

8. In response, the Respondent, in its letter dated 03.01.2022, alleged that

the goods supplied under two earlier invoices (MF119-0375 and MF119-0377,

both issued on 08.01.2019) were defective, which had affected their

relationship with their client BHEL. However, these two invoices were not part

of the Appellant's Section 9 Application.

9. On 24.12.2021, the Respondent filed a title suit (TS 1380/2021) before

the Civil Court in Howrah, attempting to show a pre-existing dispute. The

Appellant viewed this suit as a mere ploy to evade payment, as the demand

notice had already been issued.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 4 of 19

10. On 25.05.2022, the Appellant filed a Company Petition [CP (IB) No.

160/KB/2022] under Section 9 of the IBC, seeking initiation of CIRP against

the Respondent for the default amount of ₹1,39,41,382/- (rupees one crore,

thirty-nine lakhs, forty-one thousand, three hundred and eighty-two only).

11. During the pendency of these proceedings, HDFC Bank initiated a

separate CIRP process against the Appellant under Section 7 of the IBC.

12. Pertinent to mention herein that the ledger statement of the Appellant

annexed with the Company Petition clearly shows the existence of opening

balance of Rs.1,06,15,789.58/- (rupees one crore, six lakhs, fifteen thousand,

seven hundred and eighty-nine, fifty-eight paise) due and payable by the

Respondent to the Appellant.

13. On 25.05.2022, the Appellant was admitted into CIRP under Section 7

of the IB Code initiated by HDFC Bank vide order dated 25.05.2022 passed

in CP (IB) No. 128/2020.

14. The Appellant had filed the Section 9 Application on the basis of 5

invoices and two invoices bearing no. MF 119-0375 and MF 119-0377 issued

on 08.01.2019 does not form part of the claim under Section 9. Respondent

had failed to make any allegations against the 5 invoices mentioned by the

Appellant in the Application on the basis of which the Section 9 Application

was filed and the Respondent has not disputed the unpaid operational debt

towards the said 5 invoices. Respondent misled the Learned Adjudicating

Company Appeal (AT) (Insolvency) No. 1392 of 2024 5 of 19 Authority by stating that upon testing, certain goods were defective as per

quality. However, further testing was conducted by the Respondent and it was

found that the goods supplied by the Appellant were in accordance with the

terms of the purchase orders. Thus there was no dispute with respect to the

quality of the goods. Further. no excess payment has been done by the

Respondent.

15. Respondent has suppressed 3 ledgers given by the Respondent itself

vide email dated 08.10.2018. The Respondent is only laying reference to the

transactions taken place in 'Pathredi' unit of the Appellant and ledger

statement at page 13 of the supplementary affidavit also depicts the Pathredi

unit only. However, the Appellant has two manufacturing units one in

Sankrail, Howrah, West Bengal and other Pathredi Rajasthan. Further, 3

ledgers given by Respondent are related to Sumo Metallic Private Limited

which stands merged with the Appellant.

16. The account statement as attached by the Respondent, at Annexure

SA-1 at page number 13 of their supplementary affidavit is for the period

01.04.2018 to 19.06.2020 showing an excess balance of Rs. 75,627/- (rupees

seventy-five thousand, six hundred and twenty-seven only), which is only for

the Pathredi unit, but surprisingly, the net payable amount of Rs.

47,26,700.65/- (rupees forty-seven lakhs, twenty-six thousand, seven

hundred and sixty-five paise) as confirmed by the Respondent's own email

dated 08.10.2018 has not found its due place in the aforesaid account

statement. Ledger statement attached with the Section 9 Application at

Company Appeal (AT) (Insolvency) No. 1392 of 2024 6 of 19 Annexure H is from 01.04.2018 to 31.03.2022, which clearly shows that debit

opening balance of Rs.1,06,15,789.58/- (rupees one crore, six lakhs, fifteen

thousand, seven hundred eighty-nine and fifty-eight paise only) (meaning that

the Appellant to receive the amount of Rs.1,06,15,789.58 from the

Respondent) and carries the closing debit balance of Rs.1,39,41,381.58

(rupees one crore, thirty-nine lakhs, forty-one thousand, three hundred

eighty-one and fifty-eight paise only) (meaning that the Appellant to receive

the said amount from the Respondent).

17. The Corporate Debtor has misrepresented the facts by allocating their

payments with the current invoices, whereas the Appellant has allocated all

the payments on FIFO basis, in the absence of any bill wise payments or any

such confirmations, whatsoever, ever since the commencement of business

transactions with the said Respondent. The Respondent's counter affidavit at

Annexure F at page 64 depicts that no bill wise payment is being made.

18. Thereafter, on 01.01.2024, the Ld. Adjudicating Authority vide its Order

dated 01.01.2024 approved the resolution plan of Mr Tarun Kumar Singh in

the CIRP of the Appellant and Mr Tarun Kumar Singh was declared as the

Successful Resolution Applicant. Consequently, the mandate of the

Resolution Profession of the Appellant was terminated and the new

management under the control of Mr Tarun Kumar Singh was appointed.

19. Thereafter, the Ld. Adjudicating Authority vide Order dated 01.05.2024

passed the Impugned Order dismissing the Company Petition under Section

Company Appeal (AT) (Insolvency) No. 1392 of 2024 7 of 19 9 of the IB Code on the ground that at the time of filing of Section 9

Application there is a 'pre-existing dispute between the parties as there is a

pending title suit being TS 1380/2021 instituted on 24.12.2021 before the

Ld. Civil Judge, Jr Div at Howrah dealing with the 'dispute' in relating to the

invoices raised on 08.10.2019.

Submissions of the Respondent

20. The Applicant was contracted to supply stranded copper wire as per the

Respondent's specifications, based on either oral or written purchase orders.

Upon receiving a purchase order, the Applicant was required to issue a pro

forma invoice indicating the tentative value, after which the Respondent

would pay 25% of the invoice value as an advance. The Applicant was to

deliver the agreed-upon quantity and quality of stranded copper wire within

fifteen days of receiving the advance.

21. After the delivery, the Respondent would conduct quality tests to

ensure compliance with the agreed specifications. If the goods met the

required standards, the Respondent was to pay the remaining 75% of the

invoice within 30 days of receiving the test reports. In cases where the goods

did not meet the specifications, the Applicant would not be entitled to the

remaining payment, and any damages due to defective goods would be

adjusted in the price.

22. The Respondent began placing orders with the Applicant in June 2018.

Between June and December 2018, the Applicant supplied goods that met

the required specifications.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 8 of 19

23. The Respondents in their reply in this CP before the Adjudicating

Authority had submitted as under:

(i) The sums, in respect of which the Appellant has claimed operational debt against the Respondent, have already been paid by the Respondent to the Appellant in full.

(ii) Defective consignments or lacked in quality were delivered by Appellant under invoices being no. MF 119-0375 and MF 1190377 issued on 08.01.2019.

(iii) Frivolous claim of Rs. 1,13,33,639.58/- (rupees one crore, thirteen lakhs, thirty-three thousand, six hundred and thirty-nine and fifty-eight paise only) raised by Appellant vide letter dated 07.12.2021 without any particulars of the invoices in support of the claim.

(iv) Against invoices being nos. MF1080773/1920 and MF108-

0904/1920, the Appellant had released payment in excess, to the extent of Rs. 75,627/- (rupees seventy-five thousand, six hundred and twenty-seven only).

(v) As per the statement of accounts annexed herewith, against each of the said invoices, the Respondent had paid off all dues of the Appellant, without any delay, long before issuance of the statutory demand notice dated 28.01.2022 by the Appellant against the Respondent.

24. The Respondent placed on record supplementary affidavit which

contends:

(i) The bank statements of the Corporate Debtor which are annexed to the reply affidavit and marked as Annexures A, B, C, D and E already prove that the Corporate Debtor had made full payment of the five invoices that are the subject matter of the Application.

(ii) That several emails were exchanged between the parties wherein the Appellant kept demanding more advance payment despite the material not being ready at its end.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 9 of 19

(iii) Corporate Debtor made payment much more than the required advance amount as per the terms and invoices since it was in urgent need of the materials to enable to fulfil its commitment to BHEL. The payments made by the Corporate Debtor are reflected in the bank statements and ledger annexed to the main reply affidavit.

25. However, disputes arose over two invoices (MF119-0375 and MF119-

0377) dated January 8, 2019, due to defective goods as identified in the test

reports. In a letter dated December 7, 2021, the Appellant also claimed Rs.

1,13,33,639.58/- (rupees one crore, thirteen lakhs, thirty-three thousand, six

hundred thirty-nine and fifty-eight paise only) but this claim was

unsupported by invoice details and considered baseless. As a result, the

Respondent filed suit (TS 1380 of 2021) at Howrah, seeking a declaration that

no payment was due. The case is currently pending.

26. Despite the ongoing dispute, the Respondent placed further purchase

orders between May and September 2019, for which the Applicant issued the

following invoices:

o Invoice MF108-0379/1920 (June 20, 2019) for Rs. 42,25,886/- (rupees forty-two lakhs, twenty-five thousand, eight hundred and eighty-six only) against purchase order ECM/WORKS-6/19-20 (May 3, 2019).

o Invoice MF108-0478/1920 (July 10, 2019) for Rs. 49,51,281/- (rupees forty-nine lakhs, fifty-one thousand, two hundred and eighty-one only) against purchase order ECM/WORKS-7/18-19 (June 27, 2019).

o Invoice MF108-0688/1920 (August 31, 2019) for Rs. 56,26,373/- (rupees fifty-six lakhs, twenty-six thousand, three hundred and seventy-three only) against purchase order ECM/WORKS-8/19-20 (July 3, 2019).

Company Appeal (AT) (Insolvency) No. 1392 of 2024 10 of 19 o Invoice MF108-0773/1920 (September 18, 2019) for Rs. 42,28,248/- (rupees forty-two lakhs, twenty-eight thousand, two hundred and forty-eight only) against purchase order ECM/WORKS-09/19-20 (September 5, 2019).

o Invoice MF108-0904/1920 (October 24, 2019) for Rs. 34,36,125/- (rupees thirty-four lakhs, thirty-six thousand, one hundred and twenty-five only) against purchase order ECM/WORKS-10/19-20 (September 27, 2019).

The Respondent fully and promptly paid all dues for the above-

mentioned invoices, and the Applicant has duly acknowledged receipt.

27. Additionally, the Respondent overpaid Rs. 75,627/- (rupees seventy-

five thousand, six hundred and twenty-seven only) on invoices MF108-

0773/1920 and MF108-0904/1920. The Respondent requested a refund via

emails dated June 19, 2020, and June 25, 2020. The Applicant confirmed on

July 10, 2020, that the excess payment would be refunded.

28. The Applicant's claim of non-payment for the invoices is unfounded, as

all dues were cleared well before the statutory demand notice issued on

January 28, 2022. The statement of accounts attached demonstrates that no

amount was due at the time of the demand notice.

29. In light of the full payments made, the amounts claimed as dues in the

Applicant's filing have already been settled by the Respondent, rendering the

Application baseless. The Respondent requests that the Adjudicating

Authority dismiss the Application under Section 9 (5) (ii) (b) of the IBC, as it

lacks merit.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 11 of 19

30. Apart from the disputed invoices MF119-0375 and MF119-0377 (which

are the subject of a pending suit), there are no outstanding amounts for any

other invoices. The statement of accounts confirms that all dues for invoices

MF108-0379/1920, MF108-0478/1920, MF108-0688/1920, MF108-

0773/1920, and MF108-0904/1920 have been fully paid.

31. The Respondent denies any mala fide intent in filing the suit, which

pertains specifically to invoices MF119-0375 and MF119-0377 from January

8, 2019. These invoices are separate from the ones fully settled in the

application (MF108-0379/1920, MF108-0478/1920, MF108-0688/1920,

MF108-0773/1920, and MF108-0904/1920).

32. At the time the demand notice was issued on December 7, 2021, no

outstanding amounts remained for the invoices MF108-0379/1920, MF108-

0478/1920, MF108-0688/1920, MF108-0773/1920, and MF108-

0904/1920.

Analysis and findings:

33. The Adjudicating Authority dismissed the Appellant's Application

under Section 9 of the IBC, seeking to initiate Corporate Insolvency

Resolution Process (CIRP) against the Respondent/Corporate Debtor on the

grounds of a pre-existing dispute.

34. The core issue for determination before us is whether there existed a

'pre-existing dispute' at the time of filing the Section 9 Application, thereby

rendering the dismissal of the Application by the Adjudicating Authority

Company Appeal (AT) (Insolvency) No. 1392 of 2024 12 of 19 proper and valid, and whether the Appeal is maintainable on any other

ground.

35. As per Part IV of Form 5 (@ 179, APB), the Appellant / Operational

Creditor, claimed an outstanding debt of ₹1,39,41,382/- (rupees one crore,

thirty-nine lakhs, forty-one thousand, three hundred and eighty-two only)

due to five unpaid invoices for the supply of 'Annealed Tinned Copper

Conductor - Class 2' to the Respondent along with interest @24% from 24th

Oct 2019, making a total outstanding amount of Rs 2,10,09,089.11/- (rupees

two crores, ten lakhs, nine thousand, eighty-nine and eleven paise only). The

Appellant claims business relationship between the parties dates back to

2007, but it has relied on a series of purchase orders and invoices between

May 2019 and October 2019 only. The demand notice was issued by the

Appellant on 07.12.2021, to which the Respondent replied on 03.01.2022,

disputing the claim and raising allegations regarding defective goods supplied

under earlier invoices. Subsequently, the Respondent filed a title suit (TS

1380/2021) before the Civil Court, Howrah, to demonstrate the existence of

a pre-existing dispute. This suit was filed after the issuance of the demand

notice but before the filing of the Section 9 Application. The Adjudicating

Authority dismissed the Section 9 Petition on the ground of a pre-existing

dispute, as evidenced by the civil suit.

36. The Appellant argues that:

o The Respondent had raised no specific disputes regarding the five invoices mentioned in the Section 9 Application. The disputes raised by the Respondent pertained to earlier invoices (MF119-0375 and

Company Appeal (AT) (Insolvency) No. 1392 of 2024 13 of 19 MF119-0377) issued on 08.01.2019, which were not part of the Section 9 claim.

o The Respondent's assertion of defective goods was baseless, as further testing confirmed that the goods were in accordance with the purchase orders.

o The Respondent had made partial payments against the outstanding invoices, demonstrating an acknowledgment of the debt.

o The civil suit filed by the Respondent was a tactical ploy to evade payment and did not constitute a genuine pre-existing dispute.

o The Respondent's ledger statements were misleading, as they did not account for the full outstanding debt due to the merger of Sumo Metallic with the Appellant.

37. Per contra the Respondent contends that:

o There was a long-standing dispute regarding defective goods supplied by the Appellant, particularly under the invoices issued on 08.01.2019.

o The Respondent had fully paid the invoices mentioned in the Section 9 Application, and any outstanding amounts claimed by the Appellant were erroneous or had already been adjusted.

o The civil suit filed by the Respondent was prior to the filing of the Section 9 Application demonstrated a pre-existing dispute, which barred the initiation of CIRP under Section 9 of the IBC.

o The Appellant's reliance on a 'first in, first out' (FIFO) method for adjusting payments was not agreed upon by the parties, and the Respondent had paid specific invoices in full.

38. Now we go on to examine whether the Adjudicating Authority was

correct in dismissing the Section 9 Application based on the existence of a

pre-existing dispute. The Reply of the Respondent to the demand notice, at

page 101 in APB, clearly indicates that on receipts of supplied goods under

two invoices bearing no. 355 and 357, when the material was tested, it was Company Appeal (AT) (Insolvency) No. 1392 of 2024 14 of 19 not in conformity with the ordered specifications since blacking spot was

observed in the said goods. The Corporate Debtor had also accepted the

problem. Later, when a demand notice was issued as per the provisions of the

IBC in Form-3, the Corporate Debtor again reiterated the grounds of defective

goods. The relevant extract in the reply of the Corporate Debtor is as follows:

"4. Our client had accordingly placed orders on you, and that you, amongst other consignments, supplied goods under the following two invoices to our client.

Invoice Date Amount 355 08.01.2019 Rs. 17,16,794/- 357 08.01.2019 Rs.16,30,830.8/

5. Our client, upon receipt of delivery of goods under the aforesaid invoices, sent the said consignment for test. However, since our client was obliged to BHEL, before the test results could come in, the consignments had to be sent to BHEL.

6. On or about 3rd April, 2019, the test reports revealed to our client that the goods under the aforesaid two invoices, did not confirm to the ordered specification. By an email dated 3rd April, 2019, you were duly informed of the fact that the consignment under the aforesaid two invoices failed to conform to the ordered specification. In response, you had replied as follows: "May be these type problem occurred due to material pass through TC Dies, also chance a scratch after metal contact but not visible with naked eyes." Thus, you had admitted to the fact that the said consignments did not comply with the expected standards.

7. Our client states that by reason of the aforesaid sub-standard quality of goods being supplied by you to our client, BHEL not only withheld the payment in respect of the said Invoices, the said BHEL further stopped placing orders in the same frequency as it used to prior to supply of the sub-standard quality of goods. It thus appears that it suffered enormous dent to its goodwill before BHEL and its other purchasers.

8. Our client states that since it is negotiating with BHEL against the sub-standard quality of goods supplied to them, the actual amount of loss was not quantified by it yet. However, the fact that the loss to our client was caused by you is apparent and glaring.

9. In view of your flagrant breach of contract and the consequences suffered by our client, our client filed a suit being, T.S. 1380 of 2021 (Eastern Copper Manufacturing Company Pvt. Ltd. vs. Tamra Dhatu Udyog Pvt. Ltd. Civil Judge (Junior Division) at Howrah and the same is pending adjudication.

Company Appeal (AT) (Insolvency) No. 1392 of 2024 15 of 19

10. In view of the above facts and circumstances, it is apparent that your alleged claim of Rs. 2,10,09,089.11/- is not maintainable. Our client has raised a dispute against you in respect of the same subject matter alleged by you in the captioned demand notice. As such, a suit being T.S. 1380 of 2021 Eastern Copper Manufacturing Company Pvt Ltd vs Tamra Dhatu Udyog Pvt Ltd.) before the Ld. Civil Judge (Junior Division) at Howrah has been filed against you in pursuance of the breach committed by you. Your initiation of the proceeding under the Insolvency and Bankruptcy Code 2016 is absolutely bad in law, and that the same deserves no consideration at all."

39. Furthermore, the Respondent claims that he has not only paid full

amount of these five invoices raised in the CP, but small excess payment

which is borne out by his statement at page 422 of the APB. The total amount

payable to the Corporate Debtor is Rs. 75,627/- (rupees seventy-five

thousand, six hundred and twenty-seven only) by Tamra Dhatu, which has

been further flagged at page 456 of APB. In fact, the email at page 417 from

Corporate Debtor/Eastern Cooper Manufacturing Co Pvt Ltd states that

'please arrange to refund our excess payment as per the statement attached',

which was issued on 19.06.2020.

40. In the present case, the Respondent raised disputes concerning

defective goods supplied under earlier invoices (MF119-0375 and MF119-

0377) issued on 08.01.2019. While these invoices are not part of the Section

9 Application, the Respondent's contentions, along with the filing of a civil

suit prior to the Application, show that there was an ongoing dispute between

the parties at the time the demand notice was issued. The Respondent filed a

civil suit (TS 1380/2021) on 24.12.2021, prior to the filing of the Section 9

Application. The Appellant has argued that this suit was a frivolous attempt

to create a dispute post facto. However, the timing of the suit, coupled with

Company Appeal (AT) (Insolvency) No. 1392 of 2024 16 of 19 the earlier correspondences and disputes over defective goods, demonstrates

that the issue of defective supply was a matter of contention well before the

Section 9 Application.

41. The Appellant had provided the particulars of operational debt for five

invoices only for the year 2019 but while producing records of outstanding it

has produced ledgers starting from 2016. The Respondent has contested the

Appellant's Application of the FIFO method for adjusting payments, and there

is no evidence to suggest that this method was mutually agreed upon.

Moreover, the claim in the Section 9 Application concerns five invoices only

and not for past invoices. In fact for establishing the payment made, the

Respondent has filed the statement of account from the Federal Bank for each

of the five invoices from @329 to @379 in the APB, which clearly establish

that payment was made without any doubt. The ledger of Operational

Creditor/Tamra Dhatu also is very clear from @382 to @384 and establishes

that instead Operational Creditor has to pay Rs 75,627/- (rupees seventy-five

thousand, six hundred and twenty-seven only) to the Corporate Debtor. There

is no question of any outstanding to be paid by the Corporate Debtor.

42. Although the Appellant emphasizes that the dispute pertains to earlier

invoices, not included in the Section 9 Application, the dispute concerning

defective goods directly affects the overall relationship between the parties.

This becomes all the more relevant as the Appellant has stated claims of a

period prior to 2019, even though the Appellant claimed for 5 invoices raised

in the year 2019 only in part IV of Form-5, yet it has later claimed that the

Company Appeal (AT) (Insolvency) No. 1392 of 2024 17 of 19 Corporate Debtor has misrepresented the fact by allocating their payments

with the current invoices. It is contended by the Appellant that it has allocated

all the payments on FIFO basis. If this contention of the Appellant is accepted,

it is all the more reason that the disputes that have been raised concerning

two invoices as indicated in the previous para are treated as pre-existing

disputes for the supply of defective goods. The Respondent's quality concerns

and the subsequent civil litigation are, therefore, sufficient grounds to

establish a pre-existing dispute, which bars the initiation of CIRP under

Section 9.

43. This is a case wherein there is a clear case of pre-existing disputes with

respect to the quality of goods which was supplied by the Operational

Creditor. Therefore, we cannot find any infirmity in the Order of the

Adjudicating Authority.

44. Under Section 9 (5) (ii) (d) of the IBC, an Application for initiation of

CIRP by an Operational Creditor must be rejected if a 'pre-existing dispute' is

shown to exist prior to the issuance of the demand notice. The Hon'ble

Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt.

Ltd. [(2018) 1 SCC 353] held that the dispute need not be a meritorious one

but must be real, substantial, and bona fide, and it must predate the demand

notice. The relevant portion is extracted as follows:

"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

Company Appeal (AT) (Insolvency) No. 1392 of 2024 18 of 19 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."

45. In light of the facts and legal principles, we find that the Adjudicating

Authority correctly dismissed the Section 9 Application. The Respondent has

demonstrated the existence of a pre-existing dispute, as evidenced by the civil

suit filed before the demand notice and the ongoing contentions regarding

defective goods.

Order

46. The Appeal is therefore dismissed and the Impugned Order dated

01.05.2024 passed by the Adjudicating Authority is upheld. No order as to

costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical) New Delhi September 20, 2024 pawan

Company Appeal (AT) (Insolvency) No. 1392 of 2024 19 of 19