Standard With Which Case Of Pre-existing Dispute Under IBC Is Employed Can't Be Equated With Principle Of Preponderance Of Probability: SC

The Supreme Court has held that the standard with reference to which a case of a pre-existing dispute under the Insolvency and Bankruptcy Code (IBC) must be employed cannot be equated with the principle of preponderance of probability.

The bench of Justice K.M. Joseph and Justice Hrishikesh Roy observed "The standard, in other words, with reference to which a case of a pre-existing dispute under the IBC must be employed cannot be equated with even the principle of preponderance of probability which guides a civil court at the stage of finally decreeing a suit."

Facts of the Case-

There were two High Seas Sale agreements, for the supply of 500 Metric Tonnes of coal of a particular quality, each to the second respondent and its sister concern through the first respondent. Later, two purchase orders were placed indicating that the price is to be paid within seven days of receipt of the goods.

The Coal so procured was to be used in boilers and 412 metric tons of Coal were supplied to the Respondents. Certain lab tests of coal were conducted by respondent no. 2 &3 and it was found that the quality of the coal did not conform to what was promised, allegedly leading to malfunctioning of the boiler.

Several e-mails were sent regarding the quality of the coal and the losses that might occur due to the quality of coal and by email dated November 4, 2016, respondent no.1 stopped the supply of coal.

On February 3, 2018, respondent no. 1 issued the requisite notice under the IBC and raised a claim along with the interest, to which the second respondent replied and demanded a total amount of Rs.4.44 crores because the coal was not of the quality promised and went onto file two civil suits.

An application under Section 9 was filed on April 30, 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 issue involved in this case is- whether the appellant has raised a dispute which can be described as 'a pre-existing dispute'.

Advocate Kavin Gulati, Senior Advocate appeared on behalf of the appellant and Advocate Manoj Harit, appeared on behalf of respondent No. 1. and Advocate Nakul Dewan, Senior advocate appeared for the IRP.

The Apex Court deciding the issue observed that "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'. 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 could be treated as a day which is certain............

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."

The Apex Court further relied on the law laid down in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353 and held 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 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."

Accordingly, the Apex Court held that the order passed by NCLAT merits interference as it has erred in its finding about the existence of Pre-existing Dispute. Therefore, the Court set aside the impugned order.

Cause Title- Rajratan Babulal Agarwal v. Solartex India PVT. LTD. & Ors.

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