NCLAT Dismisses Section 9 Petition Due to Pre-Existing Dispute Over Product Quality

NCLAT Dismisses Section 9 Petition Due to Pre-Existing Dispute Over Product Quality

Introduction

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, held that when an operational debt is not crystallised owing to disputes over the quality of goods supplied—acknowledged by the supplier in communications—an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be admitted.

Factual Background

The Operational Creditor, Ruchira Green Earth Pvt. Ltd., supplied batteries to the Corporate Debtor, KLB Komaki Pvt. Ltd.. Soon after, disputes arose regarding product defects. The Operational Creditor acknowledged these issues over WhatsApp exchanges and assured corrective measures. However, the Corporate Debtor alleged that even the replaced goods remained defective. Despite this, the Operational Creditor initiated insolvency proceedings under Section 9 of the IBC, citing outstanding dues supported by invoices, delivery confirmations, and ledger entries.

Procedural Background

The National Company Law Tribunal (NCLT), New Delhi, dismissed the Section 9 petition on the ground of a pre-existing dispute. Aggrieved, the Operational Creditor filed an appeal before the NCLAT under Section 61 of the IBC.

Issues

1. Whether the alleged debt had crystallised and was enforceable under Section 9 of the IBC?

2. Whether the existence of a pre-existing dispute barred admission of the insolvency application?

Contentions of the Parties

• Operational Creditor’s Contentions:

o The outstanding amount constituted a legally enforceable operational debt, evidenced by invoices, delivery confirmations, and ledger entries.

o The invoices forming the basis of the Section 9 petition were unrelated to the earlier disputes and pertained to fresh supplies made between April–August 2022.

• Corporate Debtor’s Contentions:

o Continuous WhatsApp communications between the parties evidenced defects in the supplied batteries, acknowledged by the Operational Creditor.

o The faulty products were either not replaced or continued to be defective even after replacement.

o The dispute went to the root of the debt, preventing its crystallisation.

Reasoning and Analysis

The Bench of Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) observed that:

• The Operational Creditor had expressly acknowledged defects in the supplied goods and assured corrective measures through WhatsApp communications.
• The Corporate Debtor repeatedly raised objections about the defective goods, including fire-related issues, even before the issuance of the Section 8 demand notice.
• The debt, therefore, had not crystallised. The existence of such disputes fell outside the limited scope of IBC proceedings, which are not meant for adjudicating quality or warranty-related issues.
• The Appellant’s claim that the indemnity bond was executed under duress was a matter requiring deeper investigation and beyond the summary jurisdiction of IBC.

Outcome

The NCLAT upheld the NCLT’s decision and dismissed the appeal, holding that the petition under Section 9 of the IBC was not maintainable due to a pre-existing dispute and non-crystallisation of the debt.

Representation

• For Appellant (Operational Creditor): Mr. Anand Chhibbar, Sr. Advocate with Mr. Abhishek Anand, Mr. Karan Kohli, Mr. Vaibhav Sahni, Mr. Arjun Chhibbar, Advocates.
• For Respondent (Corporate Debtor): Dr. Swaroop George, Mr. Abhinandan Jain, Mr. Sunil Roy, Mr. Shivam Prajapati, Mr. Kartikey, Advocates.