NCLAT Rejects CIRP Over Defective Battery Dispute, Holds Warranty Claims as Pre-Existing Dispute Under IBC

NCLAT Rejects CIRP Over Defective Battery Dispute, Holds Warranty Claims as Pre-Existing Dispute Under IBC

Introduction

The NCLAT, New Delhi, upheld the rejection of a Section 9 insolvency application, holding that disputes arising from defective batteries supplied under warranty constituted a genuine pre-existing dispute. The Tribunal reiterated that existence of such dispute prior to issuance of demand notice is sufficient to bar initiation of CIRP.

Factual Background

The dispute arose from a commercial arrangement between Vave India Energy Solutions Private Limited and Eastman Auto & Power Limited, under which the operational creditor purchased inverter batteries for resale. Vave alleged that it received multiple complaints regarding poor power backup from customers, leading to discussions with Eastman regarding defective batteries supplied within the warranty period. Vave relied on a credit note of approximately ₹1.02 crore issued in 2019, contending that Eastman had acknowledged defects in 2,697 batteries and agreed to compensate. However, Eastman later disputed the claim, stating that the credit note was issued under economic coercion and that warranty obligations had expired.

Procedural Background

Following the dispute, a demand notice under Section 8 of the Insolvency and Bankruptcy Code was issued in December 2022, and subsequently a Section 9 application was filed seeking initiation of CIRP. The NCLT rejected the application on the ground of pre-existing dispute. Aggrieved, Vave India Energy Solutions filed an appeal before the NCLAT.

Issues

1. Whether the dispute relating to defective batteries under warranty constituted a pre-existing dispute under the IBC.

2. Whether existence of such dispute prior to issuance of demand notice bars initiation of CIRP.

Contentions of Parties

The appellant contended that the dispute had already been resolved when the credit note was issued and that the allegation of coercion was an afterthought raised by the respondent to evade liability. It argued that the tribunal should examine the genuineness of the defence and not permit frivolous disputes to defeat insolvency proceedings. The respondent, on the other hand, submitted that the claim arose from warranty-related issues concerning defective batteries and that the dispute had been communicated well before the issuance of the demand notice. It further contended that arbitration proceedings had also been invoked, demonstrating the existence of a genuine dispute.

Reasoning and Analysis

The bench of Judicial Member Justice Yogesh Khanna and Technical Member Ajai Das Mehrotra held that the existence of a genuine dispute prior to issuance of demand notice is sufficient to reject a Section 9 application, and that the adjudicating authority is not required to examine the merits or adjudicate the dispute. The Tribunal noted that the record clearly demonstrated that Eastman had raised objections regarding the credit note and warranty claims before the demand notice was issued. It emphasized that even if the dispute pertains to quality of goods or contractual obligations, such as warranty issues, it would qualify as a pre-existing dispute under the IBC. The Tribunal further observed that the initiation of arbitration proceedings reinforced the existence of a bona fide dispute. Relying on settled principles laid down by the Supreme Court, the Tribunal reiterated that insolvency proceedings cannot be used as a substitute for debt recovery where genuine disputes exist.

Decision

The NCLAT dismissed the appeal and upheld the order of the NCLT rejecting the CIRP application, holding that the dispute between the parties was pre-existing and genuine, thereby barring initiation of insolvency proceedings.