NCLAT Dismisses CIRP Plea Over Battery Warranty Dispute, Reaffirms Pre-Existing Dispute Bar Under IBC
NCLAT Dismisses CIRP Plea Over Battery Warranty Dispute, Reaffirms Pre-Existing Dispute Bar Under IBC
Introduction
The NCLAT, New Delhi, refused to permit initiation of insolvency proceedings in a dispute arising out of defective batteries supplied under warranty, holding that a genuine pre-existing dispute existed prior to issuance of demand notice. The Tribunal reaffirmed that such disputes bar admission of a Section 9 application under the Insolvency and Bankruptcy Code, 2016.
Factual Background
The dispute arose between Vave India Energy Solutions Private Limited and Eastman Auto & Power Limited under a commercial arrangement for supply of inverter batteries. Vave alleged that it received complaints regarding poor power backup from customers and raised issues concerning defective batteries supplied within the warranty period. It 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 subsequently disputed the claim, stating that the credit note had been issued under economic coercion and that the warranty period had already expired.
Procedural Background
A demand notice under Section 8 of the Insolvency and Bankruptcy Code was issued by the operational creditor in December 2022, followed by filing of an application under Section 9 seeking initiation of CIRP. The NCLT rejected the application on the ground that a pre-existing dispute existed. Aggrieved by the rejection, the operational creditor preferred an appeal before the NCLAT.
Issues
1. Whether the dispute relating to defective batteries supplied 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 stood resolved upon issuance of the credit note and that the respondent’s plea of coercion was an afterthought raised to avoid payment. It was argued that the tribunal ought to assess whether the defence was genuine or merely a sham to defeat insolvency proceedings. The respondent, on the other hand, submitted that the dispute arose out of warranty claims and was communicated prior to the issuance of the demand notice. It further contended that the credit note was issued under pressure and that arbitration had already been invoked, thereby demonstrating the existence of a bona fide dispute.
Reasoning and Analysis
The NCLAT held that the presence of a genuine dispute prior to issuance of the demand notice is sufficient to reject a Section 9 application and that the adjudicating authority is not required to examine the merits or adjudicate upon the dispute. The Tribunal noted that the material on record clearly demonstrated that Eastman had raised objections regarding the credit note and warranty obligations before the issuance of the statutory notice. It observed that disputes relating to quality of goods and warranty obligations fall within the ambit of pre-existing disputes under the IBC. The Tribunal further emphasized that insolvency proceedings cannot be used as a substitute for debt recovery where genuine disputes exist. It also noted that initiation of arbitration proceedings further substantiated the existence of a bona fide dispute between the parties.
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 genuine and pre-existing, thereby barring initiation of insolvency proceedings.
In this case the appellant was represented by Advocates R. Jawahar Lal and Sayyam Maheshwari. Meanwhile the respondent was represented by Advocates Gaurav H Sethi, Rahul Kapoor, Rahul Pawar and Kartik Nagpal.
