RAJRATAN BABULAL AGARWAL versus SOLARTEX INDIA PVT. LTD.& ORS. on 13 October 2022

1. By the impugned order, the National Company Law AppellateTribunal (hereinafter referred to as ‘NCLAT’ for brevity) has dismissedthe appeal filed by the appellant challenging the order passed by theGNational Company Law Tribunal (hereinafter referred to as ‘NCLT’ forbrevity) dated 28.05.2020. By the said order, the NCLT admitted anapplication filed by the first respondent under Section 9 of the Insolvencyand Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) againstthe second respondent. The third respondent was appointed as the Interim H

Resolution Professional and a moratorium followed. The appellant is anex-director of the second respondent.

2. The question which falls for decision is whether the appellanthas raised a dispute which can be described as ‘a pre-existing dispute’as understood by this Court in the decision in Mobilox Innovations1Private Limited v. Kirusa Software Private Limited. NCLT hasrejected the version of the appellant that there exists a pre-existing disputewhich stands affirmed by the NCLAT.

3. The facts necessary for resolution of the lis can be stated asfollows:

On 24.09.2016, there were two High Seas Sale Agreements. Onewas between respondent No. 2 and one Rawalwasia Textile IndustriesPrivate Limited. The other High Seas Sale agreement was between thesame seller and one company, the name of which is shortened as STDPL.

4. STDPL, according to the appellant, is a sister concern of thesecond respondent. This arrangement, which was essentially made onthe representation of one Mr. Sameer Agrawal, was not honoured.Mr. Sameer Agrawal offered to supply 500 Metric Tonnes of coal eachto the second respondent and its sister concern through the firstrespondent. The purchase order in respect of STDPL was dated11.10.2016. The purchase order in respect of second respondent is dated27.10.2016. The purchase order contemplated Gross Calorific Value of5400. The total moisture content was put as less than 40% +/- 2%. Outof 500 Metric Tonnes, the second respondent was supplied 412 MetricTonnes. The supply began from 28.10.2016 and ended on 02.11.2016.According to the appellant, the coal was to be used in boilers whichmanufactures starch and allied products. The coal is placed over theboilers in silos which are nearly 15 feet in height and hold upwards of200 metric tonnes of coal at once. The appellant lays stress on certainlab reports of tests, which were actually conducted allegedly at its ownlabs indicating that the quality of coal did not conform to what waspromised and what was more, allegedly it led to the malfunctioning ofthe boiler. On 30.10.2016, an e-mail was sent to the first respondent. Itreads as follows:

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A“Dear sir,

With reference to 5400 gcv imp coal supply to (stdpl) dhule and(Hdpl) jammer, following issues are to be shared.

For dhule plant: high moisture and powder percentage is to befound, already discussed to you.

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For jammer plant: recently supply include high level of powderpercentage and moisture too.

Kindly consider the issues and please make us assure about qualityof coal should not be down the level. Pics attached for yourreference.”

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Hdpl referred to in the communication is the second respondent.

5. The next correspondence to notice is e-mail dated 03.11.2016.It is addressed to the first respondent by the second respondent. It readsas follows:

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“M/s. Sortex India Pvt. Ltd.

105, Raghuvir Textile Mall,

Aai Mata Chowk, Dumbhal

Parvat Patiya,

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SURAT . 395010

Kind Attn: Mr. Samirji

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Sub: Inferior/poor quality of Indonesian Coal.

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Dear Sir,

We have placed an order for 500 MT Indonesian Coal to you videour P.O. No. HDPL/2016-17/586 dated 27.10.2016 for 5400 GCVand Moisture condition is 38-40%. But, on receiving the coal wefound that GCV less than 4000 and size of coal is 0mm 50% andmaximum size is 5mm to 6 mm only and moisture is 48-50%. Itseems if we receive such type of coal we are facing the cleaning problem of boiler and due to that nozzle bent and boiler becomedamaged. This will occur heavy production losses. Hence, pleasestop delivery of the material/coal and advise us what to do thisloss. If any more losses occurred due to poor/inferior quality ofcoal, we may debit the same amount in your account, which mayplease be noted.

Thanking you,

Yours faithfully,

For Honest Derivativeds Pvt. Ltd.

Ravi Jajodia

Vice President (Operation)”

6. The first respondent responded to the communication dated

03.11.2016 by its email dated 04.11.2016. It reads as follows:

“Dear Sir,

It is not possible that the coal is off 4000 gcv, secondly from portit is possible that moisture can go upto 42 percent but not abovethat also because at port they are putting water on the coal as perGPCB guidelines of pollution.

So please take a note regarding this. We have immediately stoppedthe delivery, but please inform your transporter.

Regards,

Samir Agarwal

Rawalwasia Group

104, Raghuvir Textile Mall,

Bh. DR world, 1 mata chock

Poona Khumbhariya Road, Surat-India-395010

M - [REDACTED], [REDACTED]

O - +91-261-2705000"

7. Pursuant to the same, further supply was stopped. The firstrespondent, on 03.02.2018 issued the requisite notice under the IBC andraised a claim for Rs.1573279 + 30 per cent interest totaling toRs. 21,57,700.38. The second respondent furnished a reply on 17.02.2018.

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AUnder the reply, it demanded a total amount of Rs.4.44 crores consequenton the coal not being of the quality promised. Respondent No. 2 also hasfiled two civil suits, one against Rawalwasia Textile Industries PrivateLimited and the other, against the first respondent claiming damages. Itis pointed out that court fee of Rs. 3 lakhs was deposited. After exchangeof the notices as mentioned in the IBC, an application under Section 9Bwas filed on 30.04.2018 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 judgment was reserved on 20.11.2019. The application came to beadmitted as already noted by the order passed on 28.05.2020. TheCconstitution of Committee was stayed by the NCLAT. With the filing ofthe appeal against the order passed by the NCLAT an order of statusquo was passed.

8. We have heard Mr. Kavin Gulati, learned Senior Counselappearing on behalf of the appellant. We further heard Shri Manoj Harit,Dlearned Counsel appearing on behalf of respondent No. 1. We also haveheard Mr. Nakul Dewan, learned Senior Counsel appearing for the IRP.9. Shri Kavin Gulati, learned Senior Counsel would draw ourattention to the following paragraph in the impugned order:

“19. With the above admission in the affidavit, it is apparent thatEon 30.10.2016, STDPL, a sister concern of the Corporate Debtorhas sent an e-mail to Group Concern of the Operational Creditorin regard to the Purchase Order dated 11.01.2016 whereas, thepresent claim is in regard to the Purchase Order dated 27.10.2016.It is also to be seen that there is no reference of this e-mail in theFreply to the statutory notice. In the said e-mail it is not mentionedthat it is in relation to the Purchase Order dated 27.10.2016. Inthe subsequent e-mail dated 03.11.2016, there is no reference tothe earlier e-mail dated 30.10.2016. In such circumstances, weare of the view that the e-mail dated 30.10.2016 is not related tothe transaction in question.”G

10. He would complain that NCLAT committed a clear mistake.The error lies in proceeding on the basis that in the email dated 30.10.2016sent by STDPL – sister concern of the corporate debtor, there is mentiononly of purchase order dated 27.10.2016. It is pointed out with referenceto the email that the said email indeed contains reference to the supplyH

of coal to HDPL-the second respondent-the corporate debtor in thiscase. Still further he drew our attention to para 22. Para 22 reads asfollows:

“Upon a bare reading of e-mail dated 03.11.2016, it is clear thatthe Corporate Debtor stated that the supplied coal is not as perspecification and due to that nozzle bent and boiler has becomedamages which would led to heavy production losses. Hence, itwas requested that delivery of the coal be stopped. It is alsomentioned that if more losses occurred due to poor/inferior qualityof coal they may debit the same amount in the account of theOperational Creditor. The Operation Creditor has sent a replythrough e-mail dated 04.11.2016 and immediately stopped thedelivery of coal. Thereafter, Corporate Debtor has neither issuedany debit note nor has returned the supplied coal but consumedthe same. It means that after receiving the e-mail dated 04.11.2016the Corporate Debtor was satisfied and kept quiet for about 15months. It is only when they received a statutory notice that theyfiled a Civil Suit against the Operational Creditor.”

11. It is on the basis of the said discussion that the NCLAT foundthat there was no dispute in regard to the transaction in question and thatit was to avoid the liability that corporate debtor through its reply to thenotice tried to impress that there was a pre-existing dispute. He nextdrew our attention to the purchase order.

12. He would point out therefrom that under the terms andconditions with statutory details, Note 1 provided that a certificate ofanalysis is required along with the material.

13. He drew our attention to Section 12 of the Sales of GoodsAct, 1930 (hereinafter referred to as ‘Act’). He would contend thatunder the said provision in a contract of sale of goods, a term may be acondition or a warranty. He would proceed on the basis that this caseinvolves the appellant having elected to treat the condition relating to thequality of the goods as a warranty. The goods in question are rawmaterials. The goods were supplied in between 28.10.2016 to 03.11.2016.

14. He drew our attention to Section 41 of the Act and contendedthat a buyer must have the right to examine the goods. He next drew ourattention to Section 42 of the Act.

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A15. Immediately upon discovery of the fact that the goods deliveredwere not in conformity with the terms of the purchase order, the appellanthad registered its protest as it were on 30.10.2016. This was again takenup on 03.11.2016 and the communication which is addressed by the firstrespondent on 04.11.2016 also would fortify appellant’s case that thecomplaint of the appellant was not a spurious one. The first respondentBis found making an attempt at justifying the moisture content of coal notbeing in terms of the purchase order. He would contend that Section 59of the Act declares the remedies open to a buyer who has elected totreat the breach of a condition as a warranty and the said provisioncontemplates a suit for damages and what is more, even setting up theCextinction of the price.

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16. He would point out that suits were filed within the period oflimitation even if it may be that the filing of the suits may strictly not bea circumstance which is relevant in the scheme of the IBC. Nonetheless,it goes a long way to establish the case of the appellant that there wasDa dispute which was pre-existing and the institution of the suits followingwhich in fact, a huge amount of Rs. 3 lakhs was paid as court feeswould only point to the dispute not being a spurious adventure. He wouldalso point out with reference to what happened in the NCLT that contraryto the mandate of Rule 150 of the NCLT Rules, 2016 which sets a timelimit of 30 days from final hearing to pronounce the order, that the saidErule being observed in its breach has resulted in patent mistakes creepinginto the order and non-advertence to the vital issues which were agitatedbefore the Tribunal.

17. Shri Manoj Harit, learned Counsel appearing on behalf of thefirst respondent, on the other hand, would point out that the only materialsFthat existed prior to the date of the notice under the IBC even as per thecase of the appellant are the three emails. The emails are dated30.10.2016, 03.11.2016 and 04.11.2016. He would contend that thedocuments do not show that there is a dispute. Admittedly, there is nosuit or arbitration proceeding initiated as contemplated for the purposeGof Section 9 of the IBC. Here is a case where the second respondentconsumed the goods supplied even after the alleged deficiency continuedto exist. The alleged variations do not constitute a dispute. The conductof the second respondent would show that the claim of dispute is asham. It is contended that in the email dated 03.11.2016, it is stated thatin the event of any further damage, the same would be debited in theH

account of the first respondent. This circumstance is seized upon tocontend that no damage had occurred till 03.11.2016 which wassufficiently serious to warrant a debit to the account of the firstrespondent. Till 03.11.2016, the appellant continued to consume the coal.In this regard, reference is placed on the words ‘any more damage’. Nodebit note was raised after 03.11.2016. This shows there was no furtherdamage.

18. Even after the email dated 03.11.2016, the appellant continuedto use the coal. The argument based on a period of 3 years being availableto file a suit close to Rs. 4 crores as against the amount of approximatelyRs.15 lakhs which is the subject matter of the application under Section9 is sought to be brushed aside as indicative of the dispute not being agenuine one. If the claim was genuine, it would have been reflected inits book of accounts. The claim that the suit can be filed within theperiod of limitation does not fit in with the scheme of Section 9 of theIBC.

19. The purchase order contemplated payment within 7 days ofdelivery. There is no denial of liability to pay before 12.11.2016 which isthe last day by which the account became payable. The analysis reportsrelied on by the appellant are sought to be painted as concoctions. Rule150 of the NCLT Rules, it is pointed out is only directory and notmandatory.

20. Learned Counsel would contend that the emails relied uponby the appellant must not be seen as anything more than an effort by thebuyer to wriggle out of its obligation to make payment for goods whichwere received. He would further contend that the purchase ordercontemplated production of the certificate of analysis. Therefore, whenthe certificate of analysis was present, it is inconceivable how the appellantwithout disputing the same could claim that the goods delivered fell shortof the standards agreed to between the parties. As regards the claim bythe appellant that the goods were consumed in large lots (the case of theappellant is that the total quantity delivered was 412 metric tonnes out ofthe total quantum agreed of 500 metric tonnes and that the manufacturingprocess is such wherein at one go large quantity can be put into theboiler) it is contended that it is not correct. He would further submit thatthe boilers would contain specific material indicating the total amount ofraw materials which are put into it. In this regard, he would draw ourattention to the findings of this Court in Mobilox Innovations Private AB

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ALimited(supra) that a dispute which is raised must be supported withevidence. He would contend that there is no evidence which can beconsidered worthwhile so as to not treat the dispute as spurious.

21. The third respondent is the Interim Resolution Professional.He is represented before us by Shri Nakul Dewan, learned SeniorBCounsel. He would submit that he is making submissions on behalf ofthe corporate debtor. After referring to the facts, he would contend thatthe task cut out for the NCLT is not a mechanical one. While it is notrequired to establish the existence of a credible dispute, it is duty boundto ascertain whether there is a credible existence of a dispute. Thequestions which would arise, according to him, are, whether theCconsumption of the coal by the corporate debtor constituted acceptanceof the goods and obliged it to make payment. The argument is to bebased on a prima facie test. He would further pose the question as towhether the emails dated 30.10.2016 and 03.11.2016 evidenced or anyother contemporaneous document evidenced deficiency in the quality ofDcoal supplied or the coal resulted in damage to the corporate debtor. Healso would draw our attention to Sections 41 and 42 of the Act. Hewould point out that there is a purchase order which sets out a guarantee.This constituted the reservation of the right to reject the material on theground. There is no evidence, it is pointed out, that the right to reject wasexercised when delivery was effected of 412 Metric Tonnes of the coal.EThe corporate debtor has accepted and consumed the delivered coal.As far as Rule 150 of the NCLT Rules is concerned, it is described as adirectory provision. The consequence of non-compliance is not set out.The principle laid down by this Court in Balwant Singh and others v.Anand Kumar Sharma and others2 is enlisted in support to contendFthat the results urged by the appellant cannot follow. He would alsosubmit that the perusal of the accounts does not establish the case that aloss ensued to the corporate debtor, in that, accounts do not show thatthe coal in question was not used.

22. In response, Shri Kavin Gulati, learned Senior Counsel wouldGinvite the Court to undertake a more exhaustive survey of the Act. Hedrew our attention to Section 13 besides Section 63 and the substance ofhis argument is as follows:

He would contend that the law provides that if the buyer treatsthe contravention of a condition as a violation of a warranty, the rightsH2 2003 (3) SCC 433

declared in Section 59 come into play. The right includes a right to suenot merely for damages but also to extinguish even the price of thegoods. He would submit that proceeding on the basis that the appellanthas accepted the goods, in view of Section 42 of the 1930 Act, it wouldnot be fatal to the appellant. He would contend that Section 13 (2) wouldthen apply in the facts. In other words, this is a case where, out of 500Metric Tonnes, the Court can proceed on the basis that there was adelivery of 412 Metric Tonnes of coal and the same was consumed bythe corporate debtor. The act of consumption may constitute acceptanceof the goods within the meaning of Section 42. But the mere acceptanceof the goods within the meaning of Section 41 would not deprive thebuyer of the right which follows treating a condition as a warranty andseeking remedies as provided in Section 59 of the Act. Such remediesinclude the relief of the extinction of the price of the goods. The suit filedwithin the period of limitation cannot be brushed aside for the merereason that it was not filed immediately or rather that the suit was notpending within the contemplation of Section 9 of the IBC. He would, infact, point out that the corporate debtor was having a turnover of aboutRs.314 crores in the previous year. He would ask the Court to bear inmind how unreasonable it would be to still postulate that for an amountof about Rs. 15 lakhs, a corporate body would risk its goodwill and veryexistence, unless the dispute projected was one which was genuine. Hewould further contend that all of these aspects must be considered inlight of the limited scrutiny of the question as to whether there is a dispute.He would point out that a conspectus of the history of legislation asunravelled by this Court inMobilox Innovations Private Limited(supra),would show the following:

Under Section 433 of the Companies Act, 1956, while a disputecould be raised to resist an order of winding up, the Court had to considerwhether the dispute was a bona fide one. The legislature was perfectlyaware of the law in this regard. The law does not require the existenceof a bona fide dispute to defend an application under Section 9 of theIBC. All that is required is that the dispute must not be got up and spurious.In this regard, he drew our attention to the exposition of the law inMobilox Innovations Private Limited(supra).

ANALYSIS : THE ACT

23. We may notice the relevant provisions of the Act. Sections 4deals with sale and agreement to sell:

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“4. Sale and agreement to sell.— (1) A contract of sale of goodsis a contract whereby the seller transfers or agrees to transferthe property in goods to the buyer for a price. There may be acontract of sale between one part-owner and another.

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(3) Where under a contract of sale the property in the goods istransferred from the seller to the buyer, the contract is called asale, but where the transfer of the property in the goods is to takeplace at a future time or subject to some condition thereafter tobe fulfilled, the contract is called an agreement to sell.

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(4) An agreement to sell becomes a sale when the time elapsesor the conditions are fulfilled subject to which the property in thegoods is to be transferred.”

Thus, till the property passes, there is no sale. Property has beendefined in Section 2(11) as the general property in goods, and not merelyDa special property.

24. Section 12 deals with Condition and warranty.

“12. Condition and warranty. — (1) A stipulation in a contractof sale with reference to goods which are the subject thereofmay be a condition or a warranty.

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(2) A condition is a stipulation essential to the main purpose ofthe contract, the breach of which gives rise to a right to treatthe contract as repudiated.

(3) A warranty is a stipulation collateral to the main purpose ofFthe contract, the breach of which gives rise to a claim fordamages but not to a right to reject the goods and treat thecontract as repudiated.

(4) Whether a stipulation in a contract of sale is a condition ora warranty depends in each case on the construction of thecontract. A stipulation may be a condition, though called awarranty in the contract.”

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25. Section 13 deals with when a condition is to be treated as awarranty.

“13. When condition to be treated as warranty. — (1) Wherea contract of sale is subject to any condition to be fulfilled by H

the seller, the buyer may waive the condition or elect to treatthe breach of the condition as a breach of warranty and not asa ground for treating the contract as repudiated.

(2) Where a contract of sale is not severable and the buyerhas accepted the goods or part thereof, 1 *** the breach ofany condition to be fulfilled by the seller can only be treated asa breach of warranty and not as a ground for rejecting thegoods and treating the contract as repudiated, unless there is aterm of the contract, express or implied, to that effect.

(3) Nothing in this section shall affect the case of any conditionor warranty fulfilment of which is excused by law by reasonof impossibility or otherwise.”

26. Section 14 provides for certain implied warranties and conditionsand it reads as follows:

14. Implied undertaking as to title, etc.—In a contract of sale,unless the circumstances of the contract are such as to show adifferent intention, there is—

(a) an implied condition on the part of the seller that, in the case ofa sale, he has a right to sell the goods and that, in the case of anagreement to sell, he will have a right to sell the goods at the timewhen the property is to pass; (b) an implied warranty that the buyer shall have and enjoy quietpossession of the goods;(c) an implied warranty that the goodsshall be free from any charge or encumbrance in favour of anythird party not declared or known to the buyer before or at thetime when the contract is made.

27. Section 15, inter alia, provides for an implied condition in asale of goods by description that the goods must conform with thedescription.

28. Section 16 is also relied upon by the appellant and it reads asfollows: - “16. Implied conditions as to quality or fitness.—Subject to theprovisions of this Act and of any other law for the time being inforce, there is no implied warranty or condition as to the quality orfitness for any particular purpose of goods supplied under a A

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Acontract of sale, except as follows:— (1) Where the buyer,expressly or by implication, makes known to the seller the particularpurpose for which the goods are required, so as to show that thebuyer relies on the seller’s skill or judgment, and the goods are ofa description which it is in the course of the seller’s business tosupply (whether he is the manufacturer or producer or not), thereBis an implied condition that the goods shall be reasonably fit forsuch purpose: Provided that, in the case of a contract for the saleof a specified article under its patent or other trade name, there isno implied condition as to its fitness for any particular purpose.

(2) Where goods are bought by description from a seller whoCdeals in goods of that description (whether he is the manufactureror producer or not), there is an implied condition that the goodsshall be of merchantable quality: Provided that, if the buyer hasexamined the goods, there shall be no implied condition as regardsdefects which such examination ought to have revealed.

D(3) An implied warranty or condition as to quality or fitness for aparticular purpose may be annexed by the usage of trade.

(4) An express warranty or condition does not negative a warrantyor condition implied by this Act unless inconsistent therewith.”

E29. Section 17 provides for implied condition in the case of a saleby sample. Thus, it can be seen that the Act declares or provides forvarious implied conditions and warranties.

30. We may also notice Section 19, which deals with the aspectof passing of property in a contract of sale of goods.

F“19. Property passes when intended to pass. — (1) Where thereis a contract for the sale of specific or ascertained goods theproperty in them is transferred to the buyer at such time as theparties to the contract intend it to he transferred.

(2) For the purpose of ascertaining the intention of the partiesGregard shall be had to the terms of the contract, the conduct ofthe parties and the circumstances of the case.

(3) Unless a different intention appears, the rules contained insections 20 to 24 are rules for ascertaining the intention of theparties as to the time at which the property in the goods is to passHto the buyer.”

31. Chapter IV deals with performance of the contract. UnderSection 31, it is the duty of the seller to deliver the goods and of thebuyer to accept and to pay for them in accordance with the terms of thecontract of sale. Section 32 reads as follows: - “32. Payment and delivery are concurrent conditions. — Unlessotherwise agreed, delivery of the goods and payment of the priceare concurrent conditions, that is to say, the seller shall be readyand willing to give possession of the goods to the buyer in exchangefor the price, and the buyer shall be ready and willing to pay theprice in exchange for possession of the goods.”

32. It is necessary to notice Section 41 and still further Section

42. “41. Buyer’s right of examining the goods. —

(1) Where goods are delivered to the buyer which he has notpreviously examined, he is not deemed to have accepted themunless and until he has had a reasonable opportunity of examiningthem for the purpose of ascertaining whether they are in conformitywith the contract.

(2) Unless otherwise agreed, when the seller tender’s delivery ofgoods to the buyer, he is bound, on request, to afford the buyer areasonable opportunity of examining the goods for the purpose ofascertaining whether they are in conformity with the contract.”

“42. Acceptance. —The buyer is deemed to have accepted thegoods when he intimates to the seller that he has accepted them,or when the goods have been delivered to him and he does anyact in relation to them which is inconsistent with the ownership ofthe seller, or when, after the lapse of a reasonable time, he retainsthe goods without intimating to the seller that he has rejected them.”

33. It is apposite also to look into Section 43.

“43. Buyer not bound to return rejected goods. — Unless otherwiseagreed, where goods are delivered to the buyer and he refuses toaccept them, having the right so to do, he is not bound to returnthem to the seller, but it is sufficient if he intimates to the sellerthat he refuses to accept them.”

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A34. Chapter V deals with the rights of the unpaid seller againstthe goods. Apart from exercising the right of lien thereunder, Section54(2), inter alia, entitles the unpaid seller in the circumstances mentionedtherein to resell the goods. Chapter VI deals with suits for breach of thecontract. Section 55 reads as follows:B“55. Suit for price. — (1) Where under a contract of sale the “55. Suit for price. — (1) Where under a contract of sale theproperty in the goods has passed to the buyer and the buyerwrongfully neglects or refuses to pay for the goods according tothe terms of the contract, the seller may sue him for the price ofthe goods.

C(2) Where under a contract of sale the price is payable on a daycertain irrespective of delivery and the buyer wrongfully neglectsor refuses to pay such price, the seller may sue him for the pricealthough the property in the goods has not passed and the goodshave not been appropriated to the contract.”

D35. It may also be necessary to notice Section 59, which reads asfollows: - “59. Remedy for breach of warranty. — (1) Where there is abreach of warranty by the seller, or where the buyer elects or iscompelled to treat any breach of a condition on the part of theEseller as a breach of warranty, the buyer is not by reason only ofsuch breach of warranty entitled to reject the goods; but he may—(a) set up against the seller the breach of warranty in diminutionor extinction of the price; or (b) sue the seller for damages forbreach of warranty.

F(2) The fact that a buyer has set up a breach of warranty indiminution or extinction of the price does not prevent him fromsuing for the same breach of warranty if he has suffered furtherdamage.”

36. An analysis of the provisions of the Act would reveal thefollowing in a contract of sale of goods. A stipulation in regard to goodsGcan be a condition or a warranty. A condition is put on a higher pedestalthan a warranty. A condition is treated as essential to the main purposeof the contract. The breach of a condition gives rise to the right with theparty to treat the contract as repudiated. In the case of the breach of awarranty which is a stipulation in a contract collateral to the main purposeHof the contract, the party (buyer) cannot reject the goods. He cannot

repudiate the contract. Under Section 12(3), on the breach of the warranty,the buyer can sue for damages. As to whether a stipulation is a warrantyor a condition is a matter to be decided on the facts of each case. Thenomenclature ‘warranty’ cannot conclude the question as to whether infact it is a ‘condition’. Even though the breach of a condition entitles thebuyer to repudiate the contract it is open to the buyer to treat the breachof the condition as a breach of warranty. [See Section 13 (1)]. Section13 (2) then provides that the breach of any condition by the seller can betreated as only a breach of warranty and not a ground for repudiatingthe contract or rejecting the goods. This is in situations where the contractis not severable. Still further, for Section 13(2) to apply, the buyer musthave accepted all or even part of the goods. This however is again madesubject to an express or implied contract providing otherwise. Section13(2) of the Act suffered an amendment by the Amending Act 33 of1963. By the said amendment, the words “or where the contract is forspecific goods the property in which has passed to the buyer” came tobe omitted. Going by the objects and reasons of the Amending Act, it isfound that the said words gave rise to some difficulty. It is, inter alia,stated in the objects and reasons that under Section 20 of the Act, propertyin specific goods in a deliverable state passes to the buyer when thecontract is made. When there is a contract for sale of specific goods bysample, Section 17(2) of the Act provides for an implied condition thatthe bulk should correspond to the sample in quality. It is further indicatedin the objects and reasons that when in such a case property is deliveredsubsequently which does not correspond with the sample, Section 13(2)obliged the buyer to treat the implied condition under Section 17(2) as awarranty, thus, robbing the buyer of the right to reject the goods andentitling him to claim damages only. The Law Commission also made arecommendation that in the case of sale of specific goods by sample itshould be taken out of Section 13(2). Thus, the omission in Section 13(2)by the Amending Act 33 of 1963 confines the compelled treatment of abreach of a condition as a breach of a warranty to only cases where thecontract is not severable and the buyer has accepted the goods or partthereof. No doubt, all of this is subject to a contract either expressly orimpliedly otherwise.

37. Section 14 (a) of the Act provides for an implied condition, inthe absence of circumstances indicating a different intention that theseller has a right to sell the goods. This is in a sale. In the case of theagreement to sell as would be the case of future goods, Section 14 (a)

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Aalso provides that there is an implied condition that the seller ‘will have’the right to sell the goods when the property is to pass. Section 14 (b)declares the existence of an implied warranty that the buyer will haveand enjoy the right of quiet possession of the goods. Section 14 (c) providesfor an implied warranty that the goods shall be free from any charge orencumbrance in favour of a third party not declared or known to theBbuyer before or at the time of the contract.

38. Section 15 creates an implied condition in the case of a saleby description interalia that the goods must correspond with thedescription. We may notice the following statements relating to ‘Sale ofSpecific Goods by Description’ and ‘Conditions as to Quality’ in TheCSale of Goods Act by Pollock and Mulla [11[th] Edition]:

“Sale of Specific Goods by Description

It will be observed that the section applies where there is a“contract for the sale of goods by description”, that is to say wherethe goods are described by the contract. This usually applies to acontract for the sale of unascertained or future goods, but it mayapply to the sale of specific goods also, if the buyer contracts inreliance on that description. This may well occur in a case wherethe buyer has never seen the goods and may also occur where hehas seen them, but in the latter case it is more difficult for thebuyer to show that the sale was a sale by description, for usuallythe contract for the sale of a specific article is a contract for thearticle as it is and any description of it at the most amounts to awarranty, for the breach of which the buyer can only recoverdamages. Occasionally, where goods are sold over the counter toa customer who asks for the goods by their name, the sale maybe a sale by description, but in general a customer who buys goodsin a shop across the counter is not buying by description. It wouldappear that the only sales not by description are sales of specificgoods as such. “Specific goods may be sold as such when theyare sold without any description, express or implied; or where anystatement made about them is not essential to their identity; orwhere though the goods are described, the description is not reliedupon, as where the buyer buys the goods such as they are”.

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mercantile contracts they will usually amount to a part of thedescription.”

“Conditions as to Quality

This section, it will be observed, deals only with the condition thatthe goods should correspond with the description. In the oldercases stipulations, express or implied, as to the quality of the goodswere treated as part of their description: the Act, however, dealswith them as separate conditions in section 16(2) and section 17.”

39. Section 16 declares that subject to the other provisions of theAct and of any other law in force, there can be no implied warranty orcondition as regards the quality or the fitness of the goods for anyparticular purpose. This is subject to two exceptions. The exception inSection 16 (1) applies when the buyer expressly or by implication revealsto the seller, the particular purpose for which the goods are required.Intimation of this information to the seller brings in the belief that thebuyer relies on the seller’s skill or judgement. Furthermore, the goodsmust be of the description which must be in the course of the seller’sbusiness to supply. In such a situation there is an implied condition thatthe goods are to be reasonably fit for the stated/particular purposes. Animplied warranty or condition regarding the quality or fitness of theparticular purpose can be established by the trade practice or usage oftrade. However, if specified goods are sold under trade name or patentname, there is no such implied condition. In this regard we may noticethat Section 16 (2) provides for an implied condition regarding the goodsbeing merchantable. The cardinal requirement to be satisfied in this regardis as follows. The goods must be bought by ‘description’ from a seller.The seller may be a manufacturer or a producer. He may not be either.In both of the cases, the only requirement for an implied condition toarise is that the seller must be one who deals in goods of ‘that description’.This is made subject to the exception in the proviso namely that if thebuyer has examined the goods, there shall be no implied condition asregards defects which the inspection should have revealed. Thisnecessarily means that the proviso would not apply where the defectsare latent. In other words, even in a case where goods are purchasedafter actual inspection of the goods if defects are not discovered thenthe implied condition would apply in the circumstances mentioned inSection 16 (2). Section 17 deals with sale by sample. Section 17(2) readsas follows:

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A17. Sale by sample:

(2) In the case of a contract for sale by sample there is an impliedcondition—

(a) that the bulk shall correspond with the sample in quality; B(b) that the buyer shall have a reasonable opportunity of comparingthe bulk with the sample;

(c) that the goods shall be free from any defect, rendering themunmerchantable, which would not be apparent on reasonableexamination of the sample.

CThus, the Act provides for certain implied conditions andwarranties. The parties may further also provide for express conditionsand warranties. Section 31 proclaims that it is the duty of the seller todeliver goods in accordance with the terms of the contract of sale.Equally, it is the duty of the buyer to accept the goods and to pay forDthem in accordance with the terms of the contract of sale. Delivery ofgoods and payment of price are acts to be performed concurrently. Inother words, the seller should be ready and willing to give possession ofthe goods to the buyer in exchange for the price and the buyer must beready and willing to pay the price on receipt of the possession of thegoods. It is significant, however, to notice that this obligation thoughEordinarily concurrent is subject to a contract to the contrary. In otherwords, there can be a condition for payment of the price before thedelivery of the possession. Equally the payment of the price can bepostponed to a point of time after the delivery of possession. Such matterscan be regulated by the contract between the parties. When goods areFdelivered to the buyer it does not mean that he has accepted the goods ifhe has not previously examined the goods. In other words, if he (thebuyer) has not previously examined the goods, the delivery of the goodsto the buyer by itself will not be deemed to be acceptance of goods byhim. He must be afforded an opportunity of examining the goods. Theopportunity must be afforded for the purpose of finding out whether theGgoods are in conformity with the agreed terms. Section 41 (2) declaresthat the seller when he delivers goods is bound on request of the buyer areasonable opportunity of examining the goods. This is again subject to acontract to the contrary. In other words, unless there is a contract to thecontrary if a demand is made by the buyer for an opportunity to examinethe goods, when delivery is given, the seller is duty bound to afford suchH

an opportunity. Section 42 specifically deals with when the goods are tobe treated as having being accepted. There are three circumstances inwhich the law treats the goods as having been accepted:

(i) The buyer informs the seller that he has accepted the goods.

(ii) When after the delivery of the goods to the buyer, he doesany act which is not consistent with the ownership of theseller. It includes a sale made by the buyer of the goods. Itmay include any other form of transfer of the goods. It mayalso include the consumption of the goods by the buyer. Itmay embrace the destruction of the goods.

(iii) The buyer retains the goods, even after a lapse of a reasonabletime of the delivery of the goods and furthermore does notinform the seller that he has rejected the goods. As to whatis reasonable time is a matter which is to be determined onthe facts.

Section 63 of the Act provides that when the Act refers toreasonable time, it is a question of fact.

40. If any of these three circumstances exist, then, the law providesthat the buyer has accepted the goods. Section 43 deals with a situationwhere a buyer who is delivered the goods refuses to accept them. Thelaw contemplates that if the buyer upon being delivered the goodsascertains and finds that the goods are not in conformity with the contract,then he is not duty bound to accept the goods. On the other hand, he isentitled to reject the goods. In such circumstances, subject to a contractto the contrary, the buyer who is entitled to reject the goods need notreturn the goods to the seller. The principle underlying Section 43 is thatthe buyer need not be saddled with the liability of expense to be incurredfor returning of the goods. This is, however the case only when thebuyer acquires a right to refuse to accept the goods. As we have noticed,Section 19 deals with the question as to when the property in the goodspasses in a contract of sale of specific or ascertained goods. The propertywould pass according to the intention of the parties. Section 19 (2) providesfor three criteria to ascertain the intention of the parties as to when theproperty passes. The court must bear in mind the following criteria: theterms of the contract, the conduct of the parties and the circumstancesof the case.

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A41. Section 20 which in terms of Section 19 (3) is one of the rulesto ascertain the intention of the parties provides that in an unconditionalcontract for sale of specific goods in a deliverable state, the propertypasses when the contract is made. Section 20 further declares that thepostponement of the delivery of the goods or the payment of the price orboth is immaterial to the passing of the property upon the making of theBcontract. Passing of property would lead to divesting of title of the sellerand vesting the title with the buyer. The significance of the passing ofthe property is also that unless it is otherwise agreed the goods willremain at the seller’s risk until the property is transferred. Equally, whenthe property is transferred, irrespective of whether delivery has beenCmade to the buyer, the risk will be shouldered by the buyer. This is subjectto the two provisos. On each we need not dilate. Section 55, whichprovides for an unpaid sellers’ right to sue for the price also highlightsthe significance of the passing of property. Section 55(1) contemplatessuch a suit if property has passed.

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DSection 55 of the Act provides for a right to sue with the seller ofgoods for the price of the goods. Section 55(1) contemplates that propertyin the goods has passed to the buyer. It further contemplates that thebuyer has wrongfully neglected or refused, to pay for the goods, accordingto the terms of the contract. Section 55(2) clothes the seller with a rightto sue for the price, if the price is payable on a certain date. This rightEinheres in the seller, irrespective of the fact that delivery has not takenplace, and what is more, the property in the goods has not passed. Eventhe appropriation of the goods to the contract is not necessary in such acase. The Section reaffirms the principle that the property can passwithout there being delivery. Delivery of goods need not always result inFpassing of the property. However, what is important is dehors any of theaspects mentioned in Section 55(2), viz., delivery of goods, passing ofproperty in the goods or appropriation of goods to the contract, theagreement between the parties, by which the buyer is obliged to pay theprice on a certain date, would entitle the seller to sue for the price of thegoods.G

42. Section 59 of the Act deals with the remedies open to thebuyer upon there being a breach of warranty. We have already noticedthat a breach of warranty gives rise to a claim for damages. (See Section12 (3)). Section 13 as noticed by us entitles the buyer to waive a conditionor to elect or treat the breach of the condition as a breach of the warranty.H

Section 13 (2) as noticed by us subject to a contract otherwise limits theright of the buyer even when there is a breach of condition to sue onlyfor breach of warranty. Section 59, accordingly, applies in all the threesituations, which are as follows. There occurs a breach of the warranty.Secondly, a condition is violated by the seller, but the buyer elects totreat the breach of the condition as a breach of the warranty. Thirdly,under Section 13 (2), in view of the buyer having accepted the goods, incircumstances described in Section 13 (2), the buyer is compelled to sueunder Section 59, namely, on the footing that there is a breach of warranty.Thus, the word ‘elects’ in Section 59 is relatable to Section 13(1) whereasthe words ‘is compelled’ in Section 59 is to be read with Section 13(2) ofthe Act.

43. It is clear that a breach of warranty does not entitle the buyerto reject the goods. The remedies which he can seek under Section 59are as follows. He can seek the reduction (diminution) of the price. Hemay also seek to be freed from the liability to pay the price (extinction ofthe price). In other words, relying upon the breach of the warranty, hecan refuse to pay the price or canvas for the reduction of the price.Section 59 further proclaims that the buyer may sue the seller for damagesfor breach of warranty. Section 59(2) declares that with respect to thesame breach of warranty which is projected as the foundation for seekingdiminution or wiping out of the liability to pay the price, the buyer canalso seek damages.

44. A question may arise as to whether after the delivery of thegoods by the seller and what is more, even after acceptance of thegoods by the buyer, whether the provisions of Section 59 can be invokedby the buyer? If the property has passed to the buyer within the meaningof Section 19 which on the one hand entitles the seller to sue for theprice of the goods, in view of the word ‘wrongfully’ neglects or refusesto pay under Section 55 read with Section 59, cannot the buyer in a suitfor the price filed by the seller, ‘set up’ a breach of warranty within themeaning of Section 59 and persuade the court to either decree a reductionin the price or extinguish the liability of the buyer to even pay any part ofthe price. To put it differently, if the goods are delivered and acceptedwithin the meaning of Section 42 of the Act, will the right of the buyerarising out of breach of warranty under Section 59 be extinguished? Ifthe mere acceptance of the goods results in depriving the right of thebuyer to invoke Section 59 of the Act, then, undoubtedly, the buyer would AB

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Abe liable to pay the price. Let us assume that there is delivery andacceptance in a given case. If parties intended that the property in thegoods would pass only after delivery is effected and acceptance is madeand if the case falls under Section 13 (2) of the Act and the buyer setsup a compelled breach of warranty though in fact a condition was violated,it may not be legal to deny the benefit of the range of remedies open toBa buyer under Section 59. Acceptance of goods at any rate within themeaning of Section 13(2), if it does not constitute passing of propertywould not also deprive the buyer of the right under Section 59 of theAct. As long as a condition is violated, be it implied or express, and it isnot waived, then, present other elements of Section 13(2), Section 59Capplies.

45. What would be the position if, after there is acceptance of thegoods, under Section 42 even if it be a case of express intimation ofacceptance, that events occur which lead to the creation of circumstancesattracting Section 14? As for instance, the buyer is confronted with aDsituation where he finds that the goods were in fact stolen and the sellerhad no right to sell the goods. A third party comes forward andsubstantiates his case that the goods were never the property of theseller. Would it not be a condition under Section 14 (a) which has beenobserved in its breach by the seller? Let us further assume that thebuyer has not yet paid the price. Can he not despite having accepted theEgoods exercise his right under Section 59 and seek extinction of theprice apart from claiming damages?

46. Under the law, namely the Act, if a suit for price were broughtin similar circumstances, the question would arise squarely, whether thesecond respondent as buyer could defend the action by ‘setting up’Fdiminution or extinction of the price. Could the second respondent asdefendant seek to non-suit the first respondent by establishing a breachof a warranty. Undoubtedly, ordinarily acceptance of the goods by thebuyer, a matter which falls to be decided with reference to Sections 41,42 and 43 would conclude the matter in favor of the seller. What howeverGwould be the position where after acceptance, circumstances exist whichjustify the buyer in pleading a breach of a condition which is treated as awarranty or a breach of warranty which is found after acceptance.Take for example breach of a condition under Section 14 (a). In casewhere the price has not been paid and suit is brought under Section 55(1), where the buyer has found that the seller has no right to sell the H

goods, can the buyer be robbed of his right to refuse to pay the pricevouchsafed for a buyer under Section 59 of the Act? The answer wouldappear to us to be in the negative. No doubt in such a case it would besaid that there is no passing of property or that the seller had no propertyto pass. Equally, if after acceptance of the goods, the quiet possession ofthe goods within the meaning of Section 14 (b) is thwarted by third partyclaims, the implied warranty for such possession would stand violatedgiving rise to the buyer a right under Section 59 to seek such diminutionof the price or even extinction of the price. Even a claim for damagesover and above the relief of diminution and even extinction of the priceis permitted under Section 59 (2).

47. It is to be remembered, that under Section 31 of the Act it isthe duty of the buyer to pay for the goods in terms of the contract.Delivery and payment of price are made concurrent conditions, unlessotherwise agreed. This means with possession of the goods beingobtained, the buyer becomes obliged to pay the price. [See Section 32].In this case, the contract obliged the second respondent to pay the pricewithin seven days, according to the first respondent as per the purchaseorder.

THE DECISION IN MOBILOX

48. After an exhaustive survey of the legislative history of theIBC, and case law, this Court, speaking through R.F. Nariman J., heldinter alia:

“32. In the passage of the Bills which ultimately became theCode, various important changes have taken place. The originaldefinition of “dispute” has now become an inclusive definition,the words “bona fide” before “suit or arbitration proceedings”being deleted. In Section 8(1), the words “through an informationutility, wherever applicable, or by registered post or courier or byany electronic communication” have been deleted. Likewise, inSection 8(2), the period of “at least 60 days … through aninformation utility or by registered post or courier or by anyelectronic communication” has also been deleted. In Section 9(5),the absence of a proviso similar to the proviso occurring in Section7(5) was also rectified. Further, the time periods of 2 and 3 dayswere uniformly substituted, as has been seen above, by 7 days, sothat a sufficiently long period is given to do the needful.

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34. Therefore, the adjudicating authority, when examining anapplication under Section 9 of the Act will have to determine:

(i) Whether there is an “operational debt” as definedexceeding Rs 1 lakh? (See Section 4 of the Act)

(ii) Whether the documentary evidence furnished with theapplication shows that the aforesaid debt is due and payable andhas not yet been paid? and

(iii) Whether there is existence of a dispute between theparties or the record of the pendency of a suit or arbitrationproceeding filed before the receipt of the demand notice of theunpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the applicationwould have to be rejected. Apart from the above, the adjudicatingauthority must follow the mandate of Section 9, as outlined above,and in particular the mandate of Section 9(5) of the Act, and admitor reject the application, as the case may be, depending upon thefactors mentioned in Section 9(5) of the Act.

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38. It is, thus, clear that so far as an operational creditor isconcerned, a demand notice of an unpaid operational debt or copyof an invoice demanding payment of the amount involved must bedelivered in the prescribed form. The corporate debtor is thengiven a period of 10 days from the receipt of the demand noticeor copy of the invoice to bring to the notice of the operationalcreditor the existence of a dispute, if any. We have also seen thenotes on clauses annexed to the Insolvency and Bankruptcy Billof 2015, in which “the existence of a dispute” alone is mentioned.Even otherwise, the word “and” occurring in Section 8(2)(a)must be read as “or” keeping in mind the legislative intent and thefact that an anomalous situation would arise if it is not read as“or”. If read as “and”, disputes would only stave off the bankruptcyprocess if they are already pending in a suit or arbitrationproceedings and not otherwise. This would lead to great hardship;in that a dispute may arise a few days before triggering of theinsolvency process, in which case, though a dispute may exist,there is no time to approach either an Arbitral Tribunal or a court.

Further, given the fact that long limitation periods are allowed,where disputes may arise and do not reach an Arbitral Tribunal ora court for up to three years, such persons would be outside thepurview of Section 8(2) leading to bankruptcy proceedingscommencing against them. Such an anomaly cannot possibly havebeen intended by the legislature nor has it so been intended. Wehave also seen that one of the objects of the Code qua operationaldebts is to ensure that the amount of such debts, which is usuallysmaller than that of financial debts, does not enable operationalcreditors to put the corporate debtor into the insolvency resolutionprocess prematurely or initiate the process for extraneousconsiderations. It is for this reason that it is enough that a disputeexists between the parties.

44. We have already noticed that in the first Insolvency andBankruptcy Bill, 2015 that was annexed to the Bankruptcy LawReforms Committee Report, Section 5(4) defined “dispute” asmeaning a “bona fide suit or arbitration proceedings…”. In itspresent avatar, Section 5(6) excludes the expression “bona fide”which is of significance. Therefore, it is difficult to import theexpression “bona fide” into Section 8(2)(a) in order to judgewhether a dispute exists or not.

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48. To similar effect is the judgment of the Chancery Divisionin Hayes v. Hayes [Hayes v. Hayes, 2014 EWHC 2694 (Ch)]under the UK Insolvency Rules. The Chancery Division held:

“I do not think it necessary, for the purposes of this appeal,to embark on a survey of the authorities as to precisely what isinvolved in a genuine and substantial cross-claim. It is clear thaton the one hand, the court does not need to be satisfied that thereis a good claim or even that it is a claim which is prima facie likelyto succeed. In Bayoil S.A., In re [Bayoil S.A., In re, (1999) 1WLR 147 (CA)] itself, Nourse, L.J. referred, at WLR p. 153, towhat Harman, L.J. had said in L.H.F. Wools Ltd., In re [L.H.F.Wools Ltd., In re, 1970 Ch 27 : (1969) 3 WLR 100 (CA)] whereHarman, L.J., having referred to a previous case, said: (Ch p. 36E-F)

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‘… The majority decided in that case that, shadowy as thecross-claim was and improbable as the events said to support itseemed to be , there was just enough to make the principle work,namely, that it was right to have the matter tried out before theaxe fell.’

On the other hand, the court should be alert to detect whollyspurious claims merely being put forward by an unwilling debtorto raise what has been called “a cloud of objections” as I referredto earlier.”

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51. It is clear, therefore, that once the operational creditor hasfiled an application, which is otherwise complete, the adjudicatingauthority must reject the application under Section 9(5)(2)(d) ifnotice of dispute has been received by the operational creditor orthere is a record of dispute in the information utility. It is clearthat such notice must bring to the notice of the operational creditorthe “existence” of a dispute or the fact that a suit or arbitrationproceeding relating to a dispute is pending between the parties.Therefore, all that the adjudicating authority is to see at this stageis whether there is a plausible contention which requires furtherinvestigation and that the “dispute” is not a patently feeble legalargument or an assertion of fact unsupported by evidence. It isimportant to separate the grain from the chaff and to reject aspurious defence which is mere bluster. However, in doing so, theCourt does not need to be satisfied that the defence is likely tosucceed. The Court does not at this stage examine the merits ofthe dispute except to the extent indicated above. So long as adispute truly exists in fact and is not spurious, hypothetical orillusory, the adjudicating authority has to reject the application.”

(Emphasis supplied)

THE PURCHASE ORDER

49. The purchase order dated 27.10.2016 reads, inter alia, asfollows:

RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT.783LTD.& ORS. [K. M. JOSEPH, J.]“PURCHASE ORDERAxxxxxxxxxBCDEFGH"

A50. The purchase order is dated 27.10.2016. The quotation isdescribed as telephonic and dated 27.10.2016. It is specifically mentionedas against the query where to be used as follows: FBC Boiler. Thegoods were described as imported coal. Apart from mentioning thequantity and the price, it is indicated that the coal must be of a certainquality in terms of its characteristics which we have already noticed.BUnder the terms and conditions with statutory details, Note 1 indicatedthat the material should be accompanied with a certificate of analysis.Payment terms provided that it was to be paid within seven days of thereceipt of materials. Delivery must be immediate. Under the heading‘Guarantee’, it is mentioned that the second respondent would reserveCthe right to reject the material at its ground site towards any quality ofmanufacturing defect. The supply commenced immediately ascontemplated in the purchase order, namely, from 28.10.2016. Indisputably,the goods were imported coal. This could be treated as a sale of goodsby description as the contract for sale related to 500 MT of Indonesiancoal.D

51. In this case, a perusal of the notice sent by first respondentand the application under Section 9 of the IBC would show that the caseis premised on there being a sale, and there was a ‘debt’ owed by thesecond respondent under the sale. It means that the cause of action ingeneral law would have been a suit for the price of the goods sold within Ethe meaning of Section 55 of the Act.

52. On 30.10.2016, an email was indeed dispatched to the firstrespondent [See paragraph 4 of this Judgment]. The email was sent bySTDPL, the sister concern of the second respondent. This email hasbeen brushed aside by the NCLAT in the impugned order on two grounds.FIn the first place, the NCLAT has proceeded on the basis that there wasno reference to purchase order dated 27.10.2016 and the concern raisedin the email was qua purchase order dated 11.10.2016 which related tothe sister concern of the second respondent namely, STDPL. The secondreason for refusing the appellant to draw support from the said email isGthat there is no reference to email dated 30.10.2016 in the reply to thestatutory notice under the IBC.

53. We are of the view that the approach of the NCLAT cannotbe sustained. A perusal of the email would clearly indicate that though itwas sent by STDPL express reference is made to the second respondent H

also, and thereafter, the issues relating to the quality of the coal arearticulated. We also notice that pictures were attached for the reference.

54. The further fact that there is no express reference to emaildated 30.10.2016 in the reply notice given by the second respondent tothe statutory notice under Section 8 of the IBC given by the firstrespondent will not, in our view, detract from the impact of thecommunication dated 30.12.2016. It is not as if there is a dispute aboutthe sending and receipt of the communication dated 30.10.2016.Therefore, we are of the view that the NCLAT has clearly erred inrefusing to lay store by the said communication. On 03.11.2016,undoubtedly, the second respondent in its own name has ventilated itscomplaint about the inferior and the poor quality of the Indonesian coal.The impact of using such coal on the boiler and about the damage beingdone to the boiler has been specifically articulated. Further, a requestwas made to stop delivery of the goods. Even advice was sought as towhat is to be done about the loss. Thereafter, it is stated that for anymore losses occurred due to the poor inferior quality of the coal, thesecond respondent may debit the same in the account of the firstrespondent. On the very next day, that is, 04.11.16, the first respondentwrote back by pointing to the improbability about the deviation from thequality of the coal but it was indicated that the further supply was beingstopped. Thus, the supply was effected of 412 MT out of the contractedquantum of 500 MT. The supply was stopped on the basis of thecommunication dated 04.11.16.

55. This is a case where there was a contract for sale of goods.The contract as gleaned from the purchase order related to goods whichwere sold by description, namely, Indonesian coal. Parties clearlycontemplated that the coal was to be a certain quality, the details ofwhich are expressly enumerated in the purchase order. The purpose forwhich the coal was purchased was also indicated, namely, it was to beused in a boiler. Therefore, it formed a part of the raw material for thesecond respondent. Pursuant to the purchase order, it is undoubtedlytrue, that 412 MT was delivered at the factory site of the secondrespondent. It is beyond challenge that no part of 412 MT has beenreturned by the second respondent to the first respondent. It would besafe to proceed on the basis that the goods so delivered may have beenused or consumed. It may constitute acceptance of the goods within themeaning of Section 42 of the Act. But then the case of the appellant is A

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Aanchored in Section 13(2) of the Act. The case is that the characteristicsof the coal or quality of the coal with reference to certain objectivecriteria were indeed specified and was understood as a condition to befulfilled by the seller and that those conditions were not fulfilled by thefirst respondent-seller. It is, therefore, the case of the appellant that theacceptance of the goods under Section 42 may not detract from SectionB13(2) of the Act applying to the facts. In other words, treating the qualityof the coal with reference to certain standards as conditions to be fulfilledby the seller, the mere acceptance of the goods by the buyer may notprevent the buyer from still contending that there has been a breach ofthe condition, but since the law permits the buyer to treat such breach ofCthe condition when there is acceptance of the goods as only a breach ofa warranty, Section 59 of the Act immediately gets attracted. Section 59of the Act contemplates a buyer ‘setting up’ a breach of a warranty todiminish or reduce the price or even extinguish it. If this line is accepted,it could indeed be said that the decks are not cleared for the firstrespondent-seller for its claim under Section 8.D

56. However, the objections of the first respondent may be noticed.Apart from supporting the order of the NCLAT with reference to itscontents, it is pointed out that the case of the appellant is a mere ruse,and that no complaint was raised on the ground and though there wasguarantee under the purchase order, nothing prevented the secondErespondent from rejecting the goods. The second respondent not onlyaccepted the supply of the goods but proceeded to consume the goods.A huge quantum of 412 MT was supplied from 28.10.2016 to 03.11.2016.No debit was made in the accounts in keeping with the intimation in theemail dated 03.11.2016. This rules out the case of any loss. There is noFevidence of any loss. The case of the appellant would fall under a merebluster.

57. We are not dealing with a suit under the Act either by theseller or the buyer. We are not oblivious to the fact that the suit hasalready been laid by the second respondent seeking damages. The factumGof the filing of the suit, however, cannot be taken into consideration forthe purpose of deciding whether there is a preexisting dispute under theIBC. This is for the simple reason that the suit was not filed before thereceipt of the demand notice under Section 8 of the IBC. No doubt, thedocumentary evidence furnished by the first respondent, namely, thepurchase order indicates that the price is to be paid within seven days ofH

receipt of the goods. It is true that Section 55(2) of the Act speaks abouta contract of sale where the price is payable on a day certain entitlingthe seller to sue for price. This is irrespective of the fact that the propertyin the goods has not passed and the goods have not been appropriated tothe contract and whether delivery has been made or not. We may notice,for the purpose of the limited inquiry we can do, for deciding, whetherthere was a pre-existing dispute, to apply Section 55(2) a certain daymust be fixed for payment of price. In this case, the payment termsspeak about ‘within seven days of delivery’. We may incidentally noticethat though in the context of Article 54 of the Indian Limitation Act,1963, a bench of three learned Judges in Ahmadsahab Abdul Mulla(2) (dead) v. Bibijan and others3 has with reference to the requirementin Article 54 held that the date for performance which is refused mustbe a fixed date. In this case, Section 55(2) speaks about a certain datewhich must be fixed in the contract. The clause in the purchase orderrefers to payment of the price being effected within seven days ofdelivery. It could, no doubt, be said that the date of payment cannot gobeyond 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. We need notexplore the matter further particularly having regard to the pendency ofthe suit, and also, the nature of the limited inquiry to be conducted underthe IBC. We may further note, however, that Section 55(2) alsocontemplates that the buyer must wrongfully neglect or refuse to paythe price. Interestingly, it will be noticed that the law-giver has in Section55(1) also used the words “and the buyer wrongfully neglects or refusesto pay for the goods” but the law-giver has further added the words“according to the terms of the contract” which words are not found inSection 55(2). Even proceeding on the basis that under Section 55(2) ofthe Act, this is a case where there is a certain day fixed for the paymentof the price irrespective of the passing of the property inter alia, thelaw does clothe the buyer with the right to resist the suit on the basis thatthe refusal to pay the price is not wrongful. In other words, he can leanon Section 59 and set up a breach of warranty and seek at least thediminution of the price if not extinction of the same. That apart, he has aright to seek damages even on the same breach.

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Asubject to which the property in the goods is to be transferred. As far asSection 55(1) of the Act, it clothes a seller with a right to sue for theprice of the goods when a property in the goods has passed. The suitcan be resisted by the buyer on the basis that the refusal to pay the priceis not wrongful having regard to the terms of the contract. As to whenproperty passes and transforms a contract for sale into a sale is largelyBa matter of intention. The rules as contained in Sections 19 to 24 of theAct would be employed. The task, however, remains to find out theintention of the parties. We may notice that a Division Bench of theHigh Court of Nagpur in the judgment inMangilal Karwa v. Shantibai4has made the following observations in an appeal by the defendant-Cbuyer who had agreed to purchase 503 bags of Masur but found that thegoods were not of merchantable quality and were rotten:

“11. The question whether the Defendant-purchaser had an optionto reject the goods because what he bargained for was masurand not some rotten stinking stuff which was once masur of thatDyear’s harvest does not arise for consideration in this case. For,even if there be a breach of a condition, the Defendant by takingdelivery has, under Section 13 of the Act, elected to treat it as abreach of warranty which under Section 59 entitles him to adiminution or extinction of the price.

EIt is settled law that even after the goods have been delivered intothe actual possession of the buyer, the performance of the seller’sduties may still be incomplete by reason of the breach of some ofthe conditions or warranties - express or implied - whether as totitle, or quality, or fitness to Which he has bound himself by thecontract: (Benjamin on Sale, Page 984).FThe question then is what is the diminution in price to which theDefendant is entitled under Section 59 of the Act?

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In the instant case the Defendant has set up the breach of warrantyGof quality in order to claim a diminution of price under Clause (a)of Sub-section (1). He is therefore entitled to such damages asare available to him under Clause (a) which would be all damagesresulting as a natural and ordinary consequence of his breach of H4 AIR 1956 Nag 221.

contract in supplying a damaged article or an article of an inferiorquality than the one contracted for.”

No doubt, the Court found, in the facts therein, that the propertyhad not passed. For the purpose of this case, we may not have toadjudicate and find that the property has passed in the goods to thesecond respondent.

59. In Mobilox(supra), this Court took the view that one of theobjects of the IBC in regard to operational debts is to ensure that theamount of such debts which is usually smaller than the financial debtsdoes not enable the operational creditor to put the corporate debtor intothe insolvency resolution process prematurely. It is further declared thatit is for this reason that it is enough that a dispute exists between theparties. It is further the law as declared inMobilox(supra) that Section5(6) of the IBC excludes the expression bona fide which qualified thewords suit or arbitration proceedings in Section 5(4) under the BankruptcyLaw Reforms Committee Report. All that is required is to see whetherthere is a plausible contention which must be investigated. This Courthas gone on to declare that a ‘patently feeble’ legal argument may notbe a plausible dispute. We respectfully agree. We are unable to find thatin the facts of this case, that the case set up by the second respondentwas a patently feeble legal argument. Again, following what this Courtheld in Mobilox(supra), we do not have to go to the extent of findingthat the second respondent is likely to succeed. Still further, findingguidance fromMobilox (supra), the examination of the merits need nottranscend the limited extent which we have undertaken which is to findthat the case of the second respondent is not to be brushed aside asspurious, hypothetical or illusory. We cannot find that the dispute asprojected by the appellant on behalf of the second respondent does notexist. In the teeth of the emails which we have adverted to, and theinference sought to be drawn in particular as also the Lab Reportsproduced, no doubt, from the second respondent’s Labs, we cannot alsofind that the case of the corporate debtor is wholly unsupported byevidence. As to the acceptability of these materials and the weight to beattached to them, needless to say, we have not pronounced on the same.

60. When we speak about evidence, we must not overlook thelaw laid down in Mobilox (supra) that the court need not be satisfiedthat the defense is likely to succeed. The standard, in other words, withreference to which a case of a pre-existing dispute under the IBC must A

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Abe employed cannot be equated with even the principle of preponderanceof probability which guides a civil court at the stage of finally decreeinga suit. Once this subtle distinction is not overlooked, we would think thatthe NCLAT has clearly erred in finding that there was no dispute withinthe meaning of the IBC.

B61. On the one hand the case of the appellant appears to be thatthe boiler can be used by putting in large quantities of raw material (300MT approximately) and this justified the consumption of the suppliedgoods over a period of a few days, and yet, justifying the complaintabout the quality of the raw material and its impact on the boiler. Thestand of the first respondent is that there is no material to justify such aCclaim. We are of the view that this would involve the court making adeeper foray into the merits and attempting to find whether the disputeis bona fide as against it being a plausible contention. We cannot beunmindful about the impact of Section 13(2). In other words, the deliveryof the goods and the acceptance of the goods by use of the goods by theDcorporate debtor being not in dispute, the impact of Section 13(2) readwith Section 59 cannot at least for the purpose of determining whetherthere is a pre-existing dispute be ignored.

62. No doubt, the first respondent lays store by the purchase orderrequiring certificate of analysis in that in view of there being no challengeEto the said certificate of analysis and there being no rejection of thegoods which was contemplated under the purchase order at the groundsite, it is contended that the dispute cannot be countenanced. The appellantwould, on the other hand, seek to buttress his case with reference to thelab reports, no doubt, procured from the labs which the second respondenthas set up. The appellant, it must not be overlooked has a definite caseFthat, only upon use of the goods, the defect in the goods came to bediscovered. No doubt, the lab reports may support the appellant. It is notthe case of either party that the quality of the coal as set out in thepurchase order is something which could be established on mere physicalexamination. As far as the contention that no debit note was raised inGrespect of supplied goods and that the accounts may not bear out thecase of the appellant about the alleged loss, as a result of the use of thegoods in question, we feel that while they may indeed have lent assuranceto the case of the corporate debtor, their absence may not clinchinglyrule out the existence of a ‘pre-existing dispute’ under the IBC. Here,we must not be oblivious to the limited nature of examination of the caseH

of the corporate debtor projecting a pre-existing dispute. Overlookingthe boundaries of the jurisdiction can cause a serious miscarriage ofjustice besides frustrating the object of the IBC. The NCLAT, has clearlyerred in not appreciating the issue, bearing in mind the principles in theAct.

63. In view of our finding that the NCLAT has erred in its findingabout the existence of a pre-existing dispute, the impugned order meritsinterference. In the said view, we need not pronounce on the aspectabout the effect of Rule 150 being breached by the NCLT.

64. We make it clear, however, that as far as the suits filed by thesecond respondent are concerned, we must not be treated as havingpronounced on any factual issues and observations made in this regardmust be treated as having been made for the purpose of deciding thisappeal. We also make it clear that since Section 13 of the Act permitsthe buyer to waive a condition, it will be open to the first respondent tocanvass that at any rate the second respondent has waived the allegedcondition.

65. The appeal is allowed. The impugned order will stand setaside. The application filed by the first respondent against the secondrespondent under Section 9 will stand rejected. In view of the fact thatthe appellant succeeds on the basis that there is a pre-existing disputewithin the meaning of IBC, we leave open all the remedies and contentionsavailable to the first respondent in law. Parties are left to bear theirrespective costs.

Bibhuti Bhushan Bose

Appeal allowed.

(Assisted by : Preetam Bharti, LCRA)

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