NCLAT rejects the appeals of Appellants and finds that there was an existing dispute between the parties prior to issue of demand notice by the Appellants; says dispute must exist before the receipt of the Demand Notice or Invoice.
NCLAT passes a common judgement in the matters of R.S. Cottmark(India) Pvt. Ltd. vs Rajvir Industries Ltd. and Krishna Bio Tech vs Rajvir Industries Ltd, in the present appeal. Appellants filed the present appeals against the impugned orders passed by the NCLT Hyderabad Bench, Hyderabad whereby the NCLT rejected the petitions filed by the Appellants after discussing the case on merit on the ground of existence of dispute. Thereafter, Appellants raises grounds as stated in the appeals, more particularly that ‘no dispute’, were brought on record by the Respondent (‘Corporate Debtor’) prior to delivery of Demand Notice under Section 8 as mandated by Insolvency & Bankruptcy Code, 2016 (IBC). Appellants further submit that the acceptance of the contention of the Respondent by the NCLT that Letter of Credit was issued in full and final settlement of claim of Appellants and other parties, NCLT passed the impugned order which is in direct contravention to “Illustration C” of Section 62 of the Indian Contract Act. Appellants submit that there is no dispute which was brought on record by the Respondent prior to delivery of Demand Notice under Section 8(1) of IBC. NCLT rejected the petitions on the ground of existence of dispute and that the dispute existed prior to the date of Demand Notice issued by Appellant(s).
NCLAT finds that there is an existence of dispute as on the date of issue of Demand Notice by the Appellants to the Respondent. NCLAT peruses the documents and finds that the letters addressed by the Respondent to the Appellants indicates that the Respondent raised a dispute with regard to quality of goods which is prior to issuance of Demand Notice. NCLAT places reliance on “Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software (P) Limited – 2017 1 SCC Online SC 353” wherein it was held that,
“ the ‘existence of dispute’ and/or the suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the Demand Notice or Invoice as the case may be.”
Further SC held that,
“The scheme under Sections 8 and 9 of the Code, appears to be that an operational creditor, as defined, may, on the occurrence of a default (i.e. on non-payment of a debt, any part whereof has become due and payable and has not been repaid), deliver a demand notice of such unpaid operational debt or deliver the copy of an invoice demanding payment of such amount to the corporate debtor in the form set out in Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 read with Form 3 or 4, as the case may be [Section 8(1)]. Within a period of 10 days of the receipt of such demand notice or copy of invoice, the corporate debtor must bring to the notice of the operational creditor the existence of a dispute and/or the record of the pendency of a suit or arbitration proceeding filed before the receipt of such notice or invoice in relation to such dispute [Section 8(2)(a)]. What is important is that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be. …..”
NCLAT observes that in the present case, the existence of dispute apparently establishes that the goods supplied by the Appellants have been rejected as per Quality Control Report and that in the impugned judgement, NCLT established the existence of dispute with regard to LOC issued by the Respondent to the extent of Rs. 39,15,148/- (Rupees Thirty-nine Lakhs Fifteen Thousand and One Hundred Forty-Eight. Thus, NCLAT finds that the NCLT has rightfully established the existence of the dispute. NCLAT reiterates that IBC, 2016 is not a recovery proceeding and hence, upholds the decision of NCLT.