M/S Bhandari Hosiery Exports Ltd. vs M/S In-Time Garments Pvt. Ltd.

The present application is filed under section 9 of Insolvency and Bankruptcy Code, 2016 (for brevity ‘Code, 2016’) read with Rule 6 of the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by M/s Bhandari Hosiery Exports Limited (for brevity

‘Applicant’) through its Managing Director, Mr. Nitin Bhandari with a prayer for initiation of Corporate Insolvency process against M/s In-Time

Garments Private Limited (for brevity ‘Corporate Debtor’). The board resolution authorizing Mr. Nitin Bhandari vide board meeting dated

14.11.2017, is annexed to the application.

The applicant M/s. Bhandari Hosiery Exports Limited, claimed to be the operational creditor, is a public limited and a listed company having its

registered office at Bhandari House, village Meharban, Rahon Road, Ludhiana-141007, Punjab.

The respondent M/s. In-Time Garments Private Limited a corporate debtor against whom initiation of corporate insolvency resolution process has

been prayed for, is a company incorporated on 4th January, 1999 under the Companies Act, 1956 having its registered office at House No. 1107, Gali

No. 10 Govind Puri, Kalakaji New Delhi and having CIN U18101DL1999PTC097778.

The Authorised share capital of the Corporate Debtor is Rs. 28,20,000/- and Issued, Subscribed and Paid up share capital of the company is Rs.

28,20,000/-.

It is the case of the applicant that during the course of business the Corporate Debtor, M/s In-Time Garments Private Limited placed orders on the

Applicant, M/s Bhandari Hosiery Exports Limited for purchase of knitted cloth and fabrics from time to time aggregating to Rs. 64,10,249/- and the

terms of purchase stipulated shall be entitled to a credit period of 45 days from the date of raising of invoices for supply of fabrics. The applicant is

entitled to interest on delayed payment beyond 45 days @ 24% from the date of default to the date of payment.

The applicant has stated that the account of CD was debited by a sum of Rs. 11,304/- and the applicant also gave a credit of Rs. 2,62,825/- to the

CD on account of sales return on 16.10.2017, which has also been reflected on the statement of account sent along with the demand notice. The total

amount of purchase made by CD from the applicant including the debit note aggregates to Rs. 64,21,553/- as on 23.01.2018. The total amount

received from the CD aggregates to Rs. 47,10,203/- as on 23.01.2018. The balance default amount thus aggregated to Rs. 17,42,195/- as on

23.01.2018.

The applicant has stated that the last supply to the CD was made on 11.11.2017 and the applicant received last payment from the CD on

05.12.2017.

The applicant had been following up with the CD for the balance amount payable both over mobile and message. Despite the repeated follow ups

by the applicant, the CD failed and neglected to pay the applicant.

Therefore, the applicant issued a demand notice, dated 29.01.2018 under section 8 (1) of the Insolvency and Bankruptcy Code, 2016 on 29.01.2018

seeking repayment of unpaid amount of Rs. 17,42,195/-. The notice was duly served on the CD, who replied to the said notice alleging existing of the

dispute.

The corporate debtor filed a reply raising dispute. It is contended by the Respondent that the initial delivery of the fabric were as per the

requirement of the respondent, however, after few deliveries, the quality of certain portion of the fabric delivered was not as per the requirement of

the CD. The defective fabric received by the CD was not fit for manufacturing purposes. On receiving the aforesaid defective fabric, the CD

immediately brought into the notice of the applicant about the defective fabric. The CD had sent WhatsApp message dated 04.11.2017 to the applicant

mentioning that the defective fabric is not acceptable.

The Respondent further contended that even after being informed about defective fabric, the applicant continued to supply the defective fabric to

the CD. That on repeated complaints by the CD, the applicant had sent an official to inspect the fabric at the CD’s factory and he had also

verified that the supplied fabric was defective. After various attempts for justification/replacement of the fabric, the applicant had assured that the CD

may proceed with the manufacturing of the garments with the fabric and the final product would be as per the requirements and specifications.

That the CD had manufactured the garments after the assurance of the quality goods supplied by the applicant, but the buyer of the CD namely,

Newtimes Group upon the inspection of the final garments from different lots of fabric delivered on 08.12.2017, rejected thrice shipment on the

grounds of defective fabric because the product was not as per the specification of the buyer. The respondent contended that the CD had suffered

huge monetary losses due to rejection from the Newtimes Group and also the reputation of CD was put on stake.

The Learned Counsel for the Respondent relied on the various orders of the NCLAT, which are as follows:

i. In the order of the Hon’ble NCLAT in the Case of Philips India Limited Vs. Goodwill Hospital & Research Centre Limited, Company Appeal

No. 14 of 2017; Philips India Limited Vs. Karina Healthcare Private Limited, Company Appeal No. 15 of 2017; Grasim Industries Limited Vs.

Spentex Industries Limited, Company Appeal No. 393 of 2018 it is held that:

“Since the respondent had already raised a dispute relating to quality of service/maintenance pursuant to notice under section 433(e)

and 434(1)(a) of the Companies Act, 2013 to the notice of the applicant. In that view of the matter, it can be safely being states that there is

existence of dispute about the claim of debtâ€​.

ii. In the order of the Hon’ble NCLAT in the Case of Innoventive Industries Limited Vs. Icici Bank, Civil Appeal Nos 8337-8338 of 2017, in this

judgement, it was held that under section 7 of the code has to ascertain the existence of a default from the records of the information utility or on the

basis of evidence furnished by the financial creditor within 14 days. The corporate debtor is entitled to point out to the adjudicating authority that

default has not occurred; in the sense that a debt, which may also include a disputed claim, is not due i.e it is not payable in law or in fact.

The applicant filed rejoinder to the reply of the Corporate Debtor stating that the Corporate debtor issued purchase order no.184 as late as

25.09.2017 and the CD was placing repeat order, which proves that the CD never had any grievances with regard to quality of goods supplied, which

also demonstrates that the fabric supplied by the applicant was in accordance with the requirements of the CD. Further, the CD himself has written

that he has sent some approved color standards of the fabric in the package.

The applicant also stated that the material was supplied as per the requirements and specifications of the CD. The applicant has made supply

through different invoices till 14.10.2017 and the CD has returned certain material vide sales return in the WhatsApp message dated 04.11.2017, the

CD informed and complained to applicant that the problem was not accepted. But it was contended by the applicant that it is not a dispute but

suggestion for correction relating to the supplies to be made in future.

Further, the applicant also contended that the applicant continued to supply material upto 11.11.2017 and also received payments from the CD upto

05.12.2017. The applicant also stated that there were five dispatches/supply invoices from 25.10.2017 to 11.11.2017 and at that time, the CD had not

raised any issue relating to the quality of fabrics supplied in relation to subsequent dispatches. The CD was avoiding payment by making lame

excuses.

The applicant also contends that if the supply of material was continued to be defective, then the CD would have raised his objection or returned

the material. The CD has not attached any proof of correspondences regarding its official communicating the defect in the material supplied. It is also

categorically denied that the representatives of applicant had verified fabrics supplied by it and if had it been so, then the CD would have attached the

proof of such verification conducted by the representatives of the applicant. In fact, there was no complaint raised by the CD against the supply of

fabric by the applicant at all.

The applicant also stated that the applicant never refused the CD for replacement whenever it approached for the same. It is stated that the

applicant was never in discussion with the CD for manufacturing of final product for further client of CD. The responsibility of the applicant ceases

the moment the CD cuts the fabrics supplied by the applicant. Further, the CD has not placed on record any exchange of documents in relation to the

averments made. In fact, the CD has consistently been assuring payment for the fabrics supplied over mobile, which has also been attached in the

application. It was further stated that there was no defect in the fabric but rather the holding back of payment was purely due to wrong intention of

the CD.

The applicant stated that the materials supplied was in accordance with the quality and to the satisfaction of the CD. Further, it is denied that CD

suffered any loss in consequence of fabric supplied by the applicant. Even otherwise, the CD never communicated of any such loss suffered before

the issuance of demand notice to the applicant.

On hearing the Ld. Counsels of both the sides and on perusal of the record, it can be concluded as under:

i. The record of the instant case reveals that the alleged liability has been disputed from time to time and that the dispute was pre-existing. It is seen

that a dispute of deficient performance was clearly pre-existing and raised by corporate debtor much prior to service of notice under section 8 of I &

B Code. In addition, the issue of deficient supply of fabrics was also raised by the respondent. Non-admission by the applicant of quality of fabrics and

defects raised by the corporate debtor is seen from applicant reply wherein the applicant had denied such defect with promise to correct the same and

further never rejected the replacement of the defective fabric which are delivered to the CD, whenever asked/raised by corporate debtor.

On repeated reassurances by the applicant to supply best quality in future, the corporate debtor placed further orders with the applicant.

Again inspection was carried out between the applicant and the corporate debtor to rectify the defects in the fabrics. There is thus force in the

contention of respondent that there is established and long-standing dispute between the parties much prior to the initiation of the present proceedings

under the code.

ii. “Dispute’ has been defined under the code in section 5 (6) which envisages that:

‘Dispute’ includes a suit or arbitration proceedings relating to - (a) the existence of the amount of debt; (b) the quality of goods or

service; or (c) the breach of a representation or warranty.â€​

iii. It is no longer Res-Integra that the definitions of dispute is inclusive and not exhaustive. Dispute has been given wide meaning so as to cover all

disputes on debt, default etc. and not be limited to only pending suit or a record of a pending arbitration.

iv. A dispute does truly exist between the parties in terms of section 5(6)(b) in the present case, which may or may not ultimately succeed but requires

trial/investigation. On one hand the applicant has relied on invoices in support of its claim. On the other hand respondent has disputed the long-standing

dispute of quality and non-performance of the complete contract till date on time. Though this is not the forum to examine and adjudicate as to which

portion of the claims or counter claims are admissible. Tribunal will not examine the merits of the dispute other than to see if there is in fact exist a

‘real dispute’ having some substance.

v. Hon’ble Supreme Court in the case of “Mobilox Innovative Private Limited vs. Kirusa Software Private Limited†in civil appeal number

9405 of 2017 vide order dated 21.09.2017 has held that: “Therefore, all the adjudicating authority is to see at this stage is whether there is a

plausible contention which requires further investigation and that the “dispute†is not a patently feeble legal argument or an assertion of fact

unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in

doing so, the court does not need to be satisfied that the defence is likely to succeed. The court does not at this stage examine the merits of the dispute

except to the extent indicated above. So long as a dispute truly exist in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to

reject the application. In the present case the respondent has raised dispute with sufficient particulars. Besides the case records reveal that there was

existence of dispute much prior to the issuance of notice under section 8 of the code. The claim of the dispute suggest the need of elaborate

investigation. The moment there is existence of such a pre-existence dispute, the corporate debtor gets out of the clutches of the code.

In view of the aforesaid facts, a conclusion can be drawn that there is ‘Pre-existence dispute’ though is not legally crystalized in any

litigation but a valid dispute was raised by corporate debtor time and again much prior to the notice served under section 8 of I & B Code. It is a fit

case to reject the application under section 9 of the I & B Code.

In view of the above discussion the present application is hereby dismissed. No order as to costs. A copy of the order shall be forwarded to IBBI

for its records.