Swastik Pipe Limited vs Associated Switchgears And Projects Limited

Abni Ranjan Kumar Sinha, Member, Judicial

The   present   petition   is   filed   under   Section 9   of  Insolvency   and Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy (Application   to   Adjudicating   Authority)    Rules,2016    by   the   Applicant/ operational creditor, i.e. "Swastik Pipe Limited" for initiation of Corporate Insolvency Resolution  Process  against the  Respondent/  Corporate Debtor Company "M/s Associated Switchgears And Projects Limited".

The Operational Creditor is a company and is engaged in the business of manufactures and exporter of C.R. Sheets, Mild Steel/Sheet/Carbon Steel ERW Black and Galvanized Pipes/ Tubes etc. and supplied C.R.  Sheets to the Corporate Debtor and accordingly, raised invoices against the same on the Corporate Debtor. The Corporate Debtor started defaulting and failed to make payment(s) against the said invoice(s).

Brief Facts of the case are as follows:

i. That   the    Corporate   Debtor   had   issued    a   cheque   bearing no.001822 dated 24.10_2016 for an amount is of Rs.4,27,118/- towards  the  part  discharge   of  its  liability,   in  favour  of  the Operational Creditor but the same is dishonoured on  25.10.2016 with remarks "STOPPED PAYMENT".

ii. Thereafter, the Corporate Debtor had made a part payment of Rs.1,00,000/- towards the aforesaid liability through NEFT on 08.06.2017   and  further  issued  a  cheque  bearing  no.215217 dated  15.01.2018  for a  sum  of Rs.1,00,000/-,  but same was again   dishonored   on 17.01.2019   with   the   remarks   "Funds Insufficient'.

iii.   That on 17.12.2018 & 11.04.2019, the Operational Creditor had issued  the  Demand   Notice  in  the  form  of  FORM  3  on  the registered  address  of the  Corporate  Debtor,  which were  duly delivered    upon   the    Corporate    Debtor    on 19.12.2018   and 13.04.2018 respectively.

iv. That the Corporate  Debtor had replied to the  said notices on 19.12.2018 and  13.04.2019 respectively without enclosing any document in support of their claim, in terms of the provisions of the Insolvency and Bankruptcy Code,  2016.  It is pertinent to submit that no payment has been received by the Operational Creditor from the Corporate Debtor within the statutory period of 10 days.

That  the  defaulted  amount is  of Rs.  6,05,630/-  being the principal amount outstanding of Rs. 3,72,118/- along with interest of Rs. 2,33,512/-. The debit notes issued on  11.07.2018 and 01.03.2019 for interest on late payment. The date from which the debt fell due is 18.01.2018.

The   Corporate   debtor   contended   the   following   in   its   reply   dated 20.02.2020:

i. The   Corporate   Debtor   is   the   well-known   manufacturer   and supplier of electrical panels and has considerable reputation in its area of operation.

ii. In  the  month  of August  2016,  the   Operational  Creditor  had approached to the Corporate Debtor and expressed their desire to supply M.S. Sheets to Corporate Debtor for the manufacturing of electrical panels.

iii. That on the assurance of Operational Creditor for providing the desired quality of 1.9 mm thickness sheets, the Corporate Debtor had  placed an order of SO tons of M.S.  Sheets on Operational Creditor on 31/08/2016. The rates were decided as Rs. 38,800 per ton inclusive of Excise Duty. The order was to be delivered  10-12 tons per week as desired by the Corporate Debtor.

iv. That    on 31/08/2016 itself, the    Operational    Creditor    had accepted the said order alongwith the price per ton.

v. That on  08/09/2016,  out of 50  tons  of sheets,  the  Corporate Debtor had placed an order of first lot of 10 tons @ Rs. 38,800/- per   ton   and   same   were   received   by   Corporate    Debtor   on 23/09/2016, but with an inflated price of Rs. 43,650/- per ton as against the decided amount of Rs. 38,800/- per ton.

vi. That   the   Corporate    Debtor   immediately   protested   with   the Operational Creditor and demanded issuance of a credit note of Rs. 50,439/- being billed in excess.

vii. That the Corporate Debtor also found that the material supplied by the Operational Creditor was very hard and defective. The said fact was brought to the notice of    Operational Creditor immediately  and  on  the  request  of the  corporate  debtor,  the officials    of   Operational   Creditor   had   visited    the   factory   of Corporate Debtor and admitted that the quality of material was inferior,  and promised  to  supply proper material regarding the balance quality.

viii. That the Corporate Debtor sent an email dated 06/10/2016 and highlighted the deficiency in the quality of the material and also protested about the invoice amount.  However, in the said email Corporate Debtor requested the Operational Creditor to send the next lot immediately but the Operational Creditor did not supply the said material to the Corporate Debtor and also stop to take calls of the Corporate Debtor.

ix. That the Corporate Debtor sent an email dated 22/10/2016 to the Operational Creditor raising the issue of quality of material and the Operational Creditor vide email dated 24.10.2016 dated 24.01.2016 apologies  to the corporate debtor for the  quality of material.

x.  That   the   Operational   Creditor   did   not   supply   the   required quantity to the Corporate Debtor and neither raised the invoices as per the agreed price of Rs.  38,800 per ton. The Operational Creditor repudiated the contract by clear breach in quality and quantity.

xi. That   since  the  Corporate  Debtor  was  in  the  urgent  need  of material, the Corporate Debtor had offered an increase rate of Rs. 2,500 per ton instead of Rs. 6,000 per ton as suggested by the Operational Creditor vide email dated 25/10/2016. The Operational Creditor never replied to the said email.

xii. That   since   the   Operational   Creditor   refused   to   supply   the material to the Corporate Debtor on previously agreed prices, the Corporate Debtor needed to purchase the remaining quantity of 39,600 kgs. from another vendor Mr. G.R. Gupta. The Corporate Debtor sent a detailed email dated 13/01/2017 to the Operational Creditor showing    the losses    incurred by    the Corporate  Debtor  while  purchasing  the  remaining  quantity  at escalated prices from another vendor.

xiii. That  due  to  the  breach  of  contract  and  poor  quality  of  the material  supplied  by  the  Operational  Creditor,   the  Corporate Debtor   had    suffered    a    loss    of   Rs. 1,00,000/-    which    the Operational Creditor is required to make good towards Corporate Debtor. Moreover, the Corporate Debtor is also entitled to claim damages   of   Rs. 50,000/-(Rs. 48.764   in   exact),   which   the Operational Creditor has over billed.

xiv. Further,  there was never any term  agreed between the parties regarding any interest to be paid on the outstanding amount, the Operational  Creditor  has  illegally  raised  invoices  with  interest amount.

xv. That the Operational Creditor had sent two (2) demand notices under rule 5 of the Insolvency and Bankruptcy Rules, 2016 on 17/12/2018  and 29/03/2019,  which were duly replied by the Corporate Debtor on 28/12/2018 and 25/04/2019 reply. In both the  replies,  the  Corporate  Debtor  denied  the  existence  of any unpaid  dues  and  also  brought  into  the  notice  of Operational Creditor  the  existence  of dispute  over the  price,  quantity  and quality  of the  services/material  provided  (CRC  sheets).  In  the replies    dated 28/12/2018    and 25/04/2019,    the    Corporate  Debtor not only denied any liability to pay any amount,  to the Operational Creditor but also claimed an amount of Rs. 48,764/- which   the  Corporate   Debtor  suffered  as  loss  because  of  the breach of agreement by the Operational Creditor.

xvi. That here is a dispute in existence since October 2016 between the parties,

xvii. The present application by the Operational creditor is also barred by the  limitation  as  the  last services provided  (supply of CRC sheets) were on 06/1012016, and hence the present application is beyond the period of limitation of three years.

The Applicant in its rejoinder dated 16.03.2020 has almost stated the same fact as stated in the application except that:

i. There has been no dispute as alleged by the Corporate Debtor in its reply.

ii. The  last  payment  was  made  by  the   Corporate  debtor  to  the Operational Creditor through NEFT dated 08.06.2017.

iii. No agreement was ever exchanged between the parties, which is further established from the fact that the Corporate Debtor has not attached any copy of the said alleged agreement.

iv. Standard practice in the steel industry to charge interest @18%  p.a. where the default has been committed by the purchasers and the sale consideration is not paid on due date,

v.  It is correct that the said 10 tons of M.S. Sheets were received by the Corporate Debtor on 23.09.2016, but it is incorrect that an inflated  price  of  Rs.43,650/-  per  ton  as  against  the   decided amount of Rs.38,800/- per ton was raised.

vi. No   debit   note   was   issued   by   the   corporate   debtor  to   the Operational Creditor.

vii.   It  is  correct  that   the  Corporate  Debtor  sent  an  email  dated 06.10.2016 which contained reference to some hardness, however,  no such deficiency in quality was raised. Further, in the said email, the Corporate Debtor had placed a further order of 308 sheets which clearly demonstrate that there was no issue about the quality, which is unacceptable to the Corporate Debtor. Further, the Corporate Debtor lost its right for the purchase of further materials since,  the payment of previous purchase was not made by him.

viii. The offer of the corporate debtor was not found acceptable by the Operational  creditor  and  as   such   they   were   not  under  any obligation to supply the same.

ix. The  Operational  Creditor has alleged to purchase the material from one Mr. G.R. Gupta at the rate of Rs.44.50 per Kg, Rs.46/-per kg, Fts.45.50/- Per kg. and Rs.46.50/- per kg. however, the Corporate Debtor did not agree to pay the Operational Creditor a price of Rs.44.50/- per kg. This clearly shows that the Corporate Debtor with  the  sole view to  evade the legitimate  dues  of the Operational Creditor as concocted the  false  story.  Further,  the Corporate Debtor has also not attached the copy of the alleged bills of the alleged purchases alongwith the reply.

The Applicant in its written submissions dated 03.12.2021 has raised almost same facts as stated in the application, except the followings:

i. The Corporate Debtor has filed its reply inter alia alleging that there was a pre-existing dispute related to the transaction since October, 2016   (Para  3 (d)   and 4  (x)  to 4  (xxii)  of the  Reply) regarding price and quality. The Corporate Debtor has relied on the  emails  exchanged  between  the  Parties  in  September  and October  2016. (Page 14-16   of  the   Reply   and   Page 7   of  the Additional Documents filed by the Corporate Debtor)

ii. That in fact, the Corporate Debtor has concealed the facts that the alleged dispute was resolved and the Corporate Debtor had issued cheques in May 2017 of the part amount, which was due and outstanding in October 2016 i.e.  Rs.- 4,27,118/-. Had the dispute continued, the Corporate Debtor would not have issued the cheque in discharge of its liability. The factum of payment via NEFT in June 2018 and issuance of another cheque in January 2019   was   also   concealed.  The   Operational   Creditor   in   its response dated 15.11.202,1 to the additional documents filed by the Corporate Debtor (vide diary no. 0710102005662020/7) has placed   on   record   the   cheque   dated 17.05.2017   bearing   no. 001985A of Rs. 4,27,1181- and cheque dated 15.01.2018 bearing no. 215217 of Rs. 1,00,000/-.

iii. The Corporate Debtor, thus, has failed to make out a case of any pre-existing dispute between the parties. On the contrary there is sufficient material on record whereby the Corporate Debtor has acted admitting its liability.

iv. In the case of Mr. Rajendra kumar Kundanmal Jain vs Mr. Vijay A.Jain, [Company Appeal  (AT)  (Insolvency)  No. 366  of 2020, Judgement  dated   04.03.2021],   the   Hon'ble   NCLAT  held   that issuance of cheques amounts to acknowledgment of debt even if the   cheques    are   dishonoured. (Relevant   Para 28    and 29). Similarly,  in the case of Hindustan Apparel Industries  vs Fair Deal Corporation [AIR 2000 Guj 261], the Hon'ble Gujarat High Court has held that payment by cheque, which is dishonoured would  amount  to  acknowledgement  of a  debt  and  a  liability. (Relevant Para 7 and 8).

v. Even otherwise, a perusal of the emails exchanged between the parties clearly shows that the order was not confirmed by the Operational  Creditor.  In  its  email  31.10.2016,  the  Operational Creditor has clearly stated, "Secondly. I shall confirm the order, once customer code will open."  (Refer Page 7 of the Additional Documents on behalf of the  Corporate  Debtor)  Further,  in the email   dated 24.10.2016,    the   Corporate   Debtor   was   clearly informed  that the  quality of goods cannot be  improved.  (Refer Page  17  of the  Reply on behalf of Corporate  Debtor)  However, despite this, the Corporate Debtor continued to place more orders with the Operational Creditor. This implies that the dispute with respect to the quality of products was resolved and question of damages does not arise.

vi. At the time of initiation of the present proceedings, no dispute existed between the parties and thus the present petition is liable to be admitted against the Corporate Debtor.

vii.   The date of institution of the petition is 30.12.2019.

The Corporate debtor in its written submissions dated 02.12.2021 has stated almost same statement as stated in the written statement, except the followings:

i. There is a dispute pending between parties since October 2016, and at  no  stage  the  Corporate  Debtor  has  accepted  or  admitted  any liability to pay any amounts to Operational Creditor. It is also clear from  the  documents  filed  by  Corporate  Debtor  that  Operational Creditor was required to supply 50 Tons of material at fixed costs of Rs. 38,800 per ton, but Operational Creditor supplied only 10 Tons but that too on an inflated cost of Rs. 44,500 per Ton, which was never decided by the parties and atleast never accepted by Corporate Debtor.   The  Operational   Creditor  is  himself  guilty  of  Breach  of Contract,  and the  Corporate Debtor has legal reasons to proceed against   Operational   Creditor   for   recovery   of  losses   suffered   by Corporate Debtor because of such deficiency of material supplied by Operational  Creditor.  The Corporate Debtor  suffered a loss of Rs. 2,70,443/- on account of purchase of remaining 40 tons of material from  a  third  party  at  higher  costs  than  that  was  decided  with Operational Creditor (Annexu.re-B colly at pg-18).

We have heard the Ld. Counsel appearing for the parties and perused the averments made in  the application,  reply,  rejoinder as well as written submissions filed by the parties. Ld. Counsel for the Applicant has raised all the   facts   and   laws   referred   to   in   the   petition,   rejoinder   and   written submissions.  Similarly,  Ld.   Counsel for  the  Respondent/Corporate  Debtor has  raised   all  the   facts   and  laws   referred   to   in   the  reply  and  written submissions, therefore, it is needless to repeat the same.

On the basis of the averments made in the application, reply, rejoinder and written submissions filed on behalf of the respective parties, we observe that the contention of the respondent is that the Respondent has raised the dispute  regarding  the  quality  of the  goods,  prior  to  the  issuance  of the Demand  Notice  and  that is the reason,  the  payment has not been  made. Whereas, the contention of the Applicant is that after raising the dispute the Applicant had made the payment, therefore, that dispute cannot be treated as a dispute in terms of Section 8 of IBC.

Before considering the submissions, at this juncture, we would like to refer to the correspondences made between the parties in respect of qualities of the goods and the scanned copies of the E-mails exchanged between the parties are reproduced below: -

On  perusal  of the  E-mails  exchanged  between the  parties,  we notice that the Respondent has raised the dispute regarding the quality of goods and also   the   hike   of  the   price.  We  further observe   that  vide  E-mail  dated 13.01.2017,   the  Corporate  Debtor  has  informed  the  Operational  Creditor regarding the loss sustained by the Corporate Debtor.

At  this juncture,  we  would  also  like  to refer  to  the  Demand  Notice issued by the  Operational  Creditor.  It  shows that the  Demand  Notice was issued on  17.12.2018,  whereas,  the E-mail exchanged between the  parties referred to supra shows that all these correspondences were made prior to the issuance of the Demand Notice and finally vide E-mail dated 13.01.2017, the Corporate Debtor has also raised the amount, due to the loss sustained by the Corporate Debtor    due to the refusal for supply of ordered material.

At the cost of repetition, we would also like to refer to the arguments advanced on behalf of the Ld. Counsel appearing for the Corporate Debtor, who in course  of his arguments  submitted  that there is no  clause in the agreement on the basis of which, the price can be increased, therefore, the Operational Creditor has increased the price unilaterally and also stopped to supply the materials. He further contended that despite the repeated requests made by the Corporate Debtor, the Operational Creditor did not increase the quality   of   goods.    On   the   other   hand,    Ld.    Counsel   appearing   for   the Operational   Creditor  submits   that  he  has  clearly   sent  a  reply  that  the Operational Creditor is not inclined to improve the quality of materials and the price was increased, in view of the prevailing market situation.

At this juncture, we would like to refer to the definition of dispute as defined under Section 5 (6) of IBC and the same is reproduced below:-

Section 5 Definitions:-

(6) "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

(e) the breach of a representation or warranty;

A bare penasal of the provision shows that 'Dispute' includes a suit or arbitration proceedings relating to the existence of the amount of debt, the quality of goods or service; or the breach of a representation or warranty.

In terms of the definition of 'Dispute', we consider the case in hand and it is  seen that prior  to the issuance of the Demand Notice,  the Corporate Debtor had raised a dispute regarding the quality of the goods and he had also  claimed  that  the  Corporate  Debtor has  sustained  a  loss  due  to  the refusal for non-supply of the ordered materials. Admittedly, the order was for supply of 50,000 KG, whereas, the material was supplied only for 10,400 KG and the  balance materials were purchased by another person namely,  Mr. G.R.  Gupta,   on  the  increased  price,  causing  loss  of total  amount  of Rs. 27,00,443.60/- We further notice that in  reply to the Demand Notice,  the Corporate Debtor has raised all the correspondences made through E-mail by which he had raised the dispute regarding the quality of materials and refusal to supply the remaining materials.

At this juncture, we would also like to refer Section 8 of the IBC and the same is reproduced below:-

Section 8: Insolvency resolution bu operational creditor.

(/) An. operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in the default to  the  corporate debtor in such form and  manner as  may  be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, [if any, or] record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

(b) the 2[payment] of unpaid operational debt—

(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or

(ii)   by   sending   an   attested   copy   of  record   that  the operational creditor has encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a "demand notice" means a notice served by an operational creditor to the corporate debtor demanding 2[payment] of the operational debt in respect of which the default has occurred.

A bare perusal of the provision shows that, in terms of Section 8 (2) of the IBC  2016,  the  Corporate  Debtor after receiving the  Demand  Notice, is required to raise the existence of dispute within a period of ten days from the receipt of Demand Notice. Here in the case in hand, the Corporate Debtor had raised the dispute by sending the reply. Therefore, in view of Section 9 (5) (ii) (d) "if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility", in that case the application under Section 9 is not maintainable.

In terms of that provision, we consider the case in hand and we are of the considered view that since there  is a pre-existing dispute between the parties,    as   discussed   to   supra,    hence,   the   present   application   is   not maintainable.

Accordingly, the prayer to initiate the CIRP is hereby rejected and the application is hereby dismissed.