Summary
A seller of Indonesian coal brought a Section 9 IBC application for unpaid price against a buyer that had received 412 MT of the 500 MT ordered. The NCLT admitted it and the NCLAT affirmed. Before the demand notice, the buyer's emails had complained of low calorific value, high moisture and boiler damage, and had asked for supply to stop; the seller replied defending the coal but stopped supply. The Supreme Court held the NCLAT wrong to discard the email of the buyer's sister concern, which expressly referred to the buyer. Even if consuming the coal was acceptance under Section 42 of the Sale of Goods Act, Sections 13(2) and 59 let a buyer set up breach of a quality condition to reduce or extinguish the price. The defence was a plausible dispute, not a spurious one, so the application was rejected.
Issues
- Whether the corporate debtor showed a pre-existing dispute within the Mobilox test so as to defeat an operational creditor's Section 9 application
- Whether acceptance and consumption of goods under Section 42 of the Sale of Goods Act bars the buyer from relying on breach of a quality condition
- Whether the NCLAT rightly ignored the sister concern's email and the absence of a debit note
Provisions considered
- Sections 8 and 9, Insolvency and Bankruptcy Code, 2016The authority need only see whether a plausible dispute existed before the demand notice; it must reject the application unless the defence is spurious, hypothetical or illusory. (¶¶ 48, 59, 60)
- Sections 13(2), 42 and 59, Sale of Goods Act, 1930Acceptance of goods compels the buyer to treat breach of a condition as breach of warranty, but Section 59 still lets the buyer set it up to diminish or extinguish the price and to claim damages. (¶¶ 36, 42, 43, 44, 55, 61)
- Section 55(2), Sale of Goods Act, 1930Even where price is payable on a day certain, the buyer can resist on the ground that its refusal to pay is not wrongful by setting up breach of warranty. (¶ 57)
Held
- Under Mobilox the adjudicating authority does not decide whether the dispute is bona fide or likely to succeed; it rejects the application if there is a plausible contention needing investigation that is not a patently feeble argument or a bare assertion unsupported by evidence. (¶¶ 48, 59, 60)
- The NCLAT erred in disregarding the 30.10.2016 email because it came from the sister concern and was not mentioned in the reply notice; it expressly referred to supply to the corporate debtor and its receipt was not disputed. (¶¶ 52, 53, 54)
- Where a buyer has accepted goods under a non-severable contract, Section 13(2) compels it to treat breach of a condition as breach of warranty, and Section 59 then allows it to set up that breach to reduce or extinguish the price; acceptance by consumption therefore does not end the dispute. (¶¶ 36, 42, 43, 44, 55, 61)
- Contemporaneous complaints about quality and boiler damage, the seller's stopping of supply, and the buyer's laboratory reports meant the defence was not wholly unsupported by evidence. The absence of a debit note or of rejection at the site did not rule out a pre-existing dispute, and weighing those matters would go beyond the limited inquiry. (¶¶ 59, 61, 62)
- Civil suits filed after the demand notice cannot themselves establish a pre-existing dispute, and the Court did not decide the effect of the NCLT's delay under Rule 150 of the NCLT Rules. (¶¶ 57, 63)
Result
Appeal allowed; NCLAT order set aside and the Section 9 application rejected. The pending suits were left unaffected, and the operational creditor's remedies and contentions were left open, including that the buyer waived the condition.