Sunday, 25 October 2020

M/s Rasayano Vs. Katariya Pet Private Limited - Pre-existing Dispute prior to the receipt of Demand notice U/s 8

NCLT Mumbai IV (06.12.2019) in M/s Rasayano Vs. Katariya Pet Private Limited [CP (IB) 2144/MB/C-IV/2019] held that; Invoking of arbitration clause mentioned in the Agreement dated 07.03.2018 after receipt of the Demand Notice dated 22.04.2019, cannot be sustained.


Excerpts of the order;

# 3. The present petition was filed on 06.06.2019 before this Adjudicating Authority on the ground that the Corporate Debtor failed to make payment of a sum of Rs.41,36,348.00 (Rupees forty-one lakh thirty-six thousand three hundred and forty-eight only) as principal and Rs.8,30,961.00 (Rupees eight lakh thirty thousand nine hundred and sixty-one only) as interest as on 22.06.2018, which is the date of default.

 

# 6. The Operational Creditor had served a Demand Notice in Form 3 dated 22.04.2019 on the Corporate Debtor (Exhibit '5', pp.33-39) in terms of section 8 of the IBC. The Corporate Debtor has not replied to the Demand Notice.

 

# 8. In its reply dated 26.08.2019, the Corporate Debtor has set up the following defence:-

  • (a) The Corporate Debtor had replied to the Statutory Notice dated 22.04.2019 issued by the Petitioner. In the reply, it has been specifically brought to the notice of the Operational Creditor that the goods supplied were faulty and of low quality, having no use to the Corporate Debtor except selling the same as scrap (para 2 at page 122 of the Reply);

  • (b) The factum of the goods being faulty were brought to the notice of the mediator, one Mr Anup Kulkarni, on 28.05.2018 itself (para 3 at page 122 of the Reply);

  • (c) The Corporate Debtor sold the supplied material as scrap for a sum of ₹2,80,000/-. A loss of ₹27,70,320 was caused to the respondent, with an additional loss of ₹4,80,000/- in manufacturing of scrap material. The Corporate Debtor also had to hire a godown for storing the scrap material, and this is valued at ₹7,20,000/-. All in all, a sum of ₹2,73,972/- is recoverable from the Operational Creditor (para 3 at page 123-124 of the Reply);

  • (d) The Corporate Debtor has invoked Arbitration Clause provided under the Sales Contract dated 07.03.2018, on 28.06.2019, and this fact has been intimated to the Operational Creditor (para 4 at page 125 of the Reply);

  • (e) The petition is liable to be rejected as Notice of Dispute has been brought to the notice of the Operational Creditor through the mediator, Mr Anup Kulkarni (para 6 and 7 at page 125-126 of the Reply);

  • (f) By invoking the Arbitration Clause and replying to the Statutory Notice, the Corporate Debtor has raised the existence of a Dispute, and therefore, in terms of the ratio laid down by the Hon'ble Supreme Court in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, the petition should be rejected (para 8 at page 127 of the Reply).

 

# 10. What has been referred to as "Statutory Notice" in the Reply filed by the Corporate Debtor is actually a legal notice simpliciter issued by the Counsel for the Operational Creditor. It cannot be treated as a reply to the Demand Notice. The dates are significant here:

  • (a) The first "legal notice" simpliciter issued by the Counsel for the Operational Creditor is dated 08.04.2019. The Demand Notice under the IBC came to be issued by the Operational Creditor on 22.04.2019, which has been duly served on the Corporate Debtor on 24.04.2019, as per acknowledgement at page 39 of the Petition. The reply to the earlier legal notice simpliciter dated 08.04.2019 came to be issued by the Corporate Debtor only on 14.06.2019.

  • (b) There was no reference whatsoever to the IBC or proceedings thereunder in the legal notice simpliciter dated 08.04.2019. However, in the reply dated 14.06.2019, which purports to be a reply to the said legal notice simpliciter, the Corporate Debtor has specifically mentioned in para 6 that the proceedings under IBC cannot be invoked.

  • (c) It is clear from this one statement that the reply, though ostensibly stated to be a response to the legal notice alone, was actually drafted after receipt of the legal notice dated 08.04.2019 and the Demand Notice dated 22.04.2019.

 

# 11. Invoking of arbitration clause mentioned in the Agreement dated 07.03.2018 after receipt of the Demand Notice dated 22.04.2019, cannot be sustained. The dispute must exist prior to the issue of Demand Notice under section 8(1) of the IBC, as held by the Hon'ble Supreme Court on 21.09.2017 in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited [(2018) 1 SCC 353]. The relevant para is quoted below;

  • 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."

 

# 12. Apart from the reply to the legal notice to the effect that the Agreement between the parties provides for arbitration, there was nothing on record to suggest that the Corporate Debtor raised any pre-existing dispute. In the absence of any evidence to suggest that dispute was raised prior to the issue of demand notice, the dispute cannot be held to be pre-existing by merely inviting attention to the arbitration clause.


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Disclaimer:

The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.