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Rajratan Babulal Agarwal vs. Solartex India Pvt. Ltd. & Ors.

Civil Appeal · 2022 INSC 1081Decided 13 Oct 2022
Civil Appeal No. 2199 of 2021
K.M. Joseph · Hrishikesh Roy

Background

Solartex India Pvt. Ltd. (the operational creditor) supplied imported coal to a company (represented by the appellant, its ex-director) under a purchase order specifying particular quality standards. After delivery, the buyer complained by email that the coal's quality (calorific value, moisture, size) was far below what was promised and was damaging its boiler, and it stopped further deliveries and demanded compensation for losses (also filing separate civil suits). When the supplier later filed an application under Section 9 of the IBC to recover the unpaid invoice amount, the buyer resisted on the ground that a genuine pre-existing dispute over quality existed. Both the NCLT and the NCLAT rejected this defence and admitted the insolvency application, holding no real pre-existing dispute existed.

Decision Breakdown

The Supreme Court held that under the standard laid down in its earlier decision in Mobilox Innovations v. Kirusa Software, an IBC adjudicating authority need only satisfy itself that a "plausible" dispute exists, not that the defence is likely to succeed, nor apply the civil-court standard of preponderance of probability. Reviewing the pre-dispute emails complaining about coal quality (sent well before the insolvency notice) and the buyer's own lab reports, the Court found this was not a spurious, hypothetical, or illusory defence, even though the buyer had not issued a formal debit note or challenged the supplier's certificate of analysis at the time of delivery. Since the NCLAT had wrongly required a higher threshold of proof, its order was set aside, the Section 9 application was rejected, and the appeal was allowed, while leaving all other legal remedies (including the pending civil suits) open to the supplier.

Lesson Learnt

A company facing an insolvency petition over a disputed invoice can defeat admission of the case by showing a genuine, plausible pre-existing dispute (such as documented complaints about goods quality raised before the insolvency notice): the bar for showing such a dispute is low, and the tribunal must not conduct a mini-trial on the merits at the admission stage.

Official source (sci.gov.in)View Judgment (PDF)

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