Pre-Existing Dispute Over Material Quality Halts Insolvency Proceedings: NCLT Chandigarh

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NCLT Chandigarh Rejects Insolvency Plea Against Arcotech Limited Citing Pre-Existing Dispute

Chandigarh, February 14, 2025 – The National Company Law Tribunal (NCLT), Chandigarh Bench, has dismissed an insolvency petition filed by M.S. Metals against Arcotech Limited , citing the existence of a pre-existing dispute between the two parties. The bench, comprising Hon’ble Mr. Harnam Singh Thakur (Member Judicial) and Hon’ble Mr. Umesh Kumar Shukla (Member Technical), delivered the judgment on February 14, 2025, concluding that the dispute regarding the quality of goods supplied predated the insolvency application, rendering the petition under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, unmaintainable.

Background of the Case

The case arose from a petition filed by Sanjay Kumar Jain , proprietor of M.S. Metals (Operational Creditor), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Arcotech Limited (Corporate Debtor) for an alleged unpaid operational debt of ₹5,24,30,694. M.S. Metals claimed to have supplied non-ferrous metal scrap to Arcotech Limited , raising invoices amounting to ₹3,96,03,130.

Arcotech Limited contested the claim, asserting that no debt was due and highlighting pre-existing disputes regarding the quality of materials supplied. The Corporate Debtor presented debit notes issued to M.S. Metals in 2017 and 2018, citing the supply of iron-mixed and defective materials.

Arguments Presented

Operational Creditor ( M.S. Metals ):

• Argued that a letter dated May 26, 2017, from Arcotech Limited acknowledged receipt of materials and promised payment, thus contradicting the debit notes.
• Contended that debit notes were "false and bogus."
• Highlighted a payment of ₹5,00,000 made by Arcotech Limited on April 29, 2019, as an admission of debt.

Corporate Debtor ( Arcotech Limited ):

• Stated that disputes regarding material quality were communicated in letters dated December 10, 2018, and April 16, 2019, prior to the demand notice.
• Presented debit notes issued in 2017 and 2018 for defective materials.
• Explained that the ₹5,00,000 payment was a "gesture of reconciliation and goodwill" and not an admission of the full claimed debt.
• Referred to communications and litigations indicating a pre-existing dispute.

Court's Analysis and Findings

The NCLT Bench meticulously examined the correspondence between the parties, including debit notes, letters, and emails. The court noted the debit notes issued by Arcotech Limited , highlighting quality concerns as early as May 2017.

The Tribunal emphasized the significance of pre-existing disputes in Section 9 applications, citing the Supreme Court's judgment in Mobilox Innovations Private Limited Vs Kirusa Software Private Limited . The NCLT reiterated the principle that the Adjudicating Authority must determine if a "plausible contention" requiring further investigation exists, ensuring the dispute is not "spurious, hypothetical or illusory."

> "Therefore, all that 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 exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application." - Mobilox Innovations Private Limited Vs Kirusa Software Private Limited

The bench found that the debit notes and subsequent letters from Arcotech Limited clearly indicated a dispute regarding the quality of materials supplied, predating the demand notice issued by M.S. Metals . The court distinguished the judgments cited by the Operational Creditor, noting that in the present case, Arcotech Limited consistently disputed the debt, unlike situations where acknowledgment of debt or offers for settlement were made.

Regarding the letter dated May 26, 2017, the NCLT observed that despite this letter, Arcotech Limited raised quality disputes in subsequent communications dated December 10, 2018, and April 16, 2019. On the payment of ₹5,00,000, the Tribunal accepted Arcotech Limited 's explanation that it was a goodwill gesture and not an admission of the entire debt.

Decision and Implications

Ultimately, the NCLT Chandigarh Bench concluded that a pre-existing dispute regarding the quality of materials was evident, rendering the Section 9 application by M.S. Metals unmaintainable. The petition was dismissed without costs.

The court clarified that its decision should not be construed as an opinion on the merits of the dispute itself and does not prevent either party from pursuing the matter in other appropriate legal forums.

Furthermore, the NCLT also dismissed IA No. 2007/2024 filed by Arcotech Limited , which sought to initiate criminal proceedings against the Operational Creditor for allegedly filing a false affidavit. The Tribunal found no evidence of 'mens rea' or intentional non-disclosure by M.S. Metals , citing a typographical error in the affidavit and the ambiguous nature of the pre-existing dispute itself. ```