Supreme Court of India
RAJRATAN BABULAL AGARWALversusSOLARTEX INDIA PVT. LTD.& ORS.
- Citation
- 2022 INSC 1081
- Decided
- 13 October 2022
- Disposal
- Appeal(s) allowed
- Bench
- K M JOSEPH
Holding
A dispute need only be plausible and not patently feeble; the evidence of emails and lab reports shows a genuine pre‑existing dispute, so the section‑9 application must be rejected.
Summary
The appellant, an ex‑director of the corporate debtor, contested the admission of an application filed by the operational creditor under section 9 of the Insolvency and Bankruptcy Code (IBC) alleging a debt for coal supplied under a purchase order. The creditor claimed the coal was of inferior quality, leading to emails and a notice of dispute before the statutory demand. The NCLT admitted the application and the NCLAT affirmed, holding that no pre‑existing dispute existed. On appeal, the Supreme Court examined whether the communications and subsequent civil suits amounted to a genuine dispute within the meaning of the IBC, relying on the Mobilox Innovations judgment. The Court held that the existence of a plausible contention, supported by emails and lab reports, suffices to constitute a pre‑existing dispute, and the NCLAT’s finding was erroneous. Consequently, the section‑9 application was rejected. The appeal was allowed, setting aside the lower tribunals’ orders.
Issues considered
- The existence of a 'pre‑existing dispute' under section 9 of the IBC in the present facts.
- Whether the dispute raised by the corporate debtor is spurious, hypothetical or illusory.
- The relevance of Sale of Goods Act provisions (condition vs warranty, sections 12, 13, 59) to the determination of a dispute.
- The effect of acceptance of goods on the right to raise a dispute under the IBC.
Legislation cited
- Companies Act, 1956s. 433
- Insolvency and Bankruptcy Code, 2016s. 4, s. 5, s. 8, s. 9, s. 9(5), s. 9(5)(2)(d)
- Limitation Act, 1963s. Article 54
- Sale of Goods Act, 1930s. 12, s. 13, s. 14, s. 15, s. 16, s. 17, s. 19, s. 20, s. 31, s. 32, s. 4, s. 41, s. 42, s. 43, s. 55, s. 59
Subjects
InsolvencySection 9 IBCPre‑existing disputeOperational debtSale of Goods ActCondition vs warrantyAcceptance of goodsCorporate debtorMoratorium
Judgment
[2022] 7 S.C.R. 755 755
RAJRATAN BABULAL AGARWAL A
v.
SOLARTEX INDIA PVT. LTD.& ORS.
(Civil Appeal No. 2199 of 2021)
OCTOBER 13, 2022 B
[K. M. JOSEPH AND RISHIKESH ROY, JJ.]
Insolvency and Bankruptcy Code, 2016 – s.9 – Application
under – Corporate Insolvency Resolution process – ‘Pre-existing
dispute’ – Application filed by first respondent u/s.9 of IBC against
C
the second respondent – Case premised on there being a sale, and
a ‘debt’ owed by the second respondent under the sale – The third
respondent was the Interim Resolution Professional – Appellant is
an ex-director of the second respondent – NCLT rejected the version
of the appellant that there existed a pre-existing dispute and admitted
application filed by first respondent u/s.9 of IBC against the second D
respondent – Order affirmed by NCLAT – Whether the appellant
raised a dispute which can be described as ‘a pre-existing dispute’
as understood by Supreme Court in the decision in Mobilox
Innovations Private Limited v. Kirusa Software Private Limited case –
Held: In Mobilox case, the Supreme Court took the view that one of
E
the objects of the IBC in regard to operational debts is to ensure
that the amount of such debts which is usually smaller than the
financial debts does not enable the operational creditor to put the
corporate debtor into the insolvency resolution process prematurely
– It was further declared that it is for this reason that it is enough
that a dispute exists between the parties – The standard with reference F
to which a case of a pre-existing dispute under the IBC must be
employed cannot be equated with even the principle of
preponderance of probability which guides a civil court at the stage
of finally decreeing a suit – Once this subtle distinction is not
overlooked, on facts, the NCLAT clearly erred in finding that there
G
was no dispute within the meaning of the IBC – The approach of
the NCLAT cannot be sustained – Application filed by the first
respondent against the second respondent under s.9 accordingly
rejected – Sale of Goods Act, 1930 – Doctrines/Principles – Principle
of preponderance of probability.
H
755
756 SUPREME COURT REPORTS [2022] 7 S.C.R.
A Mobilox Innovations Private Limited v. Kirusa Software
Private Limited (2018) 1 SCC 353 : [2017] 10 SCR
1006 – relied on.
Balwant Singh and Others v. Anand Kumar Sharma and
Others (2003) 3 SCC 433 : [2003] 1 SCR 653;
B Ahmadsahab Abdul Mulla (2) (dead) v. Bibijan and
Others (2009) 5 SCC 462 : [2009] 5 SCR 476 and
Mangilal Karwa v. Shantibai AIR 1956 Nag 221 –
referred to.
Case Law Reference
C [2017] 10 SCR 1006 relied on Para 2
[2003] 1 SCR 653 referred to Para 21
[2009] 5 SCR 476 referred to Para 57
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2199
D of 2021.
From the Judgment and Order dated 27.05.2021 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No. 546 of 2020.
Kavin Gulati, Sr. Adv., Anish Agarwal, Tejas Agarwal, Avi Tandon,
E Ms. Vanshika Gupta, Ms. Meghna Tandon, Mayur K., Advs. for the
Appellant.
Manoj Harit, Vikram Hegde, Shantanu Lakhotia, Ms. Deepanwita
Priyanka, Advs. for the Respondents.
F The Judgment of the Court was delivered by
K. M. JOSEPH, J.
1. By the impugned order, the National Company Law Appellate
Tribunal (hereinafter referred to as ‘NCLAT’ for brevity) has dismissed
the appeal filed by the appellant challenging the order passed by the
G National Company Law Tribunal (hereinafter referred to as ‘NCLT’ for
brevity) dated 28.05.2020. By the said order, the NCLT admitted an
application filed by the first respondent under Section 9 of the Insolvency
and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC’) against
the second respondent. The third respondent was appointed as the Interim
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 757
LTD.& ORS. [K. M. JOSEPH, J.]
Resolution Professional and a moratorium followed. The appellant is an A
ex-director of the second respondent.
2. The question which falls for decision is whether the appellant
has raised a dispute which can be described as ‘a pre-existing dispute’
as understood by this Court in the decision in Mobilox Innovations
Private Limited v. Kirusa Software Private Limited 1. NCLT has B
rejected the version of the appellant that there exists a pre-existing dispute
which stands affirmed by the NCLAT.
3. The facts necessary for resolution of the lis can be stated as
follows:
C
On 24.09.2016, there were two High Seas Sale Agreements. One
was between respondent No. 2 and one Rawalwasia Textile Industries
Private Limited. The other High Seas Sale agreement was between the
same seller and one company, the name of which is shortened as STDPL.
4. STDPL, according to the appellant, is a sister concern of the D
second respondent. This arrangement, which was essentially made on
the representation of one Mr. Sameer Agrawal, was not honoured.
Mr. Sameer Agrawal offered to supply 500 Metric Tonnes of coal each
to the second respondent and its sister concern through the first
respondent. The purchase order in respect of STDPL was dated
E
11.10.2016. The purchase order in respect of second respondent is dated
27.10.2016. The purchase order contemplated Gross Calorific Value of
5400. The total moisture content was put as less than 40% +/- 2%. Out
of 500 Metric Tonnes, the second respondent was supplied 412 Metric
Tonnes. The supply began from 28.10.2016 and ended on 02.11.2016.
According to the appellant, the coal was to be used in boilers which F
manufactures starch and allied products. The coal is placed over the
boilers in silos which are nearly 15 feet in height and hold upwards of
200 metric tonnes of coal at once. The appellant lays stress on certain
lab reports of tests, which were actually conducted allegedly at its own
labs indicating that the quality of coal did not conform to what was
G
promised and what was more, allegedly it led to the malfunctioning of
the boiler. On 30.10.2016, an e-mail was sent to the first respondent. It
reads as follows:
1
(2018) 1 SCC 353 H
758 SUPREME COURT REPORTS [2022] 7 S.C.R.
A “Dear sir,
With reference to 5400 gcv imp coal supply to (stdpl) dhule and
(Hdpl) jammer, following issues are to be shared.
For dhule plant: high moisture and powder percentage is to be
found, already discussed to you.
B
For jammer plant: recently supply include high level of powder
percentage and moisture too.
Kindly consider the issues and please make us assure about quality
of coal should not be down the level. Pics attached for your
C reference.”
Hdpl referred to in the communication is the second respondent.
5. The next correspondence to notice is e-mail dated 03.11.2016.
It is addressed to the first respondent by the second respondent. It reads
as follows:
D
“M/s. Sortex India Pvt. Ltd.
105, Raghuvir Textile Mall,
Aai Mata Chowk, Dumbhal
Parvat Patiya,
E
SURAT . 395010
Kind Attn: Mr. Samirji
F
Sub: Inferior/poor quality of Indonesian Coal.
Dear Sir,
G We have placed an order for 500 MT Indonesian Coal to you vide
our P.O. No. HDPL/2016-17/586 dated 27.10.2016 for 5400 GCV
and Moisture condition is 38-40%. But, on receiving the coal we
found that GCV less than 4000 and size of coal is 0mm 50% and
maximum size is 5mm to 6 mm only and moisture is 48-50%. It
seems if we receive such type of coal we are facing the cleaning
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 759
LTD.& ORS. [K. M. JOSEPH, J.]
problem of boiler and due to that nozzle bent and boiler become A
damaged. This will occur heavy production losses. Hence, please
stop delivery of the material/coal and advise us what to do this
loss. If any more losses occurred due to poor/inferior quality of
coal, we may debit the same amount in your account, which may
please be noted.
B
Thanking you,
Yours faithfully,
For Honest Derivativeds Pvt. Ltd.
Ravi Jajodia
Vice President (Operation)” C
6. The first respondent responded to the communication dated
03.11.2016 by its email dated 04.11.2016. It reads as follows:
“Dear Sir,
It is not possible that the coal is off 4000 gcv, secondly from port D
it is possible that moisture can go upto 42 percent but not above
that also because at port they are putting water on the coal as per
GPCB guidelines of pollution.
So please take a note regarding this. We have immediately stopped
the delivery, but please inform your transporter. E
Regards,
Samir Agarwal
Rawalwasia Group
104, Raghuvir Textile Mall, F
Bh. DR world, 1 mata chock
Poona Khumbhariya Road, Surat-India-395010
M - +91-9824102989, +91-9374538264
O - +91-261-2705000" G
7. Pursuant to the same, further supply was stopped. The first
respondent, on 03.02.2018 issued the requisite notice under the IBC and
raised a claim for Rs.1573279 + 30 per cent interest totaling to
Rs. 21,57,700.38. The second respondent furnished a reply on 17.02.2018.
H
760 SUPREME COURT REPORTS [2022] 7 S.C.R.
A Under the reply, it demanded a total amount of Rs.4.44 crores consequent
on the coal not being of the quality promised. Respondent No. 2 also has
filed two civil suits, one against Rawalwasia Textile Industries Private
Limited and the other, against the first respondent claiming damages. It
is pointed out that court fee of Rs. 3 lakhs was deposited. After exchange
of the notices as mentioned in the IBC, an application under Section 9
B
was filed on 30.04.2018 by respondent No. 1 against respondent No. 2.
A reply was filed by respondent No. 2 pointing out that there was a pre-
existing dispute and seeking dismissal of the application under Section 9.
The judgment was reserved on 20.11.2019. The application came to be
admitted as already noted by the order passed on 28.05.2020. The
C constitution of Committee was stayed by the NCLAT. With the filing of
the appeal against the order passed by the NCLAT an order of status
quo was passed.
8. We have heard Mr. Kavin Gulati, learned Senior Counsel
appearing on behalf of the appellant. We further heard Shri Manoj Harit,
D learned Counsel appearing on behalf of respondent No. 1. We also have
heard Mr. Nakul Dewan, learned Senior Counsel appearing for the IRP.
9. Shri Kavin Gulati, learned Senior Counsel would draw our
attention to the following paragraph in the impugned order:
“19. With the above admission in the affidavit, it is apparent that
E on 30.10.2016, STDPL, a sister concern of the Corporate Debtor
has sent an e-mail to Group Concern of the Operational Creditor
in regard to the Purchase Order dated 11.01.2016 whereas, the
present claim is in regard to the Purchase Order dated 27.10.2016.
It is also to be seen that there is no reference of this e-mail in the
F reply to the statutory notice. In the said e-mail it is not mentioned
that it is in relation to the Purchase Order dated 27.10.2016. In
the subsequent e-mail dated 03.11.2016, there is no reference to
the earlier e-mail dated 30.10.2016. In such circumstances, we
are of the view that the e-mail dated 30.10.2016 is not related to
the transaction in question.”
G
10. He would complain that NCLAT committed a clear mistake.
The error lies in proceeding on the basis that in the email dated 30.10.2016
sent by STDPL – sister concern of the corporate debtor, there is mention
only of purchase order dated 27.10.2016. It is pointed out with reference
to the email that the said email indeed contains reference to the supply
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 761
LTD.& ORS. [K. M. JOSEPH, J.]
of coal to HDPL-the second respondent-the corporate debtor in this A
case. Still further he drew our attention to para 22. Para 22 reads as
follows:
“Upon a bare reading of e-mail dated 03.11.2016, it is clear that
the Corporate Debtor stated that the supplied coal is not as per
specification and due to that nozzle bent and boiler has become B
damages which would led to heavy production losses. Hence, it
was requested that delivery of the coal be stopped. It is also
mentioned that if more losses occurred due to poor/inferior quality
of coal they may debit the same amount in the account of the
Operational Creditor. The Operation Creditor has sent a reply
through e-mail dated 04.11.2016 and immediately stopped the C
delivery of coal. Thereafter, Corporate Debtor has neither issued
any debit note nor has returned the supplied coal but consumed
the same. It means that after receiving the e-mail dated 04.11.2016
the Corporate Debtor was satisfied and kept quiet for about 15
months. It is only when they received a statutory notice that they D
filed a Civil Suit against the Operational Creditor.”
11. It is on the basis of the said discussion that the NCLAT found
that there was no dispute in regard to the transaction in question and that
it was to avoid the liability that corporate debtor through its reply to the
notice tried to impress that there was a pre-existing dispute. He next E
drew our attention to the purchase order.
12. He would point out therefrom that under the terms and
conditions with statutory details, Note 1 provided that a certificate of
analysis is required along with the material.
13. He drew our attention to Section 12 of the Sales of Goods F
Act, 1930 (hereinafter referred to as ‘Act’). He would contend that
under the said provision in a contract of sale of goods, a term may be a
condition or a warranty. He would proceed on the basis that this case
involves the appellant having elected to treat the condition relating to the
quality of the goods as a warranty. The goods in question are raw G
materials. The goods were supplied in between 28.10.2016 to 03.11.2016.
14. He drew our attention to Section 41 of the Act and contended
that a buyer must have the right to examine the goods. He next drew our
attention to Section 42 of the Act.
H
762 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 15. Immediately upon discovery of the fact that the goods delivered
were not in conformity with the terms of the purchase order, the appellant
had registered its protest as it were on 30.10.2016. This was again taken
up on 03.11.2016 and the communication which is addressed by the first
respondent on 04.11.2016 also would fortify appellant’s case that the
complaint of the appellant was not a spurious one. The first respondent
B
is found making an attempt at justifying the moisture content of coal not
being in terms of the purchase order. He would contend that Section 59
of the Act declares the remedies open to a buyer who has elected to
treat the breach of a condition as a warranty and the said provision
contemplates a suit for damages and what is more, even setting up the
C extinction of the price.
16. He would point out that suits were filed within the period of
limitation even if it may be that the filing of the suits may strictly not be
a circumstance which is relevant in the scheme of the IBC. Nonetheless,
it goes a long way to establish the case of the appellant that there was
D a dispute which was pre-existing and the institution of the suits following
which in fact, a huge amount of Rs. 3 lakhs was paid as court fees
would only point to the dispute not being a spurious adventure. He would
also point out with reference to what happened in the NCLT that contrary
to the mandate of Rule 150 of the NCLT Rules, 2016 which sets a time
limit of 30 days from final hearing to pronounce the order, that the said
E rule being observed in its breach has resulted in patent mistakes creeping
into the order and non-advertence to the vital issues which were agitated
before the Tribunal.
17. Shri Manoj Harit, learned Counsel appearing on behalf of the
first respondent, on the other hand, would point out that the only materials
F that existed prior to the date of the notice under the IBC even as per the
case of the appellant are the three emails. The emails are dated
30.10.2016, 03.11.2016 and 04.11.2016. He would contend that the
documents do not show that there is a dispute. Admittedly, there is no
suit or arbitration proceeding initiated as contemplated for the purpose
G of Section 9 of the IBC. Here is a case where the second respondent
consumed the goods supplied even after the alleged deficiency continued
to exist. The alleged variations do not constitute a dispute. The conduct
of the second respondent would show that the claim of dispute is a
sham. It is contended that in the email dated 03.11.2016, it is stated that
in the event of any further damage, the same would be debited in the
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 763
LTD.& ORS. [K. M. JOSEPH, J.]
account of the first respondent. This circumstance is seized upon to A
contend that no damage had occurred till 03.11.2016 which was
sufficiently serious to warrant a debit to the account of the first
respondent. Till 03.11.2016, the appellant continued to consume the coal.
In this regard, reference is placed on the words ‘any more damage’. No
debit note was raised after 03.11.2016. This shows there was no further
B
damage.
18. Even after the email dated 03.11.2016, the appellant continued
to use the coal. The argument based on a period of 3 years being available
to file a suit close to Rs. 4 crores as against the amount of approximately
Rs.15 lakhs which is the subject matter of the application under Section
9 is sought to be brushed aside as indicative of the dispute not being a C
genuine one. If the claim was genuine, it would have been reflected in
its book of accounts. The claim that the suit can be filed within the
period of limitation does not fit in with the scheme of Section 9 of the
IBC.
19. The purchase order contemplated payment within 7 days of D
delivery. There is no denial of liability to pay before 12.11.2016 which is
the last day by which the account became payable. The analysis reports
relied on by the appellant are sought to be painted as concoctions. Rule
150 of the NCLT Rules, it is pointed out is only directory and not
mandatory. E
20. Learned Counsel would contend that the emails relied upon
by the appellant must not be seen as anything more than an effort by the
buyer to wriggle out of its obligation to make payment for goods which
were received. He would further contend that the purchase order
contemplated production of the certificate of analysis. Therefore, when F
the certificate of analysis was present, it is inconceivable how the appellant
without disputing the same could claim that the goods delivered fell short
of the standards agreed to between the parties. As regards the claim by
the appellant that the goods were consumed in large lots (the case of the
appellant is that the total quantity delivered was 412 metric tonnes out of
the total quantum agreed of 500 metric tonnes and that the manufacturing G
process is such wherein at one go large quantity can be put into the
boiler) it is contended that it is not correct. He would further submit that
the boilers would contain specific material indicating the total amount of
raw materials which are put into it. In this regard, he would draw our
attention to the findings of this Court in Mobilox Innovations Private H
764 SUPREME COURT REPORTS [2022] 7 S.C.R.
A Limited (supra) that a dispute which is raised must be supported with
evidence. He would contend that there is no evidence which can be
considered worthwhile so as to not treat the dispute as spurious.
21. The third respondent is the Interim Resolution Professional.
He is represented before us by Shri Nakul Dewan, learned Senior
B Counsel. He would submit that he is making submissions on behalf of
the corporate debtor. After referring to the facts, he would contend that
the task cut out for the NCLT is not a mechanical one. While it is not
required to establish the existence of a credible dispute, it is duty bound
to ascertain whether there is a credible existence of a dispute. The
questions which would arise, according to him, are, whether the
C consumption of the coal by the corporate debtor constituted acceptance
of the goods and obliged it to make payment. The argument is to be
based on a prima facie test. He would further pose the question as to
whether the emails dated 30.10.2016 and 03.11.2016 evidenced or any
other contemporaneous document evidenced deficiency in the quality of
D coal supplied or the coal resulted in damage to the corporate debtor. He
also would draw our attention to Sections 41 and 42 of the Act. He
would point out that there is a purchase order which sets out a guarantee.
This constituted the reservation of the right to reject the material on the
ground. There is no evidence, it is pointed out, that the right to reject was
exercised when delivery was effected of 412 Metric Tonnes of the coal.
E The corporate debtor has accepted and consumed the delivered coal.
As far as Rule 150 of the NCLT Rules is concerned, it is described as a
directory provision. The consequence of non-compliance is not set out.
The principle laid down by this Court in Balwant Singh and others v.
Anand Kumar Sharma and others2 is enlisted in support to contend
F that the results urged by the appellant cannot follow. He would also
submit that the perusal of the accounts does not establish the case that a
loss ensued to the corporate debtor, in that, accounts do not show that
the coal in question was not used.
22. In response, Shri Kavin Gulati, learned Senior Counsel would
G invite the Court to undertake a more exhaustive survey of the Act. He
drew our attention to Section 13 besides Section 63 and the substance of
his argument is as follows:
He would contend that the law provides that if the buyer treats
the contravention of a condition as a violation of a warranty, the rights
H 2
2003 (3) SCC 433
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 765
LTD.& ORS. [K. M. JOSEPH, J.]
declared in Section 59 come into play. The right includes a right to sue A
not merely for damages but also to extinguish even the price of the
goods. He would submit that proceeding on the basis that the appellant
has accepted the goods, in view of Section 42 of the 1930 Act, it would
not be fatal to the appellant. He would contend that Section 13 (2) would
then apply in the facts. In other words, this is a case where, out of 500
B
Metric Tonnes, the Court can proceed on the basis that there was a
delivery of 412 Metric Tonnes of coal and the same was consumed by
the corporate debtor. The act of consumption may constitute acceptance
of the goods within the meaning of Section 42. But the mere acceptance
of the goods within the meaning of Section 41 would not deprive the
buyer of the right which follows treating a condition as a warranty and C
seeking remedies as provided in Section 59 of the Act. Such remedies
include the relief of the extinction of the price of the goods. The suit filed
within the period of limitation cannot be brushed aside for the mere
reason that it was not filed immediately or rather that the suit was not
pending within the contemplation of Section 9 of the IBC. He would, in
D
fact, point out that the corporate debtor was having a turnover of about
Rs.314 crores in the previous year. He would ask the Court to bear in
mind how unreasonable it would be to still postulate that for an amount
of about Rs. 15 lakhs, a corporate body would risk its goodwill and very
existence, unless the dispute projected was one which was genuine. He
would further contend that all of these aspects must be considered in E
light of the limited scrutiny of the question as to whether there is a dispute.
He would point out that a conspectus of the history of legislation as
unravelled by this Court in Mobilox Innovations Private Limited (supra),
would show the following:
Under Section 433 of the Companies Act, 1956, while a dispute F
could be raised to resist an order of winding up, the Court had to consider
whether the dispute was a bona fide one. The legislature was perfectly
aware of the law in this regard. The law does not require the existence
of a bona fide dispute to defend an application under Section 9 of the
IBC. All that is required is that the dispute must not be got up and spurious.
In this regard, he drew our attention to the exposition of the law in G
Mobilox Innovations Private Limited (supra).
ANALYSIS : THE ACT
23. We may notice the relevant provisions of the Act. Sections 4
deals with sale and agreement to sell: H
766 SUPREME COURT REPORTS [2022] 7 S.C.R.
A “4. Sale and agreement to sell.— (1) A contract of sale of goods
is a contract whereby the seller transfers or agrees to transfer
the property in goods to the buyer for a price. There may be a
contract of sale between one part-owner and another.
xxx xxx xxx
B (3) Where under a contract of sale the property in the goods is
transferred from the seller to the buyer, the contract is called a
sale, but where the transfer of the property in the goods is to take
place at a future time or subject to some condition thereafter to
be fulfilled, the contract is called an agreement to sell.
C (4) An agreement to sell becomes a sale when the time elapses
or the conditions are fulfilled subject to which the property in the
goods is to be transferred.”
Thus, till the property passes, there is no sale. Property has been
defined in Section 2(11) as the general property in goods, and not merely
D a special property.
24. Section 12 deals with Condition and warranty.
“12. Condition and warranty. — (1) A stipulation in a contract
of sale with reference to goods which are the subject thereof
may be a condition or a warranty.
E
(2) A condition is a stipulation essential to the main purpose of
the contract, the breach of which gives rise to a right to treat
the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of
F the contract, the breach of which gives rise to a claim for
damages but not to a right to reject the goods and treat the
contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or
a warranty depends in each case on the construction of the
G contract. A stipulation may be a condition, though called a
warranty in the contract.”
25. Section 13 deals with when a condition is to be treated as a
warranty.
“13. When condition to be treated as warranty. — (1) Where
H a contract of sale is subject to any condition to be fulfilled by
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 767
LTD.& ORS. [K. M. JOSEPH, J.]
the seller, the buyer may waive the condition or elect to treat A
the breach of the condition as a breach of warranty and not as
a ground for treating the contract as repudiated.
(2) Where a contract of sale is not severable and the buyer
has accepted the goods or part thereof, 1 *** the breach of
any condition to be fulfilled by the seller can only be treated as B
a breach of warranty and not as a ground for rejecting the
goods and treating the contract as repudiated, unless there is a
term of the contract, express or implied, to that effect.
(3) Nothing in this section shall affect the case of any condition
or warranty fulfilment of which is excused by law by reason C
of impossibility or otherwise.”
26. Section 14 provides for certain implied warranties and conditions
and it reads as follows:
14. Implied undertaking as to title, etc.—In a contract of sale,
unless the circumstances of the contract are such as to show a D
different intention, there is—
(a) an implied condition on the part of the seller that, in the case of
a sale, he has a right to sell the goods and that, in the case of an
agreement to sell, he will have a right to sell the goods at the time
when the property is to pass; E
(b) an implied warranty that the buyer shall have and enjoy quiet
possession of the goods;(c) an implied warranty that the goods
shall be free from any charge or encumbrance in favour of any
third party not declared or known to the buyer before or at the
time when the contract is made. F
27. Section 15, inter alia, provides for an implied condition in a
sale of goods by description that the goods must conform with the
description.
28. Section 16 is also relied upon by the appellant and it reads as
follows: - G
“16. Implied conditions as to quality or fitness.—Subject to the
provisions of this Act and of any other law for the time being in
force, there is no implied warranty or condition as to the quality or
fitness for any particular purpose of goods supplied under a
H
768 SUPREME COURT REPORTS [2022] 7 S.C.R.
A contract of sale, except as follows:— (1) Where the buyer,
expressly or by implication, makes known to the seller the particular
purpose for which the goods are required, so as to show that the
buyer relies on the seller’s skill or judgment, and the goods are of
a description which it is in the course of the seller’s business to
supply (whether he is the manufacturer or producer or not), there
B
is an implied condition that the goods shall be reasonably fit for
such purpose: Provided that, in the case of a contract for the sale
of a specified article under its patent or other trade name, there is
no implied condition as to its fitness for any particular purpose.
(2) Where goods are bought by description from a seller who
C deals in goods of that description (whether he is the manufacturer
or producer or not), there is an implied condition that the goods
shall be of merchantable quality: Provided that, if the buyer has
examined the goods, there shall be no implied condition as regards
defects which such examination ought to have revealed.
D (3) An implied warranty or condition as to quality or fitness for a
particular purpose may be annexed by the usage of trade.
(4) An express warranty or condition does not negative a warranty
or condition implied by this Act unless inconsistent therewith.”
E 29. Section 17 provides for implied condition in the case of a sale
by sample. Thus, it can be seen that the Act declares or provides for
various implied conditions and warranties.
30. We may also notice Section 19, which deals with the aspect
of passing of property in a contract of sale of goods.
F “19. Property passes when intended to pass. — (1) Where there
is a contract for the sale of specific or ascertained goods the
property in them is transferred to the buyer at such time as the
parties to the contract intend it to he transferred.
(2) For the purpose of ascertaining the intention of the parties
G regard shall be had to the terms of the contract, the conduct of
the parties and the circumstances of the case.
(3) Unless a different intention appears, the rules contained in
sections 20 to 24 are rules for ascertaining the intention of the
parties as to the time at which the property in the goods is to pass
H to the buyer.”
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 769
LTD.& ORS. [K. M. JOSEPH, J.]
31. Chapter IV deals with performance of the contract. Under A
Section 31, it is the duty of the seller to deliver the goods and of the
buyer to accept and to pay for them in accordance with the terms of the
contract of sale. Section 32 reads as follows: -
“32. Payment and delivery are concurrent conditions. — Unless
otherwise agreed, delivery of the goods and payment of the price B
are concurrent conditions, that is to say, the seller shall be ready
and willing to give possession of the goods to the buyer in exchange
for the price, and the buyer shall be ready and willing to pay the
price in exchange for possession of the goods.”
32. It is necessary to notice Section 41 and still further Section C
42.
“41. Buyer’s right of examining the goods. —
(1) Where goods are delivered to the buyer which he has not
previously examined, he is not deemed to have accepted them
unless and until he has had a reasonable opportunity of examining D
them for the purpose of ascertaining whether they are in conformity
with the contract.
(2) Unless otherwise agreed, when the seller tender’s delivery of
goods to the buyer, he is bound, on request, to afford the buyer a
reasonable opportunity of examining the goods for the purpose of E
ascertaining whether they are in conformity with the contract.”
“42. Acceptance. —The buyer is deemed to have accepted the
goods when he intimates to the seller that he has accepted them,
or when the goods have been delivered to him and he does any
act in relation to them which is inconsistent with the ownership of F
the seller, or when, after the lapse of a reasonable time, he retains
the goods without intimating to the seller that he has rejected them.”
33. It is apposite also to look into Section 43.
“43. Buyer not bound to return rejected goods. — Unless otherwise
agreed, where goods are delivered to the buyer and he refuses to G
accept them, having the right so to do, he is not bound to return
them to the seller, but it is sufficient if he intimates to the seller
that he refuses to accept them.”
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770 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 34. Chapter V deals with the rights of the unpaid seller against
the goods. Apart from exercising the right of lien thereunder, Section
54(2), inter alia, entitles the unpaid seller in the circumstances mentioned
therein to resell the goods. Chapter VI deals with suits for breach of the
contract. Section 55 reads as follows:
B “55. Suit for price. — (1) Where under a contract of sale the
property in the goods has passed to the buyer and the buyer
wrongfully neglects or refuses to pay for the goods according to
the terms of the contract, the seller may sue him for the price of
the goods.
C (2) Where under a contract of sale the price is payable on a day
certain irrespective of delivery and the buyer wrongfully neglects
or refuses to pay such price, the seller may sue him for the price
although the property in the goods has not passed and the goods
have not been appropriated to the contract.”
D 35. It may also be necessary to notice Section 59, which reads as
follows: -
“59. Remedy for breach of warranty. — (1) Where there is a
breach of warranty by the seller, or where the buyer elects or is
compelled to treat any breach of a condition on the part of the
E seller as a breach of warranty, the buyer is not by reason only of
such breach of warranty entitled to reject the goods; but he may—
(a) set up against the seller the breach of warranty in diminution
or extinction of the price; or (b) sue the seller for damages for
breach of warranty.
F (2) The fact that a buyer has set up a breach of warranty in
diminution or extinction of the price does not prevent him from
suing for the same breach of warranty if he has suffered further
damage.”
36. An analysis of the provisions of the Act would reveal the
following in a contract of sale of goods. A stipulation in regard to goods
G
can be a condition or a warranty. A condition is put on a higher pedestal
than a warranty. A condition is treated as essential to the main purpose
of the contract. The breach of a condition gives rise to the right with the
party to treat the contract as repudiated. In the case of the breach of a
warranty which is a stipulation in a contract collateral to the main purpose
H of the contract, the party (buyer) cannot reject the goods. He cannot
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 771
LTD.& ORS. [K. M. JOSEPH, J.]
repudiate the contract. Under Section 12(3), on the breach of the warranty, A
the buyer can sue for damages. As to whether a stipulation is a warranty
or a condition is a matter to be decided on the facts of each case. The
nomenclature ‘warranty’ cannot conclude the question as to whether in
fact it is a ‘condition’. Even though the breach of a condition entitles the
buyer to repudiate the contract it is open to the buyer to treat the breach
B
of the condition as a breach of warranty. [See Section 13 (1)]. Section
13 (2) then provides that the breach of any condition by the seller can be
treated as only a breach of warranty and not a ground for repudiating
the contract or rejecting the goods. This is in situations where the contract
is not severable. Still further, for Section 13(2) to apply, the buyer must
have accepted all or even part of the goods. This however is again made C
subject to an express or implied contract providing otherwise. Section
13(2) of the Act suffered an amendment by the Amending Act 33 of
1963. By the said amendment, the words “or where the contract is for
specific goods the property in which has passed to the buyer” came to
be omitted. Going by the objects and reasons of the Amending Act, it is
D
found that the said words gave rise to some difficulty. It is, inter alia,
stated in the objects and reasons that under Section 20 of the Act, property
in specific goods in a deliverable state passes to the buyer when the
contract is made. When there is a contract for sale of specific goods by
sample, Section 17(2) of the Act provides for an implied condition that
the bulk should correspond to the sample in quality. It is further indicated E
in the objects and reasons that when in such a case property is delivered
subsequently which does not correspond with the sample, Section 13(2)
obliged the buyer to treat the implied condition under Section 17(2) as a
warranty, thus, robbing the buyer of the right to reject the goods and
entitling him to claim damages only. The Law Commission also made a
F
recommendation that in the case of sale of specific goods by sample it
should be taken out of Section 13(2). Thus, the omission in Section 13(2)
by the Amending Act 33 of 1963 confines the compelled treatment of a
breach of a condition as a breach of a warranty to only cases where the
contract is not severable and the buyer has accepted the goods or part
thereof. No doubt, all of this is subject to a contract either expressly or G
impliedly otherwise.
37. Section 14 (a) of the Act provides for an implied condition, in
the absence of circumstances indicating a different intention that the
seller has a right to sell the goods. This is in a sale. In the case of the
agreement to sell as would be the case of future goods, Section 14 (a) H
772 SUPREME COURT REPORTS [2022] 7 S.C.R.
A also provides that there is an implied condition that the seller ‘will have’
the right to sell the goods when the property is to pass. Section 14 (b)
declares the existence of an implied warranty that the buyer will have
and enjoy the right of quiet possession of the goods. Section 14 (c) provides
for an implied warranty that the goods shall be free from any charge or
encumbrance in favour of a third party not declared or known to the
B
buyer before or at the time of the contract.
38. Section 15 creates an implied condition in the case of a sale
by description interalia that the goods must correspond with the
description. We may notice the following statements relating to ‘Sale of
Specific Goods by Description’ and ‘Conditions as to Quality’ in The
C Sale of Goods Act by Pollock and Mulla [11th Edition]:
“Sale of Specific Goods by Description
It will be observed that the section applies where there is a
“contract for the sale of goods by description”, that is to say where
D the goods are described by the contract. This usually applies to a
contract for the sale of unascertained or future goods, but it may
apply to the sale of specific goods also, if the buyer contracts in
reliance on that description. This may well occur in a case where
the buyer has never seen the goods and may also occur where he
has seen them, but in the latter case it is more difficult for the
E buyer to show that the sale was a sale by description, for usually
the contract for the sale of a specific article is a contract for the
article as it is and any description of it at the most amounts to a
warranty, for the breach of which the buyer can only recover
damages. Occasionally, where goods are sold over the counter to
F a customer who asks for the goods by their name, the sale may
be a sale by description, but in general a customer who buys goods
in a shop across the counter is not buying by description. It would
appear that the only sales not by description are sales of specific
goods as such. “Specific goods may be sold as such when they
are sold without any description, express or implied; or where any
G statement made about them is not essential to their identity; or
where though the goods are described, the description is not relied
upon, as where the buyer buys the goods such as they are”.
Whether statements with reference to the goods amount to a
description of them depends upon the terms of the contract, but in
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 773
LTD.& ORS. [K. M. JOSEPH, J.]
mercantile contracts they will usually amount to a part of the A
description.”
“Conditions as to Quality
This section, it will be observed, deals only with the condition that
the goods should correspond with the description. In the older
cases stipulations, express or implied, as to the quality of the goods B
were treated as part of their description: the Act, however, deals
with them as separate conditions in section 16(2) and section 17.”
39. Section 16 declares that subject to the other provisions of the
Act and of any other law in force, there can be no implied warranty or
condition as regards the quality or the fitness of the goods for any C
particular purpose. This is subject to two exceptions. The exception in
Section 16 (1) applies when the buyer expressly or by implication reveals
to the seller, the particular purpose for which the goods are required.
Intimation of this information to the seller brings in the belief that the
buyer relies on the seller’s skill or judgement. Furthermore, the goods D
must be of the description which must be in the course of the seller’s
business to supply. In such a situation there is an implied condition that
the goods are to be reasonably fit for the stated/particular purposes. An
implied warranty or condition regarding the quality or fitness of the
particular purpose can be established by the trade practice or usage of
trade. However, if specified goods are sold under trade name or patent E
name, there is no such implied condition. In this regard we may notice
that Section 16 (2) provides for an implied condition regarding the goods
being merchantable. The cardinal requirement to be satisfied in this regard
is as follows. The goods must be bought by ‘description’ from a seller.
The seller may be a manufacturer or a producer. He may not be either. F
In both of the cases, the only requirement for an implied condition to
arise is that the seller must be one who deals in goods of ‘that description’.
This is made subject to the exception in the proviso namely that if the
buyer has examined the goods, there shall be no implied condition as
regards defects which the inspection should have revealed. This
necessarily means that the proviso would not apply where the defects G
are latent. In other words, even in a case where goods are purchased
after actual inspection of the goods if defects are not discovered then
the implied condition would apply in the circumstances mentioned in
Section 16 (2). Section 17 deals with sale by sample. Section 17(2) reads
as follows: H
774 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 17. Sale by sample:
(2) In the case of a contract for sale by sample there is an implied
condition—
(a) that the bulk shall correspond with the sample in quality;
B (b) that the buyer shall have a reasonable opportunity of comparing
the bulk with the sample;
(c) that the goods shall be free from any defect, rendering them
unmerchantable, which would not be apparent on reasonable
examination of the sample.
C Thus, the Act provides for certain implied conditions and
warranties. The parties may further also provide for express conditions
and warranties. Section 31 proclaims that it is the duty of the seller to
deliver goods in accordance with the terms of the contract of sale.
Equally, it is the duty of the buyer to accept the goods and to pay for
D them in accordance with the terms of the contract of sale. Delivery of
goods and payment of price are acts to be performed concurrently. In
other words, the seller should be ready and willing to give possession of
the goods to the buyer in exchange for the price and the buyer must be
ready and willing to pay the price on receipt of the possession of the
goods. It is significant, however, to notice that this obligation though
E ordinarily concurrent is subject to a contract to the contrary. In other
words, there can be a condition for payment of the price before the
delivery of the possession. Equally the payment of the price can be
postponed to a point of time after the delivery of possession. Such matters
can be regulated by the contract between the parties. When goods are
F delivered to the buyer it does not mean that he has accepted the goods if
he has not previously examined the goods. In other words, if he (the
buyer) has not previously examined the goods, the delivery of the goods
to the buyer by itself will not be deemed to be acceptance of goods by
him. He must be afforded an opportunity of examining the goods. The
opportunity must be afforded for the purpose of finding out whether the
G goods are in conformity with the agreed terms. Section 41 (2) declares
that the seller when he delivers goods is bound on request of the buyer a
reasonable opportunity of examining the goods. This is again subject to a
contract to the contrary. In other words, unless there is a contract to the
contrary if a demand is made by the buyer for an opportunity to examine
the goods, when delivery is given, the seller is duty bound to afford such
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 775
LTD.& ORS. [K. M. JOSEPH, J.]
an opportunity. Section 42 specifically deals with when the goods are to A
be treated as having being accepted. There are three circumstances in
which the law treats the goods as having been accepted:
(i) The buyer informs the seller that he has accepted the goods.
(ii) When after the delivery of the goods to the buyer, he does
any act which is not consistent with the ownership of the B
seller. It includes a sale made by the buyer of the goods. It
may include any other form of transfer of the goods. It may
also include the consumption of the goods by the buyer. It
may embrace the destruction of the goods.
(iii) The buyer retains the goods, even after a lapse of a reasonable C
time of the delivery of the goods and furthermore does not
inform the seller that he has rejected the goods. As to what
is reasonable time is a matter which is to be determined on
the facts.
Section 63 of the Act provides that when the Act refers to D
reasonable time, it is a question of fact.
40. If any of these three circumstances exist, then, the law provides
that the buyer has accepted the goods. Section 43 deals with a situation
where a buyer who is delivered the goods refuses to accept them. The
law contemplates that if the buyer upon being delivered the goods E
ascertains and finds that the goods are not in conformity with the contract,
then he is not duty bound to accept the goods. On the other hand, he is
entitled to reject the goods. In such circumstances, subject to a contract
to the contrary, the buyer who is entitled to reject the goods need not
return the goods to the seller. The principle underlying Section 43 is that F
the buyer need not be saddled with the liability of expense to be incurred
for returning of the goods. This is, however the case only when the
buyer acquires a right to refuse to accept the goods. As we have noticed,
Section 19 deals with the question as to when the property in the goods
passes in a contract of sale of specific or ascertained goods. The property
would pass according to the intention of the parties. Section 19 (2) provides G
for three criteria to ascertain the intention of the parties as to when the
property passes. The court must bear in mind the following criteria: the
terms of the contract, the conduct of the parties and the circumstances
of the case.
H
776 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 41. Section 20 which in terms of Section 19 (3) is one of the rules
to ascertain the intention of the parties provides that in an unconditional
contract for sale of specific goods in a deliverable state, the property
passes when the contract is made. Section 20 further declares that the
postponement of the delivery of the goods or the payment of the price or
both is immaterial to the passing of the property upon the making of the
B
contract. Passing of property would lead to divesting of title of the seller
and vesting the title with the buyer. The significance of the passing of
the property is also that unless it is otherwise agreed the goods will
remain at the seller’s risk until the property is transferred. Equally, when
the property is transferred, irrespective of whether delivery has been
C made to the buyer, the risk will be shouldered by the buyer. This is subject
to the two provisos. On each we need not dilate. Section 55, which
provides for an unpaid sellers’ right to sue for the price also highlights
the significance of the passing of property. Section 55(1) contemplates
such a suit if property has passed.
D Section 55 of the Act provides for a right to sue with the seller of
goods for the price of the goods. Section 55(1) contemplates that property
in the goods has passed to the buyer. It further contemplates that the
buyer has wrongfully neglected or refused, to pay for the goods, according
to the terms of the contract. Section 55(2) clothes the seller with a right
to sue for the price, if the price is payable on a certain date. This right
E inheres in the seller, irrespective of the fact that delivery has not taken
place, and what is more, the property in the goods has not passed. Even
the appropriation of the goods to the contract is not necessary in such a
case. The Section reaffirms the principle that the property can pass
without there being delivery. Delivery of goods need not always result in
F passing of the property. However, what is important is dehors any of the
aspects mentioned in Section 55(2), viz., delivery of goods, passing of
property in the goods or appropriation of goods to the contract, the
agreement between the parties, by which the buyer is obliged to pay the
price on a certain date, would entitle the seller to sue for the price of the
goods.
G
42. Section 59 of the Act deals with the remedies open to the
buyer upon there being a breach of warranty. We have already noticed
that a breach of warranty gives rise to a claim for damages. (See Section
12 (3)). Section 13 as noticed by us entitles the buyer to waive a condition
or to elect or treat the breach of the condition as a breach of the warranty.
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 777
LTD.& ORS. [K. M. JOSEPH, J.]
Section 13 (2) as noticed by us subject to a contract otherwise limits the A
right of the buyer even when there is a breach of condition to sue only
for breach of warranty. Section 59, accordingly, applies in all the three
situations, which are as follows. There occurs a breach of the warranty.
Secondly, a condition is violated by the seller, but the buyer elects to
treat the breach of the condition as a breach of the warranty. Thirdly,
B
under Section 13 (2), in view of the buyer having accepted the goods, in
circumstances described in Section 13 (2), the buyer is compelled to sue
under Section 59, namely, on the footing that there is a breach of warranty.
Thus, the word ‘elects’ in Section 59 is relatable to Section 13(1) whereas
the words ‘is compelled’ in Section 59 is to be read with Section 13(2) of
the Act. C
43. It is clear that a breach of warranty does not entitle the buyer
to reject the goods. The remedies which he can seek under Section 59
are as follows. He can seek the reduction (diminution) of the price. He
may also seek to be freed from the liability to pay the price (extinction of
the price). In other words, relying upon the breach of the warranty, he D
can refuse to pay the price or canvas for the reduction of the price.
Section 59 further proclaims that the buyer may sue the seller for damages
for breach of warranty. Section 59(2) declares that with respect to the
same breach of warranty which is projected as the foundation for seeking
diminution or wiping out of the liability to pay the price, the buyer can
also seek damages. E
44. A question may arise as to whether after the delivery of the
goods by the seller and what is more, even after acceptance of the
goods by the buyer, whether the provisions of Section 59 can be invoked
by the buyer? If the property has passed to the buyer within the meaning
of Section 19 which on the one hand entitles the seller to sue for the F
price of the goods, in view of the word ‘wrongfully’ neglects or refuses
to pay under Section 55 read with Section 59, cannot the buyer in a suit
for the price filed by the seller, ‘set up’ a breach of warranty within the
meaning of Section 59 and persuade the court to either decree a reduction
in the price or extinguish the liability of the buyer to even pay any part of G
the price. To put it differently, if the goods are delivered and accepted
within the meaning of Section 42 of the Act, will the right of the buyer
arising out of breach of warranty under Section 59 be extinguished? If
the mere acceptance of the goods results in depriving the right of the
buyer to invoke Section 59 of the Act, then, undoubtedly, the buyer would
H
778 SUPREME COURT REPORTS [2022] 7 S.C.R.
A be liable to pay the price. Let us assume that there is delivery and
acceptance in a given case. If parties intended that the property in the
goods would pass only after delivery is effected and acceptance is made
and if the case falls under Section 13 (2) of the Act and the buyer sets
up a compelled breach of warranty though in fact a condition was violated,
it may not be legal to deny the benefit of the range of remedies open to
B
a buyer under Section 59. Acceptance of goods at any rate within the
meaning of Section 13(2), if it does not constitute passing of property
would not also deprive the buyer of the right under Section 59 of the
Act. As long as a condition is violated, be it implied or express, and it is
not waived, then, present other elements of Section 13(2), Section 59
C applies.
45. What would be the position if, after there is acceptance of the
goods, under Section 42 even if it be a case of express intimation of
acceptance, that events occur which lead to the creation of circumstances
attracting Section 14? As for instance, the buyer is confronted with a
D situation where he finds that the goods were in fact stolen and the seller
had no right to sell the goods. A third party comes forward and
substantiates his case that the goods were never the property of the
seller. Would it not be a condition under Section 14 (a) which has been
observed in its breach by the seller? Let us further assume that the
buyer has not yet paid the price. Can he not despite having accepted the
E goods exercise his right under Section 59 and seek extinction of the
price apart from claiming damages?
46. Under the law, namely the Act, if a suit for price were brought
in similar circumstances, the question would arise squarely, whether the
second respondent as buyer could defend the action by ‘setting up’
F diminution or extinction of the price. Could the second respondent as
defendant seek to non-suit the first respondent by establishing a breach
of a warranty. Undoubtedly, ordinarily acceptance of the goods by the
buyer, a matter which falls to be decided with reference to Sections 41,
42 and 43 would conclude the matter in favor of the seller. What however
G would be the position where after acceptance, circumstances exist which
justify the buyer in pleading a breach of a condition which is treated as a
warranty or a breach of warranty which is found after acceptance.
Take for example breach of a condition under Section 14 (a). In case
where the price has not been paid and suit is brought under Section 55
(1), where the buyer has found that the seller has no right to sell the
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 779
LTD.& ORS. [K. M. JOSEPH, J.]
goods, can the buyer be robbed of his right to refuse to pay the price A
vouchsafed for a buyer under Section 59 of the Act? The answer would
appear to us to be in the negative. No doubt in such a case it would be
said that there is no passing of property or that the seller had no property
to pass. Equally, if after acceptance of the goods, the quiet possession of
the goods within the meaning of Section 14 (b) is thwarted by third party
B
claims, the implied warranty for such possession would stand violated
giving rise to the buyer a right under Section 59 to seek such diminution
of the price or even extinction of the price. Even a claim for damages
over and above the relief of diminution and even extinction of the price
is permitted under Section 59 (2).
47. It is to be remembered, that under Section 31 of the Act it is C
the duty of the buyer to pay for the goods in terms of the contract.
Delivery and payment of price are made concurrent conditions, unless
otherwise agreed. This means with possession of the goods being
obtained, the buyer becomes obliged to pay the price. [See Section 32].
In this case, the contract obliged the second respondent to pay the price D
within seven days, according to the first respondent as per the purchase
order.
THE DECISION IN MOBILOX
48. After an exhaustive survey of the legislative history of the
IBC, and case law, this Court, speaking through R.F. Nariman J., held E
inter alia:
“32. In the passage of the Bills which ultimately became the
Code, various important changes have taken place. The original
definition of “dispute” has now become an inclusive definition,
the words “bona fide” before “suit or arbitration proceedings” F
being deleted. In Section 8(1), the words “through an information
utility, wherever applicable, or by registered post or courier or by
any electronic communication” have been deleted. Likewise, in
Section 8(2), the period of “at least 60 days … through an
information utility or by registered post or courier or by any
electronic communication” has also been deleted. In Section 9(5), G
the absence of a proviso similar to the proviso occurring in Section
7(5) was also rectified. Further, the time periods of 2 and 3 days
were uniformly substituted, as has been seen above, by 7 days, so
that a sufficiently long period is given to do the needful.
xxx xxx xxx H
780 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 34. Therefore, the adjudicating authority, when examining an
application under Section 9 of the Act will have to determine:
(i) Whether there is an “operational debt” as defined
exceeding Rs 1 lakh? (See Section 4 of the Act)
(ii) Whether the documentary evidence furnished with the
B application shows that the aforesaid debt is due and payable and
has not yet been paid? and
(iii) Whether there is existence of a dispute between the
parties or the record of the pendency of a suit or arbitration
proceeding filed before the receipt of the demand notice of the
C unpaid operational debt in relation to such dispute?
If any one of the aforesaid conditions is lacking, the application
would have to be rejected. Apart from the above, the adjudicating
authority must follow the mandate of Section 9, as outlined above,
and in particular the mandate of Section 9(5) of the Act, and admit
D or reject the application, as the case may be, depending upon the
factors mentioned in Section 9(5) of the Act.
xxx xxx xxx
38. It is, thus, clear that so far as an operational creditor is
concerned, a demand notice of an unpaid operational debt or copy
E
of an invoice demanding payment of the amount involved must be
delivered in the prescribed form. The corporate debtor is then
given a period of 10 days from the receipt of the demand notice
or copy of the invoice to bring to the notice of the operational
creditor the existence of a dispute, if any. We have also seen the
F notes on clauses annexed to the Insolvency and Bankruptcy Bill
of 2015, in which “the existence of a dispute” alone is mentioned.
Even otherwise, the word “and” occurring in Section 8(2)(a)
must be read as “or” keeping in mind the legislative intent and the
fact that an anomalous situation would arise if it is not read as
“or”. If read as “and”, disputes would only stave off the bankruptcy
G
process if they are already pending in a suit or arbitration
proceedings and not otherwise. This would lead to great hardship;
in that a dispute may arise a few days before triggering of the
insolvency process, in which case, though a dispute may exist,
there is no time to approach either an Arbitral Tribunal or a court.
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 781
LTD.& ORS. [K. M. JOSEPH, J.]
Further, given the fact that long limitation periods are allowed, A
where disputes may arise and do not reach an Arbitral Tribunal or
a court for up to three years, such persons would be outside the
purview of Section 8(2) leading to bankruptcy proceedings
commencing against them. Such an anomaly cannot possibly have
been intended by the legislature nor has it so been intended. We
B
have also seen that one of the objects of the Code qua operational
debts is to ensure that the amount of such debts, which is usually
smaller than that of financial debts, does not enable operational
creditors to put the corporate debtor into the insolvency resolution
process prematurely or initiate the process for extraneous
considerations. It is for this reason that it is enough that a dispute C
exists between the parties.
xxx xxx xxx
44. We have already noticed that in the first Insolvency and
Bankruptcy Bill, 2015 that was annexed to the Bankruptcy Law
Reforms Committee Report, Section 5(4) defined “dispute” as D
meaning a “bona fide suit or arbitration proceedings…”. In its
present avatar, Section 5(6) excludes the expression “bona fide”
which is of significance. Therefore, it is difficult to import the
expression “bona fide” into Section 8(2)(a) in order to judge
whether a dispute exists or not. E
xxx xxx xxx
48. To similar effect is the judgment of the Chancery Division
in Hayes v. Hayes [Hayes v. Hayes, 2014 EWHC 2694 (Ch)]
under the UK Insolvency Rules. The Chancery Division held:
F
“I do not think it necessary, for the purposes of this appeal,
to embark on a survey of the authorities as to precisely what is
involved in a genuine and substantial cross-claim. It is clear that
on the one hand, the court does not need to be satisfied that there
is a good claim or even that it is a claim which is prima facie likely
to succeed. In Bayoil S.A., In re [Bayoil S.A., In re, (1999) 1 G
WLR 147 (CA)] itself, Nourse, L.J. referred, at WLR p. 153, to
what Harman, L.J. had said in L.H.F. Wools Ltd., In re [L.H.F.
Wools Ltd., In re, 1970 Ch 27 : (1969) 3 WLR 100 (CA)] where
Harman, L.J., having referred to a previous case, said: (Ch p. 36
E-F)
H
782 SUPREME COURT REPORTS [2022] 7 S.C.R.
A ‘… The majority decided in that case that, shadowy as the
cross-claim was and improbable as the events said to support it
seemed to be , there was just enough to make the principle work,
namely, that it was right to have the matter tried out before the
axe fell.’
B On the other hand, the court should be alert to detect wholly
spurious claims merely being put forward by an unwilling debtor
to raise what has been called “a cloud of objections” as I referred
to earlier.”
xxx xxx xxx
C 51. It is clear, therefore, that once the operational creditor has
filed an application, which is otherwise complete, the adjudicating
authority must reject the application under Section 9(5)(2)(d) if
notice of dispute has been received by the operational creditor or
there is a record of dispute in the information utility. It is clear
D that such notice must bring to the notice of the operational creditor
the “existence” of a dispute or the fact that a suit or arbitration
proceeding relating to a dispute is pending between the parties.
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
E 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
F 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.”
(Emphasis supplied)
THE PURCHASE ORDER
G
49. The purchase order dated 27.10.2016 reads, inter alia, as
follows:
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 783
LTD.& ORS. [K. M. JOSEPH, J.]
“PURCHASE ORDER A
xxx xxx xxx
B
C
D
E
F
G
H
"
784 SUPREME COURT REPORTS [2022] 7 S.C.R.
A 50. The purchase order is dated 27.10.2016. The quotation is
described as telephonic and dated 27.10.2016. It is specifically mentioned
as against the query where to be used as follows: FBC Boiler. The
goods were described as imported coal. Apart from mentioning the
quantity and the price, it is indicated that the coal must be of a certain
quality in terms of its characteristics which we have already noticed.
B
Under the terms and conditions with statutory details, Note 1 indicated
that the material should be accompanied with a certificate of analysis.
Payment terms provided that it was to be paid within seven days of the
receipt of materials. Delivery must be immediate. Under the heading
‘Guarantee’, it is mentioned that the second respondent would reserve
C the right to reject the material at its ground site towards any quality of
manufacturing defect. The supply commenced immediately as
contemplated in the purchase order, namely, from 28.10.2016. Indisputably,
the goods were imported coal. This could be treated as a sale of goods
by description as the contract for sale related to 500 MT of Indonesian
coal.
D
51. In this case, a perusal of the notice sent by first respondent
and the application under Section 9 of the IBC would show that the case
is premised on there being a sale, and there was a ‘debt’ owed by the
second respondent under the sale. It means that the cause of action in
general law would have been a suit for the price of the goods sold within
E the meaning of Section 55 of the Act.
52. On 30.10.2016, an email was indeed dispatched to the first
respondent [See paragraph 4 of this Judgment]. The email was sent by
STDPL, the sister concern of the second respondent. This email has
been brushed aside by the NCLAT in the impugned order on two grounds.
F In the first place, the NCLAT has proceeded on the basis that there was
no reference to purchase order dated 27.10.2016 and the concern raised
in the email was qua purchase order dated 11.10.2016 which related to
the sister concern of the second respondent namely, STDPL. The second
reason for refusing the appellant to draw support from the said email is
G that there is no reference to email dated 30.10.2016 in the reply to the
statutory notice under the IBC.
53. We are of the view that the approach of the NCLAT cannot
be sustained. A perusal of the email would clearly indicate that though it
was sent by STDPL express reference is made to the second respondent
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 785
LTD.& ORS. [K. M. JOSEPH, J.]
also, and thereafter, the issues relating to the quality of the coal are A
articulated. We also notice that pictures were attached for the reference.
54. The further fact that there is no express reference to email
dated 30.10.2016 in the reply notice given by the second respondent to
the statutory notice under Section 8 of the IBC given by the first
respondent will not, in our view, detract from the impact of the B
communication dated 30.12.2016. It is not as if there is a dispute about
the sending and receipt of the communication dated 30.10.2016.
Therefore, we are of the view that the NCLAT has clearly erred in
refusing to lay store by the said communication. On 03.11.2016,
undoubtedly, the second respondent in its own name has ventilated its
complaint about the inferior and the poor quality of the Indonesian coal. C
The impact of using such coal on the boiler and about the damage being
done to the boiler has been specifically articulated. Further, a request
was made to stop delivery of the goods. Even advice was sought as to
what is to be done about the loss. Thereafter, it is stated that for any
more losses occurred due to the poor inferior quality of the coal, the D
second respondent may debit the same in the account of the first
respondent. On the very next day, that is, 04.11.16, the first respondent
wrote back by pointing to the improbability about the deviation from the
quality of the coal but it was indicated that the further supply was being
stopped. Thus, the supply was effected of 412 MT out of the contracted
quantum of 500 MT. The supply was stopped on the basis of the E
communication dated 04.11.16.
55. This is a case where there was a contract for sale of goods.
The contract as gleaned from the purchase order related to goods which
were sold by description, namely, Indonesian coal. Parties clearly
contemplated that the coal was to be a certain quality, the details of F
which are expressly enumerated in the purchase order. The purpose for
which the coal was purchased was also indicated, namely, it was to be
used in a boiler. Therefore, it formed a part of the raw material for the
second respondent. Pursuant to the purchase order, it is undoubtedly
true, that 412 MT was delivered at the factory site of the second G
respondent. It is beyond challenge that no part of 412 MT has been
returned by the second respondent to the first respondent. It would be
safe to proceed on the basis that the goods so delivered may have been
used or consumed. It may constitute acceptance of the goods within the
meaning of Section 42 of the Act. But then the case of the appellant is
H
786 SUPREME COURT REPORTS [2022] 7 S.C.R.
A anchored in Section 13(2) of the Act. The case is that the characteristics
of the coal or quality of the coal with reference to certain objective
criteria were indeed specified and was understood as a condition to be
fulfilled by the seller and that those conditions were not fulfilled by the
first respondent-seller. It is, therefore, the case of the appellant that the
acceptance of the goods under Section 42 may not detract from Section
B
13(2) of the Act applying to the facts. In other words, treating the quality
of the coal with reference to certain standards as conditions to be fulfilled
by the seller, the mere acceptance of the goods by the buyer may not
prevent the buyer from still contending that there has been a breach of
the condition, but since the law permits the buyer to treat such breach of
C the condition when there is acceptance of the goods as only a breach of
a warranty, Section 59 of the Act immediately gets attracted. Section 59
of the Act contemplates a buyer ‘setting up’ a breach of a warranty to
diminish or reduce the price or even extinguish it. If this line is accepted,
it could indeed be said that the decks are not cleared for the first
respondent-seller for its claim under Section 8.
D
56. However, the objections of the first respondent may be noticed.
Apart from supporting the order of the NCLAT with reference to its
contents, it is pointed out that the case of the appellant is a mere ruse,
and that no complaint was raised on the ground and though there was
guarantee under the purchase order, nothing prevented the second
E respondent from rejecting the goods. The second respondent not only
accepted the supply of the goods but proceeded to consume the goods.
A huge quantum of 412 MT was supplied from 28.10.2016 to 03.11.2016.
No debit was made in the accounts in keeping with the intimation in the
email dated 03.11.2016. This rules out the case of any loss. There is no
F evidence of any loss. The case of the appellant would fall under a mere
bluster.
57. We are not dealing with a suit under the Act either by the
seller or the buyer. We are not oblivious to the fact that the suit has
already been laid by the second respondent seeking damages. The factum
G of the filing of the suit, however, cannot be taken into consideration for
the purpose of deciding whether there is a preexisting dispute under the
IBC. This is for the simple reason that the suit was not filed before the
receipt of the demand notice under Section 8 of the IBC. No doubt, the
documentary evidence furnished by the first respondent, namely, the
purchase order indicates that the price is to be paid within seven days of
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 787
LTD.& ORS. [K. M. JOSEPH, J.]
receipt of the goods. It is true that Section 55(2) of the Act speaks about A
a contract of sale where the price is payable on a day certain entitling
the seller to sue for price. This is irrespective of the fact that the property
in the goods has not passed and the goods have not been appropriated to
the contract and whether delivery has been made or not. We may notice,
for the purpose of the limited inquiry we can do, for deciding, whether
B
there was a pre-existing dispute, to apply Section 55(2) a certain day
must be fixed for payment of price. In this case, the payment terms
speak about ‘within seven days of delivery’. We may incidentally notice
that though in the context of Article 54 of the Indian Limitation Act,
1963, a bench of three learned Judges in Ahmadsahab Abdul Mulla
(2) (dead) v. Bibijan and others3 has with reference to the requirement C
in Article 54 held that the date for performance which is refused must
be a fixed date. In this case, Section 55(2) speaks about a certain date
which must be fixed in the contract. The clause in the purchase order
refers to payment of the price being effected within seven days of
delivery. It could, no doubt, be said that the date of payment cannot go
D
beyond a period of seven days at any rate of the delivery, and therefore,
the seventh day could be treated as a day which is certain. We need not
explore the matter further particularly having regard to the pendency of
the suit, and also, the nature of the limited inquiry to be conducted under
the IBC. We may further note, however, that Section 55(2) also
contemplates that the buyer must wrongfully neglect or refuse to pay E
the price. Interestingly, it will be noticed that the law-giver has in Section
55(1) also used the words “and the buyer wrongfully neglects or refuses
to pay for the goods” but the law-giver has further added the words
“according to the terms of the contract” which words are not found in
Section 55(2). Even proceeding on the basis that under Section 55(2) of
F
the Act, this is a case where there is a certain day fixed for the payment
of the price irrespective of the passing of the property inter alia, the
law does clothe the buyer with the right to resist the suit on the basis that
the refusal to pay the price is not wrongful. In other words, he can lean
on Section 59 and set up a breach of warranty and seek at least the
diminution of the price if not extinction of the same. That apart, he has a G
right to seek damages even on the same breach.
58. Section 4 of the Act, inter alia, contemplates that an agreement
to sell becomes a sale when the time elapses or the conditions are fulfilled
3
(2009) 5 SCC 462 H
788 SUPREME COURT REPORTS [2022] 7 S.C.R.
A subject to which the property in the goods is to be transferred. As far as
Section 55(1) of the Act, it clothes a seller with a right to sue for the
price of the goods when a property in the goods has passed. The suit
can be resisted by the buyer on the basis that the refusal to pay the price
is not wrongful having regard to the terms of the contract. As to when
property passes and transforms a contract for sale into a sale is largely
B
a matter of intention. The rules as contained in Sections 19 to 24 of the
Act would be employed. The task, however, remains to find out the
intention of the parties. We may notice that a Division Bench of the
High Court of Nagpur in the judgment in Mangilal Karwa v. Shantibai4
has made the following observations in an appeal by the defendant-
C buyer who had agreed to purchase 503 bags of Masur but found that the
goods were not of merchantable quality and were rotten:
“11. The question whether the Defendant-purchaser had an option
to reject the goods because what he bargained for was masur
and not some rotten stinking stuff which was once masur of that
D year’s harvest does not arise for consideration in this case. For,
even if there be a breach of a condition, the Defendant by taking
delivery has, under Section 13 of the Act, elected to treat it as a
breach of warranty which under Section 59 entitles him to a
diminution or extinction of the price.
E It is settled law that even after the goods have been delivered into
the actual possession of the buyer, the performance of the seller’s
duties may still be incomplete by reason of the breach of some of
the conditions or warranties - express or implied - whether as to
title, or quality, or fitness to Which he has bound himself by the
contract: (Benjamin on Sale, Page 984).
F
The question then is what is the diminution in price to which the
Defendant is entitled under Section 59 of the Act?
xxx xxx xxx
In the instant case the Defendant has set up the breach of warranty
G of quality in order to claim a diminution of price under Clause (a)
of Sub-section (1). He is therefore entitled to such damages as
are available to him under Clause (a) which would be all damages
resulting as a natural and ordinary consequence of his breach of
4
H AIR 1956 Nag 221.
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 789
LTD.& ORS. [K. M. JOSEPH, J.]
contract in supplying a damaged article or an article of an inferior A
quality than the one contracted for.”
No doubt, the Court found, in the facts therein, that the property
had not passed. For the purpose of this case, we may not have to
adjudicate and find that the property has passed in the goods to the
second respondent. B
59. In Mobilox (supra), this Court took the view that one of the
objects of the IBC in regard to operational debts is to ensure that the
amount of such debts which is usually smaller than the financial debts
does not enable the operational creditor to put the corporate debtor into
the insolvency resolution process prematurely. It is further declared that C
it is for this reason that it is enough that a dispute exists between the
parties. It is further the law as declared in Mobilox (supra) that Section
5(6) of the IBC excludes the expression bona fide which qualified the
words suit or arbitration proceedings in Section 5(4) under the Bankruptcy
Law Reforms Committee Report. All that is required is to see whether
there is a plausible contention which must be investigated. This Court D
has gone on to declare that a ‘patently feeble’ legal argument may not
be a plausible dispute. We respectfully agree. We are unable to find that
in the facts of this case, that the case set up by the second respondent
was a patently feeble legal argument. Again, following what this Court
held in Mobilox (supra), we do not have to go to the extent of finding E
that the second respondent is likely to succeed. Still further, finding
guidance from Mobilox (supra), the examination of the merits need not
transcend the limited extent which we have undertaken which is to find
that the case of the second respondent is not to be brushed aside as
spurious, hypothetical or illusory. We cannot find that the dispute as
projected by the appellant on behalf of the second respondent does not F
exist. In the teeth of the emails which we have adverted to, and the
inference sought to be drawn in particular as also the Lab Reports
produced, no doubt, from the second respondent’s Labs, we cannot also
find that the case of the corporate debtor is wholly unsupported by
evidence. As to the acceptability of these materials and the weight to be G
attached to them, needless to say, we have not pronounced on the same.
60. When we speak about evidence, we must not overlook the
law laid down in Mobilox (supra) that the court need not be satisfied
that the defense is likely to succeed. The standard, in other words, with
reference to which a case of a pre-existing dispute under the IBC must H
790 SUPREME COURT REPORTS [2022] 7 S.C.R.
A be employed cannot be equated with even the principle of preponderance
of probability which guides a civil court at the stage of finally decreeing
a suit. Once this subtle distinction is not overlooked, we would think that
the NCLAT has clearly erred in finding that there was no dispute within
the meaning of the IBC.
B 61. On the one hand the case of the appellant appears to be that
the boiler can be used by putting in large quantities of raw material (300
MT approximately) and this justified the consumption of the supplied
goods over a period of a few days, and yet, justifying the complaint
about the quality of the raw material and its impact on the boiler. The
stand of the first respondent is that there is no material to justify such a
C claim. We are of the view that this would involve the court making a
deeper foray into the merits and attempting to find whether the dispute
is bona fide as against it being a plausible contention. We cannot be
unmindful about the impact of Section 13(2). In other words, the delivery
of the goods and the acceptance of the goods by use of the goods by the
D corporate debtor being not in dispute, the impact of Section 13(2) read
with Section 59 cannot at least for the purpose of determining whether
there is a pre-existing dispute be ignored.
62. No doubt, the first respondent lays store by the purchase order
requiring certificate of analysis in that in view of there being no challenge
E to the said certificate of analysis and there being no rejection of the
goods which was contemplated under the purchase order at the ground
site, it is contended that the dispute cannot be countenanced. The appellant
would, on the other hand, seek to buttress his case with reference to the
lab reports, no doubt, procured from the labs which the second respondent
has set up. The appellant, it must not be overlooked has a definite case
F that, only upon use of the goods, the defect in the goods came to be
discovered. No doubt, the lab reports may support the appellant. It is not
the case of either party that the quality of the coal as set out in the
purchase order is something which could be established on mere physical
examination. As far as the contention that no debit note was raised in
G respect of supplied goods and that the accounts may not bear out the
case of the appellant about the alleged loss, as a result of the use of the
goods in question, we feel that while they may indeed have lent assurance
to the case of the corporate debtor, their absence may not clinchingly
rule out the existence of a ‘pre-existing dispute’ under the IBC. Here,
we must not be oblivious to the limited nature of examination of the case
H
RAJRATAN BABULAL AGARWAL v. SOLARTEX INDIA PVT. 791
LTD.& ORS. [K. M. JOSEPH, J.]
of the corporate debtor projecting a pre-existing dispute. Overlooking A
the boundaries of the jurisdiction can cause a serious miscarriage of
justice besides frustrating the object of the IBC. The NCLAT, has clearly
erred in not appreciating the issue, bearing in mind the principles in the
Act.
63. In view of our finding that the NCLAT has erred in its finding B
about the existence of a pre-existing dispute, the impugned order merits
interference. In the said view, we need not pronounce on the aspect
about the effect of Rule 150 being breached by the NCLT.
64. We make it clear, however, that as far as the suits filed by the
second respondent are concerned, we must not be treated as having C
pronounced on any factual issues and observations made in this regard
must be treated as having been made for the purpose of deciding this
appeal. We also make it clear that since Section 13 of the Act permits
the buyer to waive a condition, it will be open to the first respondent to
canvass that at any rate the second respondent has waived the alleged
condition. D
65. The appeal is allowed. The impugned order will stand set
aside. The application filed by the first respondent against the second
respondent under Section 9 will stand rejected. In view of the fact that
the appellant succeeds on the basis that there is a pre-existing dispute
within the meaning of IBC, we leave open all the remedies and contentions E
available to the first respondent in law. Parties are left to bear their
respective costs.
Bibhuti Bhushan Bose Appeal allowed.
(Assisted by : Preetam Bharti, LCRA) F
G
H
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