The 5-point test the NCLT uses to spot a manufactured quality dispute.
A corporate debtor who accepted goods, paid most invoices, and only raised a quality complaint after a demand notice learned that the NCLT treats such defences as manufactured and admits CIRP
11.32
crores.
A corporate debtor who accepted goods, paid most invoices, and only raised a quality complaint after a demand notice learned that the NCLT treats such defences as manufactured and admits CIRP
When a "Quality Dispute" is Just a Bad Cheque
M/s. Rishabh Triexim LLP, a Chennai-based supplier of PVC Resin, did what any creditor would do. It invoiced M/s. Nandi Irrigation Systems Limited, a Hyderabad company, for goods delivered. 175 invoices, between April and November 2022. The total came to roughly Rs 57.83 crores. Nandi paid about Rs 46.50 crores. Then it stopped. The unpaid balance: Rs 11.32 crores. Rishabh sent reminders. It held a meeting in October 2022 where a payment plan was agreed. Nandi didn't follow through. So Rishabh did the next logical thing: it filed a Company Petition under Section 9 of the Insolvency and Bankruptcy Code, 2016, seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Nandi.
Nandi's defence? The material was of inferior quality. But here's the catch: Nandi never rejected the goods. Never returned them. Never produced a single document showing it had disposed of the allegedly defective 1091.9 metric tonnes of PVC Resin. The lorry receipts at the time of delivery recorded no defects. And Nandi's own ledger, shared via WhatsApp, acknowledged an outstanding balance of about Rs 11.87 crores — almost exactly what Rishabh claimed.
The National Company Law Tribunal, Hyderabad Bench-II, wasn't impressed. In a judgment authored by Sri Sanjay Puri, Member (Technical), with Sri Rajeev Bhardwaj concurring, the Tribunal admitted the petition, appointed an Interim Resolution Professional, and declared a moratorium. The message was clear: a manufactured quality dispute won't save you from CIRP.
The Numbers That Told the Story
The transaction history was straightforward. Rishabh supplied PVC Resin to Nandi through 175 invoices. The opening balance plus invoiced amount totalled Rs 57,83,22,545. Nandi paid Rs 46,50,80,916. The outstanding: Rs 11,32,41,629. Rishabh also claimed interest of Rs 46,66,605 at 24% per annum as per the supply invoices.
On November 30, 2022, Rishabh issued a statutory demand notice under Section 8 of the IBC. Nandi replied on December 17, 2022, denying liability. The reason: the material supplied was allegedly of inferior quality. But the reply was bare. No evidence. No rejection letters. No return documents. No proof of disposal.
Rishabh then filed CP (IB) No.22/9/HDB/2023 on January 18, 2023, under Section 9 of the IBC. Nandi responded by filing IA No. 1712 of 2023, seeking to introduce FIR documents from criminal cases between the parties. The Tribunal dismissed that application outright, holding that criminal proceedings filed after the Company Petition had no relevance to the Section 9 proceedings.
What the Ledgers Actually Said
The Tribunal compared the ledgers. Rishabh's ledger showed the outstanding amount. Nandi's own ledger, shared via WhatsApp, showed an outstanding balance of Rs 11,87,41,629 — a negligible variance of about Rs 55 lakhs. The Tribunal found this corroboration significant. It noted that bank statements and lorry receipts further supported Rishabh's claim.
The key finding: the operational debt was established. The ledger accounts, bank statements, and WhatsApp communication all pointed in the same direction. Nandi owed the money.
The Quality Defence That Fell Apart
Nandi's core argument was that the PVC Resin was of inferior quality. But the Tribunal asked the obvious question: if the material was defective, why didn't Nandi reject it? Why didn't it return it? Why didn't it produce any document showing it had disposed of the allegedly defective goods?
The lorry receipts at the time of delivery recorded no defects. Nandi had accepted the goods without protest. The alleged quality issue was raised only after the demand notice was issued — a classic pattern of a manufactured dispute.
The Tribunal held that such an uncorroborated contention does not constitute a pre-existing dispute under Section 9 of the IBC. The ratio was clear: where a Corporate Debtor raises a quality dispute but fails to produce any evidence of rejection, return, or disposal of the allegedly defective material, and the delivery documents record no defects, the dispute is manufactured and must be rejected.
THE PLAY: If you accept goods without protest, pay most of the invoice, and only raise a quality dispute after a demand notice, the Tribunal will treat it as a manufactured dispute — and admit the CIRP application.
The FIR Diversion That Didn't Work
Nandi also tried to introduce FIR documents from criminal cases between the parties. The Tribunal dismissed IA No. 1712/2023, holding that criminal proceedings filed subsequent to the Company Petition have no relevance to the adjudication of the insolvency application. The message: don't try to muddy the waters with unrelated criminal cases.
The Order That Changed Everything
On September 18, 2024, the Tribunal passed a comprehensive order. CP (IB) No.22/9/HDB/2023 was admitted. CIRP commenced. Mr Maruti Venkata Subba Rao Poluri was appointed as the Interim Resolution Professional (IRP). A moratorium under Section 14 was declared from the date of the order till the completion of CIRP.
The IRP was directed to file an Authorization for Assignment within three days and to cause a public announcement under Section 15 within three days of receiving the order. Rishabh was directed to pay Rs 2,00,000 as an advance fee towards IRP expenses. The Registry was directed to communicate the order to the Registrar of Companies, Hyderabad, for updating the MCA website.
Why This Matters for Every Creditor and Debtor
For operational creditors, this judgment is a powerful tool. It confirms that a corroborated ledger, supported by bank statements and delivery documents, is sufficient to establish an operational debt. A debtor's bare denial, without evidence, won't stop CIRP.
For corporate debtors, the lesson is harsh: if you have a genuine quality dispute, you must act on it immediately. Reject the goods. Return them. Document the defects. If you accept the goods, pay most of the invoice, and only raise the dispute after a demand notice, the Tribunal will see through it.
The judgment also clarifies that criminal proceedings filed after the Company Petition are irrelevant to Section 9 proceedings. Debtors can't use FIRs as a shield against insolvency.
And the obiter dictum on interest is worth noting: the Tribunal held that contractually stipulated interest rates in supply invoices are enforceable in IBC proceedings for computing operational debt. So if your invoices say 24% per annum, that interest is part of the debt.
The Bottom Line
If you're an operational creditor, file your Section 9 petition with your ledger, bank statements, and delivery documents — and if the debtor's quality dispute is uncorroborated, the Tribunal will admit your application and start CIRP.