Associated Chemical Corporation vs Mudra Denim Private Limited

The Corporate Debtor is liable to pay an amount of Rs. 80,50,166/- plus interest of Rs. 15,82,307/- towards supply of goods/material supplied by the Petitioner. The following documents evidencing the delivery of material have been annexed to the Petition:

I. Work Orders placed by the Corporate Debtor namely:

II. Invoices raised by the Petitioner namely:

III. Transport Challans by the Petitioner:

The Petitioner also filed complaints bearing No.CC/2920/SS/2018 and CC/5027/SS/2018 under Section 138 of Negotiable Instruments Act, 1881 before the Metropolitan Magistrate Court at Sewree against the Corporate Debtor and the same is pending.

The Petitioner issued Demand Notice under Section 8 of I & B Code on 29.01.2019 and the Corporate Debtor filed reply dated 02.02.2019, both of which has been annexed to the Petition.

The Corporate Debtor pointed out that Petitioner is represented by its sole proprietor Mr. Ketan Mehta. The same Mr. Mehta is also the sole proprietor in respect of one Associated Chemical (hereinafter called "AC") who has also filed a Company Petition No. 1139/(MB)/2019 before this Tribunal against the present Corporate Debtor under Section 9 of the Code. Therefore, both the firms, i.e., the present Petitioner and AC, are effectively merely different business names of the sole proprietary concern of one Mr. Ketan Mehta and they have no separate/ unique corporate identity of their own. Even both of their contact numbers and email addresses are identical.

The Corporate Debtor had been procuring raw materials from Mr. Ketan Mehta since 2017. It was common practice between the parties that even if the Corporate Debtor issued purchase orders on one of the above said firms, Mr. Mehta, as per his own convenience, would provide the required materials under the invoice of another firm. Additionally, it was also evident from an email dated 26.06.2018 that the same staff coordinated the accounts for both the present Petitioner upon the instructions of Mr. Mehta. It has been the customary practice that payments made by the Corporate Debtors would be adjusted against two different accounts.

Mr. Ketan Mehta, under the name of both of the above said firms, was in the business of supplying raw materials such as yarn and chemicals to the Corporate Debtor which were utilized by the Corporate Debtor to manufacture its fabrics. Since Mr. Mehta was only a trader and did not manufacture yarn and/or chemicals, he would supply yarn purchased from third parties such as Sanathan Textiles Pvt. Ltd. and Suraj Industries Pvt. Ltd. to the Corporate Debtor.

The fabrics manufactured by the Corporate Debtor would in turn be supplied by the Corporate Debtor to its buyers who would sell the fabric to garment manufacturers who would convert the same into garments. Therefore, any defect in the yarn and/or chemicals supplied by the Petitioner would only manifest itself when the fabric was being converted into finished garments which would take approx. 90 to 180 days depending on the market demand.

The Corporate Debtor raised the two following distinct claims with respect to the defective yarn that had been supplied by the Petitioner to the Corporate Debtor much before the issue of demand notice by the Petitioner:

The Corporate Debtor, in or around October, 2017, had placed purchase orders on the Petitioner for the purchase of yarn. However, instead of the present Petitioner, AC supplied the required quantity of the yarn (which was originally manufactured by Sanathan Textiles Pvt. Ltd.) and raised its invoices upon the Corporate Debtor. The Corporate Debtor manufactured the fabric out of the said yarn which was then sold by the Corporate Debtor to the distributors who in turn supplied the fabric to the garment manufacturers. It was only then revealed that the yarn was defective and consequently, various complaints were raised by the distributors upon the Corporate Debtor. The Corporate Debtor had already paid an aggregate sum of Rs. 99,97,202/- to the Petitioner towards the invoices bearing nos. 3500357, 3500367, 3500379, 3500380, 3500385, 3500483, 3500484, 3500489, 3500560 and 3500586 prior to the defects in the yarn coming to light. The Corporate Debtor exchanged following emails in 2017 with Mr. Ketan Mehta regarding the issue of defective yarn which show that Mr. Mehta was aware of and admitted the fact that the yarn was defective:

The Petitioner stopped supplying yarn manufactured by Sanathan Textile and began supplying yarn manufactured by Suraj Industries. Mr. Mehta even assured the Corporate Debtor that the problems being faced in the yarn supplied by Sanathan Textile would not arise in the yarn supplied by Suraj Industries. In the period of February to April 2018, the Petitioner had supplied yarn manufactured by Suraj Industries to the Corporate Debtor, in respect of which invoices for an aggregate amount of Rs. 16,81,835/- were raised upon the Corporate Debtor by the Petitioner. The Corporate Debtor once again made duly payments in respect of the said invoices and then later realized again that the yarn supplied by Mr. Mehta was defective and various complaints were again raised by the traders who had purchased fabric from the Corporate Debtor. The Corporate Debtor again exchanged following emails in 2018 with Mr. Ketan Mehta regarding the issue of defective yarn:

It was then submitted that the above emails show that the defects in the yarn came to light to the Corporate Debtor only after a period of 90-120 days from the date on which the yarn was supplied by the Petitioner, by when the Corporate Debtor had already made an aggregate payment of Rs. 1,16,79,037/-in total to Mr. Mehta. In addition to the loss in terms of the payments made by the Corporate Debtor to the Petitioner for the defective goods, the Corporate Debtor also suffered losses on account of expenses incurred in converting yarn to fabric as well as loss of goodwill for having sold fabric made of defective yarn to its buyers, who in turn refused to pay the Corporate Debtor for the fabric. Also, the distributors made claims to the Corporate Debtor towards operational costs for converting the fabric to garment and losses suffered due to delay in shipment of the new fabric to their garment manufacturer. The same is evident from the ledgers of the respective distributors maintained by the Corporate Debtor.

The Corporate Debtor continued to do business with Mr. Mehta’s firms, i.e., the present Petitioner and AC, based on the assurance given by Mr. Mehta personally and through his agents, including but not limited to the assurance recorded in the Minutes of Meeting that commercial implications of the defective yarn will be looked into. However, Mr. Mehta failed to take any steps whatsoever to offset the losses suffered by the Corporate Debtor and hence, the Corporate Debtor was constrained to withhold the payments in respect of the impugned invoices which form the basis of captioned Petition.