Asianet Satellite Communications Limited vs Cinema 24x7 Private Limited

Charanjeet Singh Gulati, Member (Technical)

This Petition has been filed by Asianet Satellite Communications Limited (“Petitioner/ Operational Creditor”) to initiate Corporate Insolvency Resolution Process (“CIRP”) against Cinema 24x7 Private Limited (“Respondent/Corporate Debtor”) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“the I&B Code”) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for an alleged default of Rs. 12,77,98,130.

The Corporate Debtor is a private limited company incorporated under the Companies Act, 1956 having its registered office at Mumbai, Maharashtra. Therefore, this Bench has jurisdiction to deal with the present petition.

The Operational Creditor is a Multi System Operator (MSO) engaged in the business of transmission/ retransmission of programming service/ signals received from the broadcaster(s) or its authorized agencies and also transmit their own programming service for simultaneous reception either by multiple subscribers directly or through one or more local cable operators which include the authorized distribution agencies. The Corporate Debtor is a broadcaster engaged in the business of providing programming services and internet services.

The Operational Creditor and the Corporate Debtor entered into an agreement dated 24.07.2015 whereby the Operational Creditor agreed to place the Corporate Debtor’s 5 (five) Free to Air Satellite TV Channels being Cinema TV, Cine 21, MGK Naaptol Tamil, Wow Cinema and Naaptol  Malayalam  in  the  Operational  Creditor’s  digital  platform  in Kerala.

Relevant terms and conditions of the said agreement dated 24.07.2015 are stated below:

i) Clause 2.1 – Corporate Debtor agreed to pay a non-refundable consideration of Rs. 4,25,00,000/- plus taxes for the first year of the Agreement by way of a post-dated cheque;

ii) Clause 2.2 – Carriage fee shall increase at a minimum rate of 20% for the second year (Rs. 5,10,00,000/- plus taxes) and further by 30% for the third year (Rs. 6,63,00,000/- plus taxes). The said payments were to be made half yearly by way of post-dated cheques;

iii) Clause 8.1 – The term of the Agreement shall be for a period from 1st July 2015 to 30th June 2018 and that the same can be terminated only with the concurrence of both parties;

iv) Clause 9.1 – Even in case of cancellation of the Agreement by the Operational Creditor, the Operational Creditor has the right to recover the outstanding amounts and realise the full payments as per Clause 2 of the Agreement;

v) Clause 9.2 – A party is to provide notice in case of event of default is committed by the other party and if the defaulting party fails to rectify the default within two weeks from the notice period, the non-defaulting party can terminate the Agreement by providing a written termination notice of 30 days.

In accordance with the terms and conditions of the Agreement, the Corporate Debtor had issued post-dated cheques at the time of entering into the Agreement itself.

Thereafter, an Addendum Agreement dated 12.06.2016 was entered into between the parties for Channel Carriage and Placement whereunder the Operational Creditor agreed to assign a prime Logical Channel Number (‘LCN’)107 to Naaptol Malayalam on its network instead of the previously agreed LCN 139. As per the said Addendum Agreement, the Corporate Debtor agreed to pay Rs. 2 crores plus applicable taxes per annum as non-refundable consideration and the value estimated at the time of signing the agreement was Rs. 4,33,33,333/- plus applicable taxes.

The net effect of the Agreement and the Addendum Agreement was that the Operational Creditor had displaced its own channel to place the Corporate Debtor’s channel at a prime Logical Channel Number, 107. The Operational Creditor had also agreed to carry 3 channels viz. Cinema TV, Cine 21 and Wow Cinema on promotional basis, free of cost.

It is submitted that there was no obligation on part of the Operational Creditor to raise invoices under the Agreement, however, the Operational Creditor raised invoices for its internal accounting purpose. Since the Corporate Debtor defaulted in making payment due in accordance with the Agreement and Addendum Agreement, the Operational Creditor had sent requests and reminders regarding the same.

The Operational Creditor temporarily switched off the Naaptol Malayalam channel on a request made by the Corporate Debtor to that effect vide email dated 01.06.2017 while continuing the operation of other channels and informed the same to the Corporate Debtor vide an email dated 03.06.2017.

Thereafter, the Corporate Debtor sent another email dated 07.06.2017 asking the Operational Creditor to temporarily discontinue its channels till further intimation in view of Press Note No. 39/2017 dated 31.05.2017 issued by the Telecom Regulatory Authority of India (TRAI) which barred the MSOs from carrying the same channels at multiple LCNs and at more than one genre.

When the Operational Creditor raised its concern about the same, the Corporate Debtor clarified that its carriage in accordance with the Agreement is not in violation of any directions issued by the TRAI, as the channels being carried were unique channels and placed on unique LCNs. Thereafter, the Operational Creditor addressed a subsequent email dated 12.06.2017 requesting the Corporate Debtor to provide material for the landing channel for uninterrupted operations.

However, the Corporate Debtor unilaterally terminated the Agreements vide letter dated 21.06.2017. The Purported Disconnection was issued purportedly under Regulation 6(1) of the Telecommunication (Broadcasting and Cable Services) Interconnection (Digital Addressable Cable Television Systems) Regulations, 2012 (Interconnection Regulations) on the ground that the business of the channels are purportedly declining contrary to the purported understanding of targeting large subscriber base with increase in viewership. Pertinently, no such understanding was ever arrived at by the parties and the same is not borne by the Agreement or the Addendum Agreement.

It was stated in the Purported Disconnection Notice that the signals of the Corporate Debtor’s channels under the Agreement would be disconnected upon expiry of the notice period and after issuing a public notice in accordance with the Interconnection Regulations. However, admittedly, till date, no such public notice has been issued by the Corporate Debtor in accordance with the Interconnection Regulations.

The cheques given by the Corporate Debtor for discharge of its payment obligations under the Agreements were dishonoured for the reason “payment stopped by drawer”. Thereafter, Operational Creditor sent notices dated 14.07.2017 and 23.01.2018. In reply to the said notices, the Corporate Debtor denied its liability to make pending payments under the Agreements. Later, the Operational Creditor issued a Demand Notice dated 27.02.2018.

The Corporate Debtor replied on 13.03.2018 denying its liability and further stated that it has filed a Petition No. 70/2018 before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) against the Operational Creditor inter alia seeking permanent injunction to cease, desist and restrain the Operational Creditor from raising any demand for money from the Corporate Debtor (Broadcasting Petition).

It is submitted that the signals of the Corporate Debtor’s channels were unencrypted, as recorded in the Broadcasting Petition as well, and since there was no effective termination of the Agreements, the Operational Creditor continued to retransmit the signals of the Corporate Debtor’s channels.

Till date, the Operational Creditor has received only a sum of Rs. 12,44,81,666/- from the Corporate Debtor in lieu of the services rendered by the Operational Creditor, and there is a total outstanding amount of Rs. 12,77,98,130/- (principal amount + interest @ 18% p.a.).

Submissions of the Corporate Debtor

The Corporate Debtor is a company incorporated under the provisions of the Companies Act, 1956 and is a prominent name in the business of distribution of television channels, namely Naaptol Malayalam, MGK Naaptol Tamil, Cinema TV, Cine 21, and Wow Cinema.

The Corporate Debtor has not denied the obligations under the Agreements as stated above. However, it is submitted that the subscriber base/viewership of the network of the Operational Creditor had been diminishing since the date of the Addendum Agreement which had affected the business of the Corporate Debtor resulting in imbalance of cost incurred and revenue generated for the Channels being distributed under the Agreement, thereby causing substantial loss to the Corporate Debtor. Further, the Operational Creditor had launched its own channel in direct competition to the channels of the Corporate Debtor which had hurt the business of the Corporate Debtor drastically.

A Press Release Notice dated 31.05.2017 was issued by the Telecom Regulatory Authority of India (TRAI) whereby the MSOs were warned to not place channels at more than one LCN under multiple genres simultaneously. As a precaution, the Corporate Debtor requested the Operational Creditor to stop the transmission of all the Corporate Debtor’s channels to evaluate the contents and carriage internally for checking the Order Generation Ratio. However, the Operational Creditor chose not to disconnect the channels stating that the carrying of the channels was not in violation of any regulations.

The Respondent expressed its displeasure towards the conduct of the Operational Creditor vide its email dated 12.06.2017 and further cautioned about the directions given in the Press Release vide its response dated 13.07.2017. However, despite numerous communications, the Operational Creditor was adamant to continue the channels.

Thus, the Petitioner’s refusal to comply with the directions of TRAI Press Release, the losses caused due to decrease in subscription/viewership of the Operational Creditor’s network and the Operational Creditor’s rival channel coupled with temporary acts of swapping its own channel with that of the Corporate Debtor had made the Corporate Debtor susceptible to actions by the TRAI besides suffering continuous losses, due to the wrongful acts of the Operational Creditors. The Operational Creditor’s actions rendered the entire object of the Channel Carriage Agreements worthless and commercially unviable for the Corporate Debtor.

Consequently, the Corporate Debtor issued a Discontinuation Notice dated 21.07.2017 in accordance with Clause 6.1 of the Interconnection Regulations, 2012. Clause 6.1 is reproduced below:

“6.1 No broadcaster shall disconnect the signals of a TV Channels of a multi system operator without giving three weeks’ notice to such multi system operator, clearly specifying the reasons for the proposed disconnection.”

It is submitted that the Corporate Debtor has done no illegal act but has exercised its bona fide statutory right under the TRAI Act and Interconnection Regulations, 2012. The mere fact that the Agreement states that termination can take place only with the concurrence of both parties cannot be used as an advantage by the Operational Creditor in contravention of the special enactment on the subject matter. Moreover, in the present case, the Operational Creditor itself failed to comply and exercise caution to the regulatory framework of TRAI and has also breached the fundamental terms of the Channel Carriage Agreements.

The Corporate Debtor also submits that the termination clause in the Agreement cannot override the statutory law. Moreover, Clause 11.1 of the Agreement itself states that its terms shall be construed and enforced in accordance with the laws of India. Further, Clause 9.2 of the Agreement states that if a party commits an event of default on any of the clause of the Agreement, the other party may immediately on providing notice and rectify the default within two weeks from the notice period failing which the agreement can be terminated by the non-defaulting party providing a written termination notice of 30 days to the defaulting party.

The Operational Creditor indirectly accepted the Disconnection notice by not raising any invoices thereafter and neither was the Corporate Debtor called upon for performance of its obligations under the Agreement nor did the Operational Creditor performed its part thereunder after the termination. Thus, the payments claimed by the Petitioner could only be in the nature of damages and not in consideration for services rendered, and therefore, such a claim cannot be categorized as an operational debt under the I&B Code.

Two legal notices dated 14.07.2017 and 23.01.2018 were sent by the Operational Creditor under section 138 of Negotiable Instruments Act, 1881 (NI Act) which act is in contravention to the disconnection notice as the Corporate Debtor repeatedly requested to return the post-dated cheques after the termination of the Agreement on expiry of disconnection notice. The Corporate Debtor replied to the said notices on 31.07.2017 and 31.01.2018 respectively denying any payment due and payable post the disconnection notice.

Due to the continuous harassment by the Operational Creditor for payments, the Corporate Debtor had filed a Broadcasting Petition bearing no. 70 of 2018 dated 22.02.2018 under the Interconnection Regulations, 2012 which has been ‘admitted for hearing’ by the Telecom Dispute Settlement & Appellate Tribunal (TDSAT) vide its order dated 05.10.2018. Admittedly, the said Broadcasting Petition has been filed by the Corporate Debtor before the issue of demand notice dated 27.02.2018 by the Operational Creditor to which notice, the Corporate Debtor sent its reply on 07.03.2018 underlining the already exiting dispute between the parties.

In view of the above, it is submitted that there is a pre-existing dispute between the parties. The Corporate Debtor states that no amount/interest stemming from Channel Carriage Agreement is due and payable by the Corporate Debtor as the Agreement has been terminated and the amount now claimed by the Operational Creditor is in the nature of damages.

Response of Operational Creditor

In response to the Corporate Debtor’s Reply, the Operational Creditor filed a Rejoinder and submitted as follows:

i) The Agreement, and more particularly Clause 5 and Clause 8.1 thereof, shows that it is a composite, indivisible contract for 3 years and the Corporate Debtor was obligated to honour the total payments for the complete duration of the Agreement from 01.07.2015 to 30.06.2018 as long as the Operational Creditor was providing/ willing to provide the services thereunder. Even post the disconnection notice, the Operational Creditor rendered services to the Corporate Debtor by retransmitting the signals of the Corporate Debtor’s channels as per the Agreement.

ii) The Corporate Debtor has not paid Rs. 12,57,56,666/- as stated in the Reply but only Rs. 12,44,81,666/- has been paid and the Corporate Debtor has not sent any correspondence denying its liability to make due payments under the Agreement. Accordingly, the remaining outstanding amount is Rs. 12,77,98,130/- is due and payable, and since this amount is for services rendered post termination notice, it would still be operational debt.

iii) There is no genuine pre-existing dispute between the parties as the Broadcasting Petition is filed as a mere counterblast to prevent the Operational Creditor from making its lawful demands of outstanding amounts. There is no real grievance/dispute raised therein and the admission of it by the TDSAT is merely on the basis that it has the requisite jurisdiction and not on merits. Moreover, it is submitted that the matter at hand is clearly distinct from that which is raised in the Broadcasting Petition and that the said Petition will have no bearing on the present proceedings.

iv) Clause 9.2 of the Agreement in the present case as there is no breach of any terms of Agreement by the Operational Creditor. No material is placed on record evidencing the breach committed by the Operational Creditor. The grounds raised by the Corporate Debtor in the disconnection notice was never raised before which clearly shows that the same was done only to evade its liability under the Agreement. Further, the said disconnection notice was purportedly issued under Regulation 6 of Interconnection Regulations, 2012, however, the notice is not in compliance with the said Regulation.

FINDINGS/OBSERVATIONS

Heard the Counsels and perused the documents placed on record.

It is an admitted fact that the Operational Creditor and the Corporate Debtor entered into Channel Carriage Agreement and Addendum Agreement dated 24.07.2015 and 12.06.2016 respectively which were terminated by the Corporate Debtor vide a Disconnection Notice dated 21.06.2017.

The Operational Creditor admitted that Rs. 12,44,81,666/- has been received from the Corporate Debtor for the services rendered whereas the Corporate Debtor states that an amount of Rs. 12,57,56,666/- has been paid as per the terms of the Agreement. It is the case of the Operational Creditor that an amount of Rs. 12,77,98,130/- is due and payable by the Corporate Debtor in accordance with the Agreement which claim is denied by the Corporate Debtor in total.

The Corporate Debtor contended that there exists a dispute between both the parties because of which the Corporate Debtor had even stopped payment of the post-dated cheques dated 30.06.2017 and 31.12.2017. It is a trite law that the Adjudicatory Authority is obligated to dismiss a petition under section 9 of the I&B Code if it is clearly visible that there exists a pre-existing dispute between the parties, even if the petition is otherwise complete in all respect. Thus, it is imperative for this Tribunal to adjudicate on the issue as to the existence of pre-existing dispute between the parties.

The Corporate Debtor, in its Disconnection Notice dated 21.06.2017, raised certain disputes regarding the conduct of Operational Creditor in a manner prejudicial to the Agreements dated 24.07.2015 & 12.06.2016. Relevant extract from the Disconnection Notice is reproduced below:

“***

It is however pertinent to mention herein that the said consideration amount as deduced in the aforementioned Agreement were subject to mutual understanding of targeting large subscriber base with increase in viewership and accordingly LCNs were assigned to justify the intent of the Agreement.

However, to our dismay, the business of the aforesaid channels are rather declining in contrary, thus resulting in massive imbalance of cost being incurred and revenue generated for the channels being distributed under the Agreement, stemming to irreparable injury and substantial loss being caused to the Broadcasters. ***

Kindly note the signals of the channels under the aforesaid Agreement will be disconnected upon expiry of the notice period and after issuing a public notice in accordance with TRAI Regulations.

Furthermore, in lieu of disconnection of channels upon expiry of notice period and immediate termination of the aforementioned Agreement, you are hereby informed to return the cheques dated 30.06.2017 and 31.12.2017 as handed over to you towards payment for the period 01.07.2017-31.012.2017 and 01.01.2018-30.06.2018 respectively.”

The Operational Creditor replied to the said Disconnection Notice vide letter dated 13.07.2017, relevant portion of which is stated below:

“***

… Your disconnection notice is nothing but an afterthought to our repeated requests and remainders to pay the amounts as per two mutually signed agreements. As per clause 8.1, the agreement is valid till 30.06.2018 and can be terminated only with the concurrence of both parties.

Further, we would also like to bring to your notice that there is a huge outstanding amount of Rs. 6,84,57,666/- (excluding delayed payment charges and a cheque dated 31/12/2017 for Rs. 3,44,76,000/- Less of TDS) due and payable by you to us as on 30.06.2017, under two Agreements with your company. We hereby call upon you to clear the outstanding amount along with delayed payment charges as per Clause 2 of the Agreement.

As per your request, we have been carrying 3 channels of yours – Cinema TV, Cine 21 and Wow Cinema on promotional basis, free of cost with a clear understanding that you would be fulfilling all the terms of the agreement including clearing advance payments as per the agreement. After availing the free services for 3 channels for more than 2 years, asking for disconnection now is a clear violation of the agreement.

... Issuing disconnection notice without paying the amount as per the Agreements is a clear violation of the clause 9 of our mutually signed agreement. As per Clause 9, you are bound to honour the total payments for the duration of the agreements from 1sty July 2015 to 30th June 2018, as mentioned in Clause 2 of the agreement. From the scheme of things it is apparent that you are intentionally delaying the payment of the due amounts.”

Further, since the Operational Creditor did not return the cheques dated 30.06.2017 and 31.12.2017 as requested by the Corporate Debtor in the disconnection notice, the Corporate Debtor stopped the payment of cheque dated 30.06.2017 on 07.07.2017. Consequently, a legal notice dated 14.07.2017 under section 138 of Negotiable Instruments Act, 1881, was issued by the Operational Creditor, through its Advocates, calling upon the Corporate Debtor to pay Rs. 3,44,76,000, being the dishonoured cheque amount, within 15 days.

The Corporate Debtor replied to the above-mentioned legal notice on 21.07.2017 stating that the said notice is not maintainable as the said cheques has been presented by the Operational Creditor without occurrence of any debt or liability. Relevant portion of the reply is reproduced below:

“5. … it is stated that our Client is not liable to pay any amount to you on the count of dishonor of the said Cheques mentioned therein in your notice as the present case is not of dishonor on the count of any insufficient funds but it is the case of stop payment as our Client has issued a specific direction to the bank not to honour the said Cheques as the agreement has already been terminated by the statutory notice and therefore our Client is not liable to pay the same.

… the said Cheque was presented without any existing debt or liability as the Cheque were issued in advance for consideration for the work to be done in future and the said work is not being availed by our Client post the termination notice of 21 days.”

On  01.08.2017,  the  Corporate  Debtor  sent  another  letter  to  the Operational Creditor as a response to the Operational Creditor’s reply to disconnection notice, denying all the allegations stated therein and reiterating that no amount is due and payable by the Corporate Debtor.

The subsequent correspondences between the Operational Creditor and Corporate Debtor were on similar lines as those stated hereinabove. From the plain reading of the aforesaid communications, it can be inferred that there is a dispute between the parties as to the conduct of parties as well as the amount due and payable by the Corporate Debtor to the Operational Creditor.

Further, we also note that a Broadcasting Petition No. 70 of 2018 is pending before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) New Delhi. The main contention in the said Broadcasting Petition is that the Corporate Debtor has no outstanding amount left to be paid to the Operational Creditor, and the Corporate Debtor has prayed therein to desist the Operational Creditor from illegally and arbitrarily raising demand of monies despite the disconnection notice dated 21.06.2017. It is pertinent to mention here that the Broadcasting Petition, which has been admitted for hearing by TDSAT and is pending adjudication, was filed by the Corporate Debtor on 22.02.2018 which is before the issue of Demand Notice by the Operational Creditor on 27.02.2018. The subject matter in that Petition is directly related to the facts of the present case. Further, in the reply dated 07.03.2018 of the Corporate Debtor to the Demand Notice, the Corporate Debtor specifically stated that the reply shall be treated as a notice of dispute under section 8(2) of the I&B Code, 2016.

From the foregoing, it is apparent that there is a pre-existing dispute between the Parties which has led to disagreement in the outstanding amount. It is not for the Adjudicating Authority to hear the disputes between the parties and to decide as to the quantum of amount due to the Operational Creditor. Since in this, there exists pre-existing dispute, the instant Petition is not maintainable under section 9(5)(ii)(d) of the I&B Code.

We rely on the judgment of the Hon’ble Supreme Court in the Mobilox Innovations  Private  Limited  v.  Kirusa  Software  Private  Limited [2018 (1) SCC 353]:

“40. 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 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 argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”

(Emphasis Provided)

We also rely on the judgment of Hon’ble NCLAT in Karpara Project Engineering Private Limited vs. BGR Energy Systems Ltd [Company Appeal No. 622 of 2018] wherein it was held as follows:

“7. … It is the settled position of law that the existence of a pre-existing dispute is a bar to initiation of Corporate Insolvency Resolution Process at the instance of an Operational Creditor. The Adjudicating Authority is required to ascertain whether the Operational Creditor has received the notice of dispute pursuant to service of notice of demand on the Corporate Debtor within the specified time or a dispute emerges from the record of information utility. A suit or arbitration proceeding relating to a dispute may be pending between the parties or the dispute raised qua the claim or the invoices may emerge from the record of information utility or correspondence and communication between the parties. The Adjudicating Authority is not required to conduct a roving enquiry or examine the merits of dispute in a manner as if he were going to decide the issues on merit. The Adjudicating Authority exercises a limited jurisdiction and cannot dwell upon the pros and cons of the claim or merits of dispute. The limited exercise required to be undertaken by the Adjudicating Authority extends only to sift the material for separating the grain from the chaff with a view to reject a palpably spurious defense. Likelihood of such defense succeeding or failing is not the concern of Adjudicating Authority. If the dispute exists in fact, is a pre-existing dispute and is not spurious, hypothetical or illusory, the Adjudicating Authority must reject the application.”

(Emphasis Provided)

Thus, taking into consideration the facts and circumstances of the case, this Tribunal is of earnest view that there is pre-existing dispute which prima facie renders the petition as non-maintainable as held in Mobilox Innovations Private Limited v. Kirusa Software Private Limited [2018 (1) SCC 353] which serves as a locus classicus on the issue.

Accordingly, the present Company Petition is dismissed.