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Judgment
JUSTICE RAKESH KUMAR, MEMBER (JUDICIAL)
The present appeal has been preferred under Section 61 of Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as Code) against an order dated 20.06.2022 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi (hereinafter referred to as NCLT) in IB-877/ND/2020. By the said order the Learned NCLT has rejected the application filed under Section 9 of Code and Rule 6 of the Insolvency & Bankruptcy Code (Application to Adjudicating Authority) Rules, 2016. The appellant, Castrol India Ltd, had filed application under Section 9 of the Code before the NCLT for initiation of Corporate Insolvency Resolution Process (CIRP) against Respondent (Cargo Motors Pvt Ltd/alleged Corporate Debtor). The appellant before the NCLT had claimed that there was total outstanding debt of Rs.2,80,00,000/- after invoking the bank guarantee for Rs.1,40,00,000/- otherwise total outstanding claimed by the appellant before NCLT was to the tune of Rs.4,20,00,000/-. However, after adjusting amount of bank guarantee the appellant had claimed that there was outstanding debt of rs.2,80,00,000/-.
The Learned NCLT after hearing both the parties has dismissed the petition by the impugned order. Before the NCLT the Respondent herein (alleged Corporate Debtor) raised the objection on the petition filed by the appellant mainly on two grounds. First ground which was taken by the Respondent before the NCLT was that the claimed debt was not operational debt under the provisions of Code. Second objection was raised that the application was fit to be rejected since there was pre-existing dispute between the parties. However, learned NCLT disapproved the first objection raised by the Respondent and recorded that there was operational debt. However, accepting the second objection regarding pre-existing dispute the Learned NCLT dismissed the application filed under Section 9 which has been assailed in the present appeal.
At the time of hearing of the appeal Mr. P. Nagesh, learned senior counsel taking us to number of documents placed on record submitted that there was operational debt against the Respondent to the tune of Rs.2,80,00,000/- and also there was no pre-existing dispute. However, learned NCLT has rejected the application. Mr. Darpan Wadhwa, learned senior counsel appearing on behalf of the Respondent (alleged Corporate Debtor) besides making submissions on the point of pre-existing dispute has also argued that considering the nature of agreement in between the parties i.e. “Castrol Advance Rebate Agreement dated 10th August, 2017 and also considering the termination of the agreement by the appellant prior to expiry of three years the claimed debt was not required to be considered as operational debt. However, we are of the opinion that since the issue regarding the operational debt has already been decided by the NCLT against the Respondent we may not examine this issue due to the reason that against part of the order dealing with the issue i.e. operational debt the respondent has not filed any appeal nor same has been assailed by the Respondent, it would not be appropriate for us to examine and decide this issue. Accordingly we are confining this appeal to examine only second issue as to where there was pre-existing dispute in between the parties or not.
Before proceeding we may incorporate the case which has been formulated by the appellant in the present Memo of Appeal. It is the case of the appellant that it was manufacturer company of automation and industrial lubricants in Indian lubricant market. The respondent company is involved in sale of motor vehicles including whole sale and retail sale of new and used passenger motor vehicles and lorries, trailers and semi trailers. In the year 2017, on 10.08.2017 an agreement was entered in between the appellant and respondent in the form of an advance rebate agreement. It was agreed that Respondent for the period commencing from 01.08.2017 to 31.07.2020 shall purchase for use at their workshops lubricants greases and other products manufactured from the appellant. The Respondent agreed to purchase from the appellant upon procuring the bank guarantee of Rs.1,40,00,000/- and the appellant was to give an advance rebate of Rs.7 crore. In terms of the agreement repayment of advance rebate by the Respondent (customer) to the appellant (Castrol India Ltd) was based on the target achieved by the Respondent in purchasing castor products as agreed in the table below:
| Total Target achieved in | The advance rebate repayable by the Customer |
|---|---|
| Less than 20% | Entire advance rebate |
| 20 – 50% | 60% of the advance rebate |
| 51 – 70% | 40% of the advance rebate |
| 71 – 90% | 20% of the advance rebate |
| 91 – 99% | 10% of the advance rebate |
| 100% | Nil |
However, before the expiry of period of agreement i.e. three years on 25.02.2019 the agreement was terminated. It is the claim of the appellant that in terms of the agreement the services were provided by the appellant (operational creditor) to the Respondent in the form of an advance rebate for infrastructure of the workshop owned by the Corporate Debtor. It is further case of the appellant that as per conditions incorporated in Clause vii of advance rebate agreement, upon termination of agreement the entire amount was to be considered as due and payable by the Respondent in favour of the appellant. The appellant in terms of agreement gave an advance of Rs.7 crore to enable respondent to meet volume of target of 1500 KL. It has been pleaded that the volume of target from 1500 KL was subsequently reduced to 920 KL against an advance rebate of Rs.7 crore. Mr. P Nagesh, learned senior counsel during hearing besides referring to advance agreement dated 10.08.2017 has also drawn our attention to emails dated 19.11.2018, 24.11.2018, 27.12.2018, 23.01.2019, 24.02.2019 and finally termination letter dated 25.02.2019. He submitted that in view of aforesaid communications it was clear cut case that there was outstanding of operational debt to the tune of Rs.2,80,00,000/- against the respondent. Since despite admitted operational debt it was not being cleared by the respondent without raising any dispute the appellant on 24.12.2019 issued demand notice under Section 8 of the Code against the respondent. The said demand notice was replied by the respondent by its communication dated 8.1.2020. In its reply, according to Mr. Nagesh, learned senior counsel, a plea was taken that Respondent even denied the relationship of creditor and debtor and also denied about any of operational debt outstanding against Respondent. The learned senior counsel submits that only with a view to defeat the right of the appellant to initiate CIRP the respondent by said reply raised a dispute as if it was a case of pre-existing dispute. Mr. Nagesh, learned senior counsel further submits that before the NCLT the appellant in its application filed under Section 9 of the Code had categorically made out a case that there was admitted corporate debt outstanding against the respondent and there was no pre-existing dispute. However, the learned NCLT incorrectly dismissed the application as if there pre-existing dispute. He has also drawn our attention to running page 89 and 90 of the memo of appeal particularly Part IV of the application filed before the NCLT for initiating CIRP. Part IV of form V filed before the NCLT is reproduced herebelow:-
Part –IV
PARTICULARS OF OPERATIONAL DEBTE
(1) Total amount of Debt(principal only) INR 2,80,00,000/- (Rupees Two crore Eighty lakh only)
1 TOTAL AMOUNT OF DEBT, DETAILS OF TRANSACTIONS ON ACCOUNT OF WHICH DEBT FELL DUE, AND THE DATE FROM WHICH SUCH DEBT FELL DUE (2) Details of Transactions on account of which debt fell due: i. Cargo Motors Private Ltd (Proposed Corporate Debtor) entered into an Agreement dated 10.08.2017 with Castrol India Limited (Operational Creditor) which was in the form of an Advance Rebate Agreement. ii. In accordance with Clause 1 of the said Agreement, at the request of the proposed Corporate Debtor, the Operational Creditor had agreed to provide an advance rebate of Rs.7.00,00,000/- (Rs. Seven Crores only) provided that the proposed corporate Debtor would provide a bank guarantee in favour of the Operational Creditor to secure 20% of the advance rebate. Clause 5 of the said Agreement read as follows: “Repayment of the advance rebate by the Customer to Castrol will be based on the Targets achieved by the Customer in purchasing the Castrol products as agreed in the Table below: Total Target The advance achieved in % rebate payable by the customer
Total Target achieved in % The advance rebate payable by the customer
Less than 20% Entire advance rebate. 20-50% 60% of the advance rebate 51-70% 40% of the advance rebate 71-90% 20% of the advance rebate 91-99% 10% of the advance rebate 100% Nil iii.Clause 7 of the said agreement also reads as under:
“The amount of the advance rebate, which will remain due and payable by the Customer to Castrol as per the table in Clause 5 above at the time of this Agreement coming to an end, either by efflux of time or termination as herein provided, will be payable by the Customer on demand by Castrol. With prejudice to their rights in recover the amount of the advance rebate, so due and payable by the customer by due process of law, Castrol will be entitled to invoke the Bank Guarantee to recover the amount of the advance rebate secured by the Bank Guarantee.”
A copy of the said Advance Rebate Agreement is annexed herewith and marked as Annexure –A.
(3)That on 25.02.2019, the Operational Creditor sent a notice to the proposed Corporate Debtor that in lieu of non-payment made, the Operational Creditor had exercised its option to terminate the said agreement under Clause 6.2 of the same agreement and thereby stating that the agreement would stand terminated at the end of the business hours on 25.05.2019. Therefore, the day on which the debt would have been said to have become due and payable would be 27.05.2019. A copy of the notice of Termination addressed to the proposed corporate Debtor by the Operational Creditor is annexed hereto and marked as Annexure B.
(1)Amount claimed to be in Default: Indian Rupees Two Crore and Eighty Lacs Only AMOUNT CLAIMED TO BE IN (INR 2,80,00,000/-) DEFAULT AND THE DATE ON (2) Date on which the default WHICH THE DEFAULT occurred: OCCURRED 27.05.2019 (ATTACH THE WORKINGS FOR (3) Workings for the computation of 2 COMPUTATION OF AMOUNT Default:
| 1 | Total amount to be refunded raised | Rs.4,20,00,000/- |
| 2. | Amount claimed by the Operational Creditor through invocation of Bank Guarantee | Rs.1,40,00,000/- |
| 3 | Total Amount claimed to be in default | Rs.2,80,00,000/- |
Mr Nagesh, learned senior counsel by way of referring to the aforesaid facts submits that since the respondent had not achieved the target as contemplated in agreement dated 10.08.2017 the appellant rightly claimed for recovery of outstanding debt against the respondent. In sum and substance it has been argued that without any pre-existing dispute learned NCLT has committed error in dismissing the application filed under Section 9 of the Code as if there was pre-existing dispute. According to Mr. Nagesh the order impugned is liable to be set aside.
Mr. Darpan Wadhwa, learned senior counsel appearing on behalf of the respondent at the very outset by way of referring to para ‘C’ of running page 41 of the Memo of Appeal which is part of the Castrol Advance Rebate Agreement submits, that it is not a case of operational debt. He has specifically placed reliance at Clause ‘C’ of page 41 which is quoted hereinbelow:
“C.It is agreed that subject to the Customer purchasing for use at their workshop/s (hereinafter referred to as "the workshop" speciality products manufactured and marketed by Castrol as described in Annexure 1 annexed hereto (hereinafter referred to as "the Castrol Products"), Castrol, at the request of the Customer, has agreed to give advance rebate of INR7,00,00,000/- (Rupees Seven Crores) (hereinafter referred to as "the advance rebate") on the terms hereinafter appearing to enable the Customer to utilize lubricants, greases and other the same towards Infrastructure related to the business of the workshop provided the Customer will give a Bank Guarantee in favour of Castrol to secure 20% of the advance rebate (hereinafter referred to as "the Bank Guarantee"). The Bank Guarantee shall be valid from the commencement date of this Agreement Le from 1"Aug 2017 till 6 months from the expiry or prior termination of this Agreement.”
He submits that so far as goods and services are concerned all payments were made by the Respondent to the appellant. He emphasized that it was not a case of corporate debt. However, we may not entertain such submission considering the fact that Learned NCLT has considered this issue and decided against the Respondent. The said portion of the order has not been assailed by the Respondent. Accordingly it would not be appropriate to entertain such argument at this stage. Mr. Wadhwa, learned senior counsel for the Respondent further submitted that agreement was itself for three years and as per terms of the agreement the target was to be achieved within three years. As per agreement the Respondent was at liberty to achieve target upto 31st July, 2020. However, to the reasons best known to the appellant the said agreement was terminated taking aid of provisions contained in Clause 6.2 of the agreement. It has been argued that there was no allegation of breach of any condition of the agreement on the part of the respondent and this was reason that the appellant while terminating the agreement consciously had invoked provisions contained in Clause 6.2 of the agreement. He by way of referring to termination letter i.e. at Page 61 i.e. Annexure 8 to the Memo of Appeal submits that the appellant while terminating the agreement has referred to Clause 6.2 of the agreement in para 3 and 4 of the termination letter for cancelling the agreement. It would be appropriate to reproduce termination letter dated 25.02.2019 as follows:
“CASTROL INDIA LTD 25th February, 2019 Cargo Motors Pvt Ltd, 1/9-B Jindal House, Asaf Ali Road, New Delhi-110002. And Office at Rajpath Club Sarkhej Gandhinagar Highway Ahmedabad 380015 Gujarat Dear Sirs,
1.As you are aware, you had entered into a "Castrol Advance Rebate Agreement" (herein after referred to as ('the said Agreement') dated 10 August 2017 with us. i.e. Castrol India Limited (CIL). The said Agreement was subsequently modified vide a letter dated 28 June 2018. Under the said Agreement (modified as stated hereinabove), you agreed to buy from CIL, a volume of 928Kilo litres of Castrol Products as set out in Annexure A to the said Agreement. We state that at your request, CIL gave you an advance rebate of Rs.7.00.00.000- as inore particularly stipulated under the said Agreement. We state that the said advance rebate is repayable in accordance with Clause 5 of the said Agreement which is reproduced hereinunder:
5.Repayment of the advance rebate by the Customer to Castrol will be based on the Targets achieved by the Customer in purchasing the Castrol Products us agreed in the Table below
Total Target achieved in The advance rebate repayable by the Customer Less than 20% Entire advance rebate 20 – 50% 60% of the advance rebate 51 – 70% 40% of the advance rebate 71 – 90% 20% of the advance rebate 91 – 99% 10% of the advance rebate 100% Nil 2.We further state that during the period August 2017 to February 2019. you placed orders upon CIL from time to time for purchase of goods, namely, lubricants and oils manufactured/marketed by CIL. Pursuant to such orders for purchase, CIL sold and delivered the ordered goods to you upon such terms and conditions as stipulated and agreed upon under the said Agreement. We state that CIL duly sold and delivered the said goods to you as per the purchase orders to your full satisfaction, thereby fulfilling its obligations with utmost diligence. We further state that the delivery of the goods was accepted by you without any demur and/or protest on any ground whatsoever.
3.Further, clause 6.2 of the said Agreement provides as under:
6.2Notwithstanding what is stated in this Agreement, either party will be entitled to terminate this Agreement before the expiry of the Agreement Period by giving 3 (three months written notice to the other Party
4.We wish to inform you that CIL hereby exercises its option to terminate the said Agreement under the said clause 6.2 thereof and please note that the Agreement shall stand terminated at the end of business hours on 26 May 2019. Please note that the consequences and/or formalities post termination shall accordingly apply post 27th May 2019. We expect and request your kind co-operation in the matter.
For Castrol India Ltd. Sd/- Rajeev Govil Vice President Workshop and OEM”
By way of referring to aforesaid termination letter learned senior counsel emphasized that there was no allegation against the Respondent herein regarding contravention or breach of any of the condition of the agreement dated 10.08.2017 and as such after terminating the agreement taking aid of Clause 6.2 of the agreement prior to completion of three years the appellant may not be allowed to take any advantage of such termination. It was further argued that there are number of communications in the Memo of Appeal itself which reflects that due to non regular supply despite repeated requests of the respondent herein for sometime the respondent herein have suffered adversely in immediately achieving the target. However, had the agreement continued for three years there was no difficulty for the Respondent to achieve the complete target.
According to learned counsel for the respondent since there was no outstanding debt against the respondent herein even after termination of agreement, the respondent did not take any step. However, immediately after noticing the creation of demand of debt by the appellant, after receipt of notice under Section 8 of the Code, the respondent responded by way of giving reply that there was no outstanding. According to him it was a clear cut case of pre-existing dispute and as such Learned NCLT has rightly accepted the objection raised by the respondent herein and rejected the petition filed under Section 9 by the appellant. There is no error in the order.
Besides hearing learned counsel for the parties we have perused the material available on record. Since nucleus of the claim of the appellant is advance agreement dated 10.08.2017 we propose to reproduce the relevant extract of the agreement which is at Page 40 to 42:-
“This Agreement is made at Ahmedabad on 10th day of August, 2017. BETWEEN CASTROL INDIA LIMITED, a Company registered under the Companies Act, 1956 and having its Registered office at Technopolis Knowledge Park, Mahakali Caves Road, Chakala, Andheri (East), Mumbai 400093 and having a regional office at Silver Utopia, Cardinal gracious road, Chakala, Andheri (East), Mumbai 400069 hereinafter referred to as "Castrol" (which expression shall unless repugnant to the context or contrary to the meaning thereof be deemed to mean and include its successors and assigns) of the ONE PART. AND
Cargo Motors Private Limited, a limited/ Private Limited Company incorporated under the Companies Act, 1956 and having its Registered office at Ahmedabad, Gujrat thereinafter referred to as the "Customer") which expression shall unless it be repugnant to the context or contrary to the meaning thereof be deemed to mean and include its successors and assigns of the OTHER PART.
HEREAS:
A.Castrol is in the business of manufacturing and marketing lubricants and other speciality products.
B.The Customer is carrying on business of vehicle service workshop in various geographical parts of Maharashtra.
C.It is agreed that subject to the Customer purchasing for use at their workshop/s (hereinafter referred to as "the workshop" speciality products manufactured and marketed by Castrol as described in Annexure 1 annexed hereto (hereinafter referred to as "the Castrol Products"), Castrol, at the request of the Customer, has agreed to give advance rebate of INR7,00,00,000/- (Rupees Seven Crores) (hereinafter referred to as "the advance rebate") on the terms hereinafter appearing to enable the Customer to utilize lubricants, greases and other the same towards Infrastructure related to the business of the workshop provided the Customer will give a Bank Guarantee in favour of Castrol to secure 20% of the advance rebate (hereinafter referred to as "the Bank Guarantee"). The Bank Guarantee shall be valid from the commencement date of this Agreement Le from 1"Aug 2017 till 6 months from the expiry or prior termination of this Agreement.
D.The Parties hereto have agreed to record the terms of their agreement in writing as hereinafter appearing
IT IS AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:
1.In consideration of the Customer agreeing to purchase for use in the workshop the Castrol Products as per the Schedule, (forming part of this Agreement) either TRA from Castrol or from a Distributor of Castrol and upon the Customer procuring or East Tower the Bank Guarantee of INR 140 lakhs, Castrol hereby agrees to give to the Plate, Prag Customer the advance rebate of INR7,00,00,000/-(Rupees Seven Crores only) to enable the Customer to utilize the same towards infrastructure related to the business of the workshop. The Bank Guarantee shall be valid from the commencement date of this Agreement Le. from 1"Aug 2017 till 6 months from the expiry or prior termination of this Agreement. The Customer shall provide to Castrol ITS latest audited P/L statement of 2 years for Castrol's Finance Department to approve and release the Advance Rebate amount.
2.This Agreement will commence from 1"Aug 2017, subject to the Customer procuring and giving to Castrol the Bank Guarantee, and will continue to be in force for a period of 3 years upto 31 July 2020. The period of this Agreement commencing from 1"Aug 2017 and ending after the expiry of 3 years is hereinafter referred to as "the Agreement Period". On Castrol giving the advance rebate to the Customer, after receiving the Bank Guarantee from the O Customer, the Customer agrees to purchase during the Agreement Period the Castrol Products in the manner stipulated in this Agreement.
3.In consideration of Castrol providing to the Customer the advance rebate for utilization towards infrastructure related to the business of the workshop as agreed in Clause 1 above, the Customer agrees and undertakes that during the Agreement Period it will use and promote the Castrol Products in the manner stipulated in this Agreement.
4.The Customer agrees:
(a)That they will utilize the advance rebate towards purchase, installation and maintenance of infrastructure related to the business of the workshop and for no other purpose.
(b)To promptly settle the invoices raised by Castrol for the purchase of Castrol products on agreed Castrol or the Distributor of terms of payments.
(c)Not to assign this Agreement to any person, firm or corporation without the prior written consent of Castrol
(d)To use infrastructure which the Customer has herein agreed to purchase and Install from the advance rebate, for the purpose relating to the use of Castrol Products including handling or dispensing the Castrol Products orfor the allied activities.
(e)To advertise and promote Castrol's goodwill, the Castrol Products, and
5 Repayment of the advance rebate by the Customer to Castrol will be based on the Targets achieved by the Customer in purchasing the Castrol Products as agreed in the Table below:-
Total Target achieved in The advance rebate repayable by the Customer Less than 20% Entire advance rebate 20 – 50% 60% of the advance rebate 51 – 70% 40% of the advance rebate 71 – 90% 20% of the advance rebate 91 – 99% 10% of the advance rebate 100% Nil 6.1In the event the Customer commits breach of any of the terms of this Agreement Castrol shall give the Customer 30 (thirty) days notice specifying the breach and requiring the Customer to remedy such breach. If the Customer fails to remedy the breach within the said period of 30 (thirty) days, Castrol shall be entitled to terminate this Agreement.
6.2Notwithstanding what is stated in this Agreement, either party will be entitled to terminate this Agreement before the expiry of the Agreement Period by giving 3 (three) months written notice to the other party.
7 The amount of the advance rebate, which will remain due and payable by the Customer to Castrol as per the Table In Clause 5 above at the time of this Agreement coming to an end, either by efflux of time or termination as herein provided, will be payable by the Customer on demand from Castrol. Without prejudice to their rights to recover the amount of the advance rebate, so due and payable by the Customer, by due process of law, Castrol will be entitled to invoke the Bank Guarantee to recover the amount of the advance rebate secured by the Bank Guarantee.
8 On Castrol being satisfied that the Customer has met the Target in purchasing the Castrol Products as agreed In Clause 5 above, and upon this Agreement having completed the Agreement Period, Castrol will issue 'No due Certificate' to the Customer. 9. If the Target in purchasing the Castrol Products as agreed in Clause 5 above is
10.If the Target in purchasing the Castrol Products as agreed in Clause 5 above is achieved prior to the expiry of the Agreement P:eriod, then also Castrol will issue ‘No due Certificate’ to the Customer.
On examination of aforesaid extract of the agreement it is clear that target was to be achieved within a period of three years from the date of agreement and as per agreement last date for achieving the target was 31.07.2020. The aforesaid agreement further entitles both the parties for termination of agreement but agreement was to be terminated under two situations as contemplated in Clause 6.1 and 6.2 hereinabove. It is admitted case of both the parties that before expiry of period of three years agreement was terminated on 25.02.2019 by the appellant. It is evident from termination letter dated 25.02.2019 which has been quoted hereinabove. Meaning thereby that there was no allegation leveled by the appellant that respondent had breached any of the conditions of agreement. Once the agreement was itself terminated only after issuance of three months notice in terms of Clause 6.2 the appellant was not entitled to make any claim as if Respondent had not achieved the target. It can be inferred that if the Respondent was allowed to continue till the final date of achieving of target i.e. 31.07.2020 there was possibility of achieving the entire target. Since in the mid it was cancelled/terminated, the appellant may not be allowed to get any advantage of such termination. However, we are not here to record any adjudication on such claim nor our observation be taken note of in any other proceeding but fact remain that such dispute cannot be adjudicated in a proceeding under the Code. However, on perusal of reply dated 08.01.2020 sent by the Respondent to the appellant to its demand notice dated 24.12.2019 it is evident that the debt amount was disputed by the Respondent. For examining the demand notice one will have to interpret the agreement i.e. Castrol advance rebate agreement dated 10.08.2017 and in view of fact of termination before three years that too without any allegation of any breach by the respondent it was difficult for the NCLT to adjudicate on the issue. Apparently there was pre-existing dispute and in such situation the Learned NCLT has rightly recorded that
“10.We find that the corporate debtor had replied to the demand notice dated 24.12.2019 issued by the corporate debtor vide reply dated 08.01.2020, wherein the corporate debtor had issued notice for dispute raising the disputes with regard to the achievement of targets and the amount due. Further, on a perusal of the correspondence between the operational creditor and the corporate debtor via email dated 14.12.2019 (14.02.2019), it is established beyond doubt that there was disagreement with regard to the disbursement of amount of rebate and the introduction of the quarterly targets imposed by the operational creditor which were not the part of the Advance Rebate Agreement or amended agreement thereto. Further the corporate debtor presents e-mails dated 19.11.2018 and 24.11.2018 which recorded the dispute with regard to delay in supply of goods by the operational creditor to the corporate debtor.”
We have also examined emails dated 14.02.2019, 19.11.2018 and 24.11.2018 and we too are of the opinion that it was a specific case of pre-existing dispute. There is no error in the impugned order warranting interference. Accordingly, the appeal stands dismissed without costs.