Chetan Singhal vs M/s. Shiv Mahima Milk Products Private Limited

Per: Shri Raghu Nayyar (Technical Member)

This Application is filed under Section 9 of the Insolvency and Bankruptcy Code ('IBC'), 2016 read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by Chetan Singhal ('Applicant') claiming to be an operational creditor ('Operational Creditor') with a prayer for initiation of Corporate Insolvency Resolution Process ('CIRP') against M/s. Shiv Mahima Milk Products Pvt. Ltd. ('Corporate Debtor').

The Corporate Debtor is a Private Limited Company, incorporated under the relevant provisions of the Companies Act, 1956 on 04.04.2013, duly registered with the Registrar of Companies, Jaipur bearing CIN: U15139RJ2013PTC042011, and its Registered Office is located at, 6/403, Chitrakoot, Near SBBJ Bank, Vaishali Nagar, Jaipur, Rajasthan 302021. The Authorized share capital of the Corporate Debtor is Rs. 1,66,00,000/- and Issued, Subscribed and Paid up share capital of the Corporate Debtor is Rs. 1,65,75,000/-.

The Applicant has submitted that he has expertise in providing management consultancy services to entities which are setting up business. The Applicant further submitted that he had been providing management consultancy and support to the Corporate Debtor since 2014, during setting up of business and also management advisory during the course of business of the Corporate Debtor who executed a management services agreement with the Applicant dated 01.07.2016 (herein also referred to as 'Agreement' or 'Management Services Agreement'). It is the case of the Applicant that the Corporate Debtor has failed to pay an amount of Rs. 23,33,899/- in discharge of its liability arising out of the said Agreement.

Salient extracts of the aforesaid Management Services Agreement, which is valid for twenty years, are as follows:

The Applicant had issued a notice under Section 8 of the Insolvency and Bankruptcy Code read with Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 dated 24.05.2018 for an amount of Rs. 23,33,899/- on the Corporate Debtor, which was duly received by the Corporate Debtor. Post and tracking report as proof of service of the said Section 8 notice is annexed to the Application. Despite being in receipt, the Corporate Debtor neither replied to the Demand Notice nor raised any dispute of the unpaid operational debt. Thus, the Applicant filed the present Application under Section 9 of IBC, 2016.

The total amount claimed by the Applicant as mentioned in Part IV is a sum of Rs. 23,33,899/- as an outstanding amount which is due and payable by the Corporate Debtor as described below:

The Corporate Debtor in its reply has stated that the Agreement has been made effective from 01.07.2016 and thus any invoice in pursuance of the Management Services Agreement could be only for the period starting from 01.07.2016 and not earlier. It is contended that the Operational Creditor has claimed an amount of Rs. 11,33,899/-, being the fee for management services for the Financial Year 2016-17. The invoice is dated 15.04.2017 and has been allegedly raised as per the aforesaid Agreement. The invoice raised for F.Y. 2016-17 is contrary and bogus as no bill for the period 01.04.2016 to 30.06.2016 could have been raised by the Operational Creditor. Furthermore, there is no communication between the Operational Creditor and Corporate Debtor after November 2016 and therefore the Operational Creditor has provided management consultancy only for the period from 01.07.2016 to 10.11.2016 and thereafter no consultancy has been provided by the Operational Creditor. In view thereof the Corporate Debtor has submitted that invoices after 10.11.2016 are of no consequence and the Corporate Debtor is not liable for such invoices raised.

The Corporate Debtor has also submitted that a perusal of the invoice annexed would show that the said bill has been prepared at the time of issuance of notice under Section 8 of IBC 2016 as there is no GST number, or Service Tax number, and no service tax has been levied in the bill which is an essential requirement while issuing the invoice. It is further submitted that the Operational Creditor never raised any invoice pertaining to the alleged consultancy services prior to the issue of notice under Section 8 of IBC. Moreover, since no invoice was raised by the Operational Creditor, it has not accounted for the aforesaid invoices in F.Y. 2016-17 and 2017-18. It is also submitted that the invoice categorically states that the amount stated in the invoice becomes due on its receipt. Hence the invoices, without prejudice to the aforesaid submissions, became due for payment only when notice under Section 8 was received by the Corporate Debtor, i.e. on 29.05.2018.

The Corporate Debtor has further stated that as per the Agreement dated 01.07.2016, in case of default of payment by the Corporate Debtor for a period of 3 months, a prior notice of 15 days was mandatorily required to be sent to the Corporate Debtor, and only after the said prior notice any legal proceedings could have been initiated against the Corporate Debtor.

It is seen by this Adjudicating Authority from annexures filed by the Corporate Debtor that both the parties had also entered into an investor agreement on 01.07.2016 (herein also referred to as 'Investor Agreement'), besides Management Services Agreement whereunder the Operational Creditor had invested Rs. 25,00,000/- by purchasing 20,000 shares at price Rs. 125/- per share and had also agreed to buy 85,000 shares at a price of

M/s. Shiv Mahima Milk Products Private Limited Rs. 10/- per share from some of Corporate Debtor's existing shareholders. Salient extracts of the Investor Agreement are as follows:

M/s. Shiv Mahima Milk Products Private Limited

The Corporate Debtor has submitted that on 11.07.2017 a settlement agreement (herein also referred to as 'Discharge Agreement') was signed by the parties, whereunder it is stated that the Corporate Debtor had issued 2 cheques, both being dated 15.08.2017 for an amount of Rs. 15,00,000/- and Rs. 10,00,000/- respectively, to the Operational Creditor. It is also mentioned that after clearance of the aforesaid cheques, totalling to Rs. 25,00,000/-, the Investor Agreement dated 01.07.2016 and Management Services Agreement dated 01.07.2016 would cease to exist and the Operational Creditor would have no right to claim from the Corporate Debtor, nor could initiate any legal proceedings against the Corporate Debtor. The Corporate Debtor stated that the Applicant did not disclose the said Discharge Agreement dated 11.07.2017 in his Application. Salient extracts of the Discharge Agreement are as follows:

It is further stated by the Corporate Debtor that after the execution of the Discharge Agreement the old liability which might have arisen against the Corporate Debtor came to an end. The Corporate Debtor thus submits that the bills raised post 11.07.2017 by the Operational Creditor are not justified as there is no document available on record to show that any consultancy has been provided post the execution of the Discharge Agreement.

The Corporate Debtor has further contended that the Operational Creditor has given a legal notice to the Corporate Debtor on 25.02.2018 wherein he has asked for payment of Rs.25,00,000/- on account of alleged liability arising out of the Discharge Agreement dated 11.07.2017. It is seen that such payment was not cleared in the account of the Operational Creditor.

It is also submitted that the insolvency application filed by the Operational Creditor is a premature application as clause 4.5 of the Agreement dated 01.07.2016 provides for adjustment of Rs. 15,00,000/- in 2 instalments of Rs. 7,50,000/- each. The Corporate Debtor has stated that the Agreement dated 01.07.2016 was made effective from 01.07.2016 and therefore the adjustment of the aforesaid amount could have only been made against the bills for the period of 01.07.2016 to 10.11.2016, during which period the parties were in regular communication.

The Applicant has filed rejoinder stating therein that he had served invoices to the Corporate Debtor vide letter dated 10.04.2018, prior to the demand notice. It is stated that despite receipt of the same, the Corporate Debtor never raised any objection. It is seen that no date is mentioned in the copy of letter annexed, although the postal receipts annexed along with the letter are of 10.04.2018. However, the Corporate Debtor in its written submission has pointed out that the contention of the Applicant, that the invoices annexed with the petition were sent via letter dated 10.04.2018, is contradictory to the fact that invoice nos. SM/013 and SM/014 are dated 15.04.2018 and 15.05.2018 respectively. On examination of the letter dated 10.04.2018 and annexures appended thereto, it is seen that the Applicant/Operational Creditor had only sent invoice statement till February 2018, which is also so implied (excluding month of March) in the covering letter.

It is submitted by the Applicant that in so far as GST and Service Tax Registration is concerned, the Applicant is not liable for GST registration. It is also submitted by the Applicant that the invoices raised for financial year 2016-17 are in terms of clause 4.1 of the Management Services Agreement dated 01.07.2016. The Applicant has also submitted that any waiver of his claims and extinguishment of liability of the Corporate Debtor in terms of the Discharge Agreement was to only occur upon the clearance of the cheques as mentioned in the Discharge Agreement dated 11.07.2017 and strict compliance thereof.

It is further stated by the Applicant that the cheques handed over to the Applicant were at one instance re-issued by the Corporate Debtor and thereafter the fresh cheques were dishonoured upon presentation. Copy of cheques along with return memo are annexed with the rejoinder. It is also submitted that the Operational Creditor had initiated proceedings under Section 138 of the Negotiable Instruments Act, 1881 in relation to the aforesaid dishonoured cheques. It is stated that the Corporate Debtor never complied with its obligations in terms of the Discharge Agreement dated 11.07.2017 and therefore it cannot be said that the Management Services Agreement dated 01.07.2016 has ceased to be in force.

In response thereto the Corporate Debtor submitted that that the Applicant is trying to mislead this Tribunal by placing on record photocopy of the cheques which were originally issued along with cheque return memo giving an impression that the aforesaid cheques got bounced whereas the fact is that the Applicant requested the Corporate Debtor to replace the aforesaid cheques with new ones as the validity of the cheques had expired, which was done in January 2018. Overall, this does not have any material bearing on the case. Rather, it is indicative of the fact that a Management Services Agreement did exist and the Corporate Debtor wanted to inter-alia square-off the obligation thereunder through the Discharge Agreement.

The Applicant has also submitted that the Investor Agreement dated 01.07.2016 is of no relevance to the present proceedings since the present proceedings pertain to the operational debt due under the Management Services Agreement. The Corporate Debtor is trying to raise vague, baseless and frivolous disputes at a belated stage and the same is impermissible under the Code.

Counsel for the Applicant has relied upon the judgement given by Hon'ble NCLAT in the case of Rajeev K Aggarwal vs Panipat Texo Fabs Pvt. Ltds and Anr., Company Appeal (AT) Insolvency No. 715 of 2018, wherein the Hon'ble NCLAT has held that raising of dispute in regard of quality of goods being inferior/substandard or defective for the first time in reply to demand notice would not constitute a pre-existing dispute. The counsel for the Applicant has also referred to a judgement given by the Hon'ble National Company Law Appellate Tribunal in the case of Ahiuwalia Contracts (India) Limited vs Raheja Developers Limited, Company Appeal (AT) (Insolvency) No. 703 of 2018, dated 23.07.2019 wherein the Hon'ble NCLAT held as under:

Counsel for the Applicant has also relied upon the judgement given by the NCLT, Mumbai Bench in the case of Anil Kumar Tunk vs A Little World Private Limited, CP 2414/I&BP/NCLT/MAH/2018, wherein it was held that the Adjudicating Authority has only to see whether the said debt can be said to be disputed and that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence.

The Counsel for the Corporate Debtor has relied upon the judgement given by the Hon'ble Apex Court in Kirusa Software Pvt. Ltd. vs. Mobilox Innovations Pvt. Ltd., MANU/SC/1196/2017, wherein the Hon'ble Supreme Court held 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. The Counsel for the Corporate Debtor has also relied upon the judgement given by the Hon'ble NCLAT in the case of Value Kine Interiors Pvt. Ltd. vs. Rattan India Power Ltd., MANU/NL/0205/2017, wherein the Hon'ble NCLAT adopted the judgement given by Hon'ble Apex court in Mobilox Innovations case (supra).

Amidst such rival contentions, it is essential to examine the core of the understanding between the parties which is the crux of the matter at hand. It stems from the Management Services Agreement, the essence of which is for 0.5% of yearly revenues of the Corporate Debtor company to be paid to the Operational Creditor for twenty years. The habendum / main clauses of the aforesaid Agreement cast an obligation on the Corporate Debtor to annually pay 0.5% of the turnover of the Corporate Debtor company to the Operational Creditor mainly in lieu of management consultancy / support provided by the Operational Creditor for setting up the business of the Corporate Debtor and also management advisory in the course of business. Also, payments are to be made as per monthly revenues of the company against invoices at the end of the month of the end of each financial year. total of 0.5% of revenues are to be paid by the Corporate Debtor to the Operational Creditor after deducting for interim payments already made. The substantive clause is payment of 0.5% of the revenues and monthly invoicing is a procedural aspect of on-account monthly payments that are netted and squared-off against the amount due at the end of the year. The objection of the Corporate Debtor about payments being only due within 30 days of receipt of monthly invoices does not hold ground due to obligation of the Corporate Debtor to pay 0.5% of annual turnover of the company. Monthly invoicing seems to have fallen on the wayside, perhaps in absence of communication of monthly turnover figures of the Corporate Debtor to the Operational Creditor. Even if invoices and payments for the intervening months may not be there, the Corporate Debtor cannot detract from amount due at end of the year.

Further, the Management Services Agreement clarifies that on inception, it shall be paid on yearly basis for the first year at the end of 2016-17 and thereafter on a monthly basis with the first such payment being due on 31^st April 2017 (sic). Discount of Rs. 15,00,000/- would be adjusted in two instalments of Rs. 7,50,000/- each in the first two years of payments to be made to the Operational Creditor. Since the Agreement provides for annual remittance by the Corporate Debtor to the Operational Creditor, the aspect of monthly invoices does not inter-of Rs 7,50,000/- has been done in the invoice for the first year. Thereafter, discount of Rs 62,500/- is reflected in monthly invoices in the second year, aggregating to Rs 7,50,000/-.

There is no contra indication in above Agreement to the fact that services were predominantly provided for setting-up of the company's business and there is no pre-existing dispute or denial of the Corporate Debtor about this. Further, there is no mention of any regular / specified consultancy services from 01.07.2016. On the contrary, the reference is to management advisory during course of business, which does not entail broad specifications but seems to be in the nature of retainership for advisory support for queries, clarifications, requests, guidance, etc. if required on occasions, perhaps in regard to start-up consultancy and support already provided. This is particularly relevant as tenure of the agreement is for 20 years and the Agreement notes that there are no exceptions in the payments to be made to Mr. Chetan Singhal, which cannot be withheld, deducted, defaulted by Shiv Mahima (the Corporate Debtor) in any circumstances whatsoever during the tenure of the Agreement. For the sake of clarity, it has been stated, quality and quantity of management service cannot be made grounds for deduction of payments. Thus, the averments of the Corporate Debtor that there is no communication after 10.11.2016 does not hold ground in such context. Moreover, the Applicant / Operational Creditor stated that he is not liable for Service Tax / GST registration and arguments of the Corporate Debtor in this regard do not absolve the Corporate Debtor of liability.

It is also seen by this Adjudicating Authority that the avowed Investor Agreement dated 01.07.2016 never really came into force fully and seems to have been partly fulfilled only to the extent of investment of Rs. 25,00,000/- in the equity capital of the company by the Applicant / Operational Creditor for 20,000 shares at Rs. 125 per share of Rs. 10 each (i.e. Rs. 115 premium, which is corroborated by the Balance Sheet of Financial Year 2016-17 on the record of the case).

The Corporate Debtor further stated that the Discharge Agreement dated 11.07.2017 would show that the Operational Creditor undertook to transfer 105000 equity shares of Rs. 10 each in favour of any person designated by Mr. Bharat Mittal. It was submitted that as on 11.07.2017 Mr. Chetan Singhal held only 20000 equity shares and he undertook to get the balance transferred from the respective shareholders in favour of the person so designated by Mr. Bharat Mittal but he could not get the remaining 85000 shares transferred. The Investor Agreement entailed that transfer of 85,000 shares to the Applicant / Operational Creditor would be facilitated by the lead promotor, Sh. Bharat Mittal, and he would be responsible to offer the same from his shareholding if not so done / provided. It is not clear from the submissions / pleadings. whether the said transfer actually / formally took place or not, initially or subsequently, because re-transfer of the said shares is envisaged by the Discharge Agreement dated 11.07.2017. It is seen from the tabulation in the Investor Agreement of 01.07.2016 that the relevant shareholding upon the signing thereof and as stated in the Annual Report for the Financial Year 2017-18 as on 31.03.2018 (i.e. after Discharge Agreement of 11.07.2017) is the same and unchanged, except for 30 shares out of shareholding of Sh. Bharat Mittal being held by three persons who have advanced unsecured loans to the company and the additional shares allotted to M/s Jindal Ispat Industries, as per the Annual Report for 2017-18. If Sh. Bharat Mittal had facilitated transfer of relevant shares initially, then they were indeed retransferred back. If initial transfer had not been facilitated, then these shares never changed ownership practically. Thus, the averment of the Corporate Debtor that the Applicant / Operational Creditor did not (re)transfer 85,000 shares is bland and opaque. Perhaps, the Applicant / Operational Creditor was a temporary custodian, or formal transfer of the said shares to / in his name had not taken place, and allusion for transfer of the same in the Discharge Agreement is reflective of a cautionary clause rather than any formal obligation. It is also seen that Discharge Agreement is defectively executed on a non-judicial stamp paper of Rs. 70/- for affidavit.

Be that as it may, the Discharge Agreement, that, amongst other clauses, envisaged annulment of the Management Services Agreement, did not bear fruit, as the raison d'etre of the same was for due payment of sum of Rs. 25,00,000/- by the Corporate Debtor, which was not realized in the account of the Applicant / Operational Creditor. Non-disclosure of the same in the application of the Operational Creditor is not material or fatal. Also, the Investor Agreement never seems to have fructified as it inter-alia envisaged the Operational Creditor or his nominee to be appointed as a director of the company. There is no indication of the same in 2016-17 and 2017-18. Even increase of equity capital in 2017-18 could not have been without approval of the Operational Creditor. Moreover, there are various other clauses in the Investor Agreement which imply that the Applicant / Operational Creditor was to play critical role in the affairs of the company, which was to be reflected by changes in the Articles of Association through amendments therein to align with the Investor Agreement. There is no whiff of any such changes.

The Corporate Debtor has stated that Applicant / Operational Creditor was under legal obligation to invest an amount of Rs. 60 lakhs in the company by subscribing to the share capital of the company. Further the Operational Creditor was to provide unsecured loan of Rs. 40 lakhs to the existing shareholders of the company. However, the Investor Agreement does not reflect the same as a compulsion. It rather pitches this as an option instead of an obligation. In any case, the Investor Agreement, which did not really come into effect, is distinct from the Management Services Agreement that gave rise to the operational debt.

The Corporate Debtor's contention that the Operational Creditor could have initiated insolvency proceedings only in the event of continuous default in payment for 3 months, and absence of cure thereof within 15 days after notice in such regard, does not hold ground in context of Section 238 of IBC. The clauses of the Agreement cannot override the provisions of IBC, which is centred on resolution rather than recovery.

On perusal of the facts and circumstances and documents placed on records it is clear that the Corporate Debtor has not complied with its obligations in terms of the Discharge Agreement dated 11.07.2017 and the cheques issued have been dishonoured. Therefore, it cannot be said that the Management Services Agreement dated 01.07.2016 has ceased to be in force. It is also on record that the Applicant had sent the invoices to the Corporate Debtor prior to the issuance of the demand notice, but the Corporate Debtor had not raised any objection at that point of time. Further, the Corporate Debtor did not send any reply to the demand notice. The aspect of billing for the period 01.04.2016 to 30.06.2016 was not objected earlier. Irrespectively, the due amount is above the applicable threshold of IBC. It is for the first time, after filing of the case, that the Corporate Debtor has raised a dispute. In this regard, reliance is placed by this Adjudicating Authority on the judgement of Raheja Developers Limited (supra), wherein the Hon'ble NCLAT held as under:

In view of the foregoing, the claim stands established and there is a clear default in payment of the amount due to the Applicant. Hence, this Tribunal is inclined to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor as envisaged under the provisions of IBC, 2016.

This Tribunal perused all the relevant papers and found them to be in order. The Registered Office of the Corporate Debtor is situated in Jaipur and therefore this Adjudicating Authority has jurisdiction to entertain and try this Application. The matter is also within the purview of Law of Limitation.

The Applicant has not proposed the name of any Interim Resolution Professional ('IRP'). In view of the same, this Tribunal appoints Mr. Hari Babu Sharma, having Registration No. IBBI/IPA-002/IP-N00767/2019-2020/12477 and email id [email protected] (contact number 9909913901), as the IRP of the Corporate Debtor. The IRP is directed to take all such steps as are required under the statute, inter-alia in terms of Sections 15, 17, 18, 19, 20 and 21 of the IBC, 2016.

The consequences of initiation of CIRP shall be inter alia are as follows: -

In the circumstances this Application, i.e. CP No. (IB) 42/9/JPR/2018, is admitted.