Concept Group, Limited Liability Company vs CNS Fashion Retail Private Limited

PER SHRI L. N. GUPTA, MEMBER (T)

The present Application is filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (for brevity, the ‘IBC, 2016’) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 by Concept Group, Limited Liability Company (for brevity, the ‘Applicant/Operational Creditor’), with a prayer to initiate the Corporate Insolvency Resolution Process against CNS Fashion Retail Private Limited (for brevity, the ‘Respondent/Corporate Debtor’).

That the Corporate Debtor namely, M/s CNS Fashion Retail Private Limited is a Company incorporated on 12.09.2016 with CIN U18104DL2016PTC309024 under the provisions of the Companies Act, 2013, having its registered Office at 252E, 2^nd Floor, Front Portion, Sant Nagar, New Delhi-110065, which is within the jurisdiction of this Adjudicating Authority.

That the Authorized Share Capital of the Corporate Debtor is Rs.2,50,00,000/- and Paid-up Share Capital is Rs.2,50,00,000/- as per the Master Data of the Corporate Debtor.

It is stated by the Applicant that on 23.08.2017, the Operational Creditor entered into a Goods Supply Contract No. 01/IN/SC (“Contract”) with the Corporate Debtor, under which the Operational Creditor agreed to supply goods to the Corporate Debtor on the terms and conditions agreed. It has been added that as per the terms and conditions of the Contract, the Applicant supplied goods to the Corporate Debtor in accordance with the specifications approved by the Corporate Debtor.

That the detailed particulars of the Operational Debt including the total amount of default and the date of default as furnished in the Part IV of the application are reproduced below for the convenience :

That from perusal of Part IV of the Application, it is observed that the Applicant has claimed an unpaid Operational Debt of Rs. 02,01,43,443.87/- and mentioned September 01, 2019 as the date of default.

It is stated by the Applicant that since the Corporate Debtor did not make the due payment of his operational debt, it had issued a Demand Notice dated 23.01.2020 under Section 8 of IBC, 2016 at the registered office of the Corporate Debtor, which was served vide Russian Post on 05.02.2020. The Tracking Report has been placed by the Applicant on record at page no. 599 of the Application. The Applicant has also annexed the reply to the Demand Notice dated 15.02.2020.

That on issuance of notice, the Corporate Debtor has filed its reply and written submissions and stated that the Operational Creditor has concealed the fact that the Respondent/Corporate Debtor is a Joint Venture Company, wherein the Operational Creditor is a 49% Shareholder and in terms of Clause 9 of the Share Purchase, Subscription and Shareholders Agreement (hereinafter, termed as SHA) dated 23.05.2017 (Annexure R-2 of the Reply), the Operational Creditor undertook to contribute a minimum amount of USD 15,00,000/- by way of contribution to the share capital of the Corporate Debtor for the purpose of carrying on the business. As against the above, it is submitted by the Corporate Debtor that the total contribution of the Operational Creditor towards working of the Corporate Debtor has only been Rs.1,36,10,550/-.

It is stated by the Corporate Debtor that it had raised dispute with the Operational Creditor regarding the goods supplied by the OC not being marketable in India vide its emails dated 31.08.2018 and 27.10.2018.

It is further stated by the Corporate Debtor that the Operational Creditor, with sheer mala fide and in order to escape its liability of making due contribution to the Corporate Debtor in terms of the SHA, has dragged the Corporate Debtor into the present insolvency proceedings. It has been added that the said fact is also admitted by the Operational Creditor vide its email dated 30.05.2019 (Annexure R- 5 of the Reply). The Corporate Debtor had asked the Operational Creditor to make contributions to the JV as per the SHA but all its efforts went in vain.

It is submitted by the Corporate Debtor that it had earlier sent an email dated 22.03.2019 to the Operational Creditor on account of non-performance of contribution obligations by the Operational Creditor (Annexure R-6 of the Reply). That the Operational Creditor has even admitted the fact vide its letter dated 21.03.2019 that it had failed in making contributions as per the SHA and offered to the other shareholder of the Corporate Debtor to purchase its shares in the Corporate Debtor (Annexure R-7 of the Reply). The aforesaid facts indicate that the Operational Creditor being a 49% shareholder of the Corporate Debtor have failed to make contributions in the efficient running of the corporate debtor and therefore, in order to avoid its liability, it has approached the Adjudicating Authority to initiate the insolvency proceedings.

The Applicant has filed its rejoinder and written submissions and stated that the argument raised by the Corporate Debtor that non-contribution to the share capital of the Corporate Debtor for the purpose of carrying its business has led to losses to the Corporate Debtor has no bearing on the admission of the present Application or initiation of CIRP. Any such statement by the Corporate Debtor is irrelevant in the context of the present application as the Corporate Debtor cannot claim any set-off.

It is stated by the Applicant that the SHA executed between the Parties and others, governs the terms of the share subscription and is completely different and unrelated to the transaction in question, which is governed as per the terms of the Supply Contract (read with Addendum). The SHA and the Supply Contract (read with Addendum) are two different contacts and are not co-related. Any purported breach of the SHA by the Operational Creditor cannot give a right to the Corporate Debtor to raise a defense/or claim immunity for breach of the Supply Contract. It is submitted that any dispute or issue arising in relation to the validity, interpretation, implementation or any alleged breach of any provision of the SHA is governed by the terms of SHA, which provides for a dispute resolution mechanism. The same cannot act as a bar against initiation of CIRP for an admitted Debt.

It is further submitted by the Applicant that provisions of Section 9 of the IBC, 2016 do not allow any set-off or counter claims, and therefore, any reliance on the terms of SHA or purported non-contribution of Operational Creditor does not come in the way of admission of the present Application. In this regard, reliance is placed on the judgment of the Hon’ble NCLAT in the case of AP Coated Drums & Barrels Pvt. La & Anr. v. Haresh Dharmani, 2019 SCC OnLine NCLAT 549, Relevant Para 8-11, wherein the Hon’ble NCLAT while dealing with a Section 9 application clearly held that “the question of set off after determining the claim or counter claim cannot be decided by the Adjudicating Authority.”

It is further submitted by the Applicant that there is no bona fide pre-existing dispute in relation to the operational debt and the allegation of the pre-existing dispute raised in the Reply is nothing but a mere sham and moonshine defense by the Corporate Debtor. That there is no pre-existing genuine dispute, which becomes clear from the following facts :

It is added by the Applicant that it is the trite law, as held by the Hon'ble Supreme Court of India in the case of Mobilox Innovations Private Limited v Kirusa Software Private Limited, (2018) 1 SCC 353, Para 51 and 56, that the Adjudicating Authority while examining the admissibility of an application under Section 9 has to examine that the contention regarding `pre-existing dispute' is not a patently feeble legal argument or an assertion of fact unsupported by evidence, as is being done in the present case. Further, mere assertion regarding existence of dispute does not give rise to a pre-existing dispute as it is important to separate the grain from the chaff and to reject a spurious defence which is a mere bluster.

It is further added by the Applicant that in Macquarie Bank Limited v. Shilpi Cable Technologies Limited, (2018) 2 SCC 674, Para 24; the Hon'ble Supreme Court has stated that an earlier letter written by the corporate debtor to the operational creditor confirming that a particular operational debt is due and payable is a sufficient piece of evidence that such debt is due and default has taken place. In the present case, the execution of the Addendum after supply of goods makes it evident that the Corporate Debtor had acknowledged its obligations to pay the Debt.

After perusing the documents/pleadings placed on record and hearing submissions of both the parties, this Bench observes that the Applicant/Operational Creditor is a 49% Shareholder in the Corporate Debtor which is a JV by virtue of the Shareholders Agreement (SHA) 27.01.2017, as evident from the admission made by both the parties.

It is further observed that though the said fact was not disclosed by the Applicant/Operational Creditor in its application, it was brought to the notice of the Bench by the Corporate Debtor in its Reply, and which was later confirmed by the Applicant in its Rejoinder.

That here it is worthwhile to refer to the contents of the Shareholders Agreement, which in the Clause 10.1.1 (e), depicts that the Applicant is having voting rights as a shareholder in the Corporate Debtor. The scanned copy of the relevant portion of the SHA is reproduced overleaf :

From the fact that the Applicant is a 49% shareholder in the Corporate Debtor by virtue of the Shareholder’s Agreement, it can be inferred that both the Operational Creditor and the Corporate Debtor are “related parties” in terms of Section 5(24)(j) of the IBC 2016, which reads as below :

Here, we refer to the Decision of this Bench passed in the matter of Zoom Communications Private Limited Vs. M/s Par Excellence Real Estate Private Limited in IB No. 616/ND/2020, dated 17.05.2022, (2022) ibclaw.in 345 NCLT, wherein the following has been observed in relation to initiation of the CIR process by the “related party”:

That the Corporate Debtor has averred that the Operational Creditor has not made contributions in terms of the Addendum to the Shareholders Agreement dated 23.05.2017, therefore, the Operational Creditor in order to escape its liability has filed the present application under Section 9 of IBC, 2016. Hence, it has been argued by the Corporate Debtor that the present Application to initiate CIR process against it has been filed with a malicious intent.

At this juncture, we refer to the email dated 31.05.2019 sent by the Operational Creditor to the Corporate Debtor (placed at Page 61-62 of the Reply), the scanned copy of which is reproduced below :

From the perusal of aforesaid e-mail, it can be observed that the Operational Creditor, on the date of writing the e-mail on 31.05.2019, was of the opinion that the Indian Joint Venture (JV) of the Operational Creditor with the Corporate Debtor was not profitable. Further, through the said e-mail, it has been suggested to engage a legal advisor to undertake the bankruptcy process of the Corporate Debtor. The e-mail dated 31.05.2019 further reads as below :

That the aforesaid communication clearly indicates that even much before the date of default of 01.09.2019 mentioned in the present application, on account of the dispute between the Operational Creditor and Corporate Debtor over transfer of shares, the Operational Creditor had made up its mind to drag the Corporate Debtor into the Insolvency process.

Per contra, the Applicant has submitted that non-transfer of shares by the Applicant has no bearing on the admission of the application as the Corporate Debtor has not claimed set off in terms of SHA.

As already observed by us in Para 21 above, both the Operational Creditor and the Corporate Debtor are related parties. However, this material fact has been concealed by the Applicant/ Operational Creditor while filing the present application. Also, from perusal of the record, we observe that there is a dispute between the parties as regards to transfer of shares as per the Shareholders Agreement.

Since the intention of the Applicant, who happens to be a related party of the Corporate Debtor, to initiate the CIR process will always raise eyebrows, and further here it is a case, where the Operational Creditor, even before the date of default, had made up its mind to initiate the Insolvency proceedings against the Corporate Debtor, the possibility of filing this Application under Section 9 of IBC with an intent to escape its liability in respect of the transfer of shares cannot be denied.

That the Corporate Debtor has also raised a defense that there is a pre-existing dispute between the parties. The Corporate Debtor has relied upon the emails dated 31.08.2018 and 27.10.2018 in order to demonstrate that there is a pre-existing dispute between the parties, the scanned copy of which are reproduced below :

Per contra, the Operational Creditor has submitted that the aforesaid dispute is moonshine in nature, since the emails do not raise any dispute regarding quality or quantity of goods but only about the use of goods in India on account of weather change. Further, these emails were sent much after the invoices raised and goods delivered to the Corporate Debtor, which were accepted by the Corporate Debtor.

In our considered view, the dispute vide emails were raised much prior to the issuance of the Demand Notice. Therefore, a plausible contention has been raised by the Corporate Debtor.

In sequel to the above, we conclude that both the Applicant/Operational Creditor and the Respondent/Corporate Debtor are “related parties” in terms of Section 5(24)(j) of the IBC 2016. Further, there is a pre-existing dispute between the parties, which requires further investigation.

In view of the discussion and reasons stated above, the present Application is Dismissed.