IMECO Limited vs BEML Limited

Bansi Lal Bhat, J

'M/s IMECO Limited' (hereinafter referred to as 'Appellant') claiming to be an 'Operational Creditor' having executed several sub-contracts for the Respondent - 'BEML Ltd.' (hereinafter referred to as 'Corporate Debtor') in respect whereof the Respondent allegedly committed default regarding outstanding amount of Rs.38,77,88,860/- is aggrieved of rejection of CP (IB) No. 130 of 2017 filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'I&B Code') in terms of impugned order passed by Adjudicating Authority (National Company Law Tribunal), Bengaluru Bench on 31st October, 2018, which has been assailed by the Appellant through the medium of instant appeal on the grounds set out in the memo of appeal to which we will advert later.

Facts of the case may briefly be noticed. The parties i.e. the Appellant and the Respondent reached an understanding to participate in tenders floated by Railways for execution of certain works and a Memorandum of Agreement (MOA) dated 18th September, 2017 came to be executed inter-se the parties by virtue whereof they decided to jointly take up the Railway contracts for supply and retro-fitment of middle berths on longitudinal side wall of coaches and cushioning of berths. In terms of the Agreement, it was the Respondent who had to participate in the tendering process and work orders were to be obtained by it from the Railways. Appellant had to execute the work for which payments in terms of the work order would be paid to it on back-to-back basis i.e. in proportion to and in relation to receipt of payment from Railways for the executed works. Appellant was not entitled to participate directly in the tendering process. However, both parties were required to work closely so that the execution of allotted work adhered to the timelines. The Agreement in question envisaged a strategic alliance inter-se the parties with liability of each party being mutually agreed between the parties prior to any commitment made by Respondent to the Railways in regard to the project under execution. The MOA contained an arbitration clause for settlement of disputes inter-se the parties in regard to the subject matter of agreement. Out of 44 contracts awarded to Appellant admittedly payments have been settled in regard to 32 contracts while payments qua remaining 12 contracts remain to be settled. It is not in dispute that the Appellant filed WP No. 162 of 2012 before the Hon'ble High Court of Calcutta wherein, inter-alia, relief in regard to payment of outstanding amounts from Respondent and Railways was sought. The Writ Petition was disposed of in terms of order dated 18th December, 2012 with direction to the South-Eastern Railways to release the funds allotted to it for payment towards fitment of longitudinal berths on the basis of claim of Respondent, in its favour, within two months with further direction to the Respondent to release such payment in favour of the Appellant within one month from the date of its receipt from South-Eastern Railways. The decision of Hon'ble High Court is stated to have been challenged in appeal by Railways and the appeal is stated to be pending disposal.

Before proceeding to appreciate the case setup by the Appellant before the Adjudicating Authority as also before this Appellate Tribunal, in the context of contractual relationship inter-se the parties, it would be appropriate to notice that there is no tripartite agreement between the Appellant, Respondent and the Indian Railways. The Ministry of Railways with a view to enhance passenger carrying capacity as also to boost Revenue introduced the scheme for provision of middle berths along the longitudinal side of coaches in trains. Zonal Railway Divisions invited tenders for supply and retro-fitment of longitudinal middle berths for certain types of coaches. Respondent associated with the Appellant to participate in the tender floated by Railways and in furtherance of same Memorandum of Agreement dated 18th September, 2007 was entered into between the parties. Being the lowest tenderer, the Respondent emerged as the successful bidder. The Railways accordingly issued Letter of Acceptance in its favour. Appellant submitted work contract proposals to Respondent for approval which issued Letter of Acceptance, in furtherance whereof Appellant executed the work for which it raised invoices upon the Respondent. It is not in dispute that in all 44 contracts were executed inter-se the parties. According to Appellant payment has been made in regard to 32 contracts but payment with respect to 12 contracts was lying outstanding. The scheme of provision of longitudinal middle berths in coaches was called off by the Railway Board on 18th February, 2009 which also directed that the payments be made to the contracting agency for the work already executed by the contractors till the issue of notification calling off the scheme, on the basis of quantification of work done. Appellant's case is that it had manufactured the material prior to suspension of scheme by Railway Authorities and this fact was certified by the Respondent. The Railway Board directed the Chief Mechanical Engineer of Railways for reconciliation and settlement of the pending bills. However, the Respondent failed to discharge its liability towards the Appellant who was constrained to file W.P. No.162 of 2012 before the Hon'ble High Court of Calcutta against the Respondent and the Ministry of Railways. The Writ Petition came to be disposed of in terms of order dated 18th October, 2012 recognising the Appellant's claim. The Appellant also claims to have obtained information from Respondent through RTI to the effect that the amount outstanding as on 31st March, 2009 amounts to Rs.43,08,96,214/- subject to reconciliation. According to Appellant, it repeatedly approached the Respondent for release of aforesaid amount but the same not having been done, demand notice under Section 8(1) of the I&B Code was issued to Respondent on 9th August, 2017. Since the demand was not complied with, Appellant filed application under Section 9 of the I&B Code before the Adjudicating Authority which came to be rejected in terms of the impugned order.

The impugned order is assailed on the ground that the work carried out by the Appellant prior to change in policy had been duly certified by the Respondent itself and the certificate clearly spelled out that the goods had been manufactured by the Appellant and were awaiting dispatch, therefore, it does not lie in the mouth of Respondent that the goods were not of standard quality and process of fitment of berths was not carried out by the Appellant. It is further submitted on behalf of Appellant that in response to the RTI Application of the Appellant, Respondent has, vide its letter dated 15th June, 2015 acknowledged the outstanding debt of Rs.43,08,96,214/- as on 31st March, 2009, which has not been paid and such default alone justified admission of application under Section 9 of the Code.

Per contra it is argued on behalf of the Respondent that the debt of the Appellant is not payable on account of the Payment Terms providing for back-to-back basis. It is further submitted that for the 12 outstanding contracts Appellant did not fit the middle berths on to the railway carriages. Moreover, Respondent has not received money from the concerned Zonal Railways, thus under Clause 9 of the LOAs, the payment terms are not triggered and the Respondent is not in default in payment of any money owed to the Appellant. It is further submitted that the Appellant had agitated the issue in the Writ Petition, which was decided on 18th October, 2012 acknowledging and confirming the back-to-back payment mechanism contracted between the parties. According to Respondent, there is a pre-existing dispute between the parties in form of the Writ Petition, decision rendered wherein stands challenged in appeal before the Division Bench. It is submitted that the information provided in reply to Appellant's RTI Application is not an admission of debt and relates to amount which has already been disbursed to Respondent for the works executed. This fact has been admitted by the Appellant in its rejoinder. According to learned counsel for Respondent, the Appellant had no locus to issue the demand notice, payments being liable to be made on back-to-back basis, no debt is recoverable as on date and there is a pre-existing dispute between the parties which justified rejection of the application under Section 9 of the I&B Code.

We have given our thoughtful consideration to the submissions made at the Bar. It has been noticed elsewhere in this judgment that there is no tripartite agreement between the Railways (Employer), the Respondent (Contractor) and the Appellant (Subcontractor). Admittedly, Respondent entered into a contract with the Southern Railway for fitment of longitudinal middle berth in Sleeper Class Coaches. Respondent also entered into a contract with the Appellant for execution of the works allotted to it by Southern Railways, which was in the form of 'Memorandum of Agreement' (MOA) executed on 18th September, 2007. It is not in dispute that the business relationship between the parties is governed by the MOA. Therefore, it is imperative to ascertain the import of provisions in MOA entitling the Appellant to payment for the works executed. The MOA is reproduced hereinbelow:-

A bare look at the MOA brings it to fore that the parties, being desirous of associating themselves to participate in the tenders being floated by Zonal Railways for the retro-fitment of longitudinal middle berth in Sleeper Class Coaches, entered into MOA assigning distinct roles to each of them. It was agreed that all tenders relating to this project will be quoted, process participated and allotments obtained by the Respondent and after it finalizes the contract with the Railways, it will place work order on the Appellant. It is clearly stipulated in MOA that the order will be executed by Respondent and the Appellant will assist it in completing the contract on time. It is further stipulated that the payments to Appellant as per the Work Order will be paid on back-to-back basis i.e. in proportion to and in relation to receipt of payment from Railways. It further emerges from MOA that the Appellant was not eligible to participate directly in the tenders floated by Railways for the aforesaid project. Relationship between the parties had to be in the nature of 'strategic alliance' with liabilities of each party based on mutually agreed terms. MOA also provided for resolution of disputes arising out of it through mutual discussion and settlement failing which such disputes were to be referred to arbitration under the Arbitration and Conciliation Act, 1996. It is abundantly clear that there is no privity of contract between the Appellant and the Railways and the Railways owes no obligation to satisfy any claim raised by the Appellant directly against the Railways. Clause 4.1 of MOA clearly stipulated that for the works executed by the Appellant in terms of Work Order placed upon it by the Respondent, the payments to Appellant as per the Work Order will be paid on back-to- back basis i.e. in proportion to and in relation to receipt of payment from Railways. The dispute relating to 12 contracts in respect whereof Appellant alleged default involved interpretation of 'back-to-back basis clause' as Respondent did not dispute the liability but pleaded that payment in relation thereto was not released by the Railways as a sequel to suspension of contract/calling off scheme by the Railway Board on 18th February, 2009 which also directed that the payments be made to the contracting agency for the work already executed by the contractors till the issue of notification calling off the scheme, on the basis of quantification of work done. As per Appellant, it had manufactured the material prior to suspension of scheme by Railway Authorities and this fact was certified by the Respondent. The Railway Board directed the Chief Mechanical Engineer of Railways for reconciliation and settlement of the pending bills. However, the Respondent appears to have failed to discharge its liability towards the Appellant who was constrained to file W.P. No.162 of 2012 before the Hon'ble High Court of Calcutta against the Respondent and the Ministry of Railways. Apart from raising the plea of not having received any money from Railways in regard to the 12 Letters of Acceptance (LOAs), Respondent pleaded that the Appellant did not fit the middle berths on to the Railway carriages thereby failing to execute the Work Orders in entirety. It is not in dispute that it was the Appellant itself which sought resolution of dispute qua the payment arising out of 12 Work Orders by filing Writ Petition No.162 of 2012 before Hon'ble High Court of Calcutta against the Respondent and the Ministry of Railways. From perusal of judgment it emerges that the Hon'ble High Court while dealing with the merits of the Writ Petition observed that it was during the progress of the work allotted that the contract was cancelled on the basis of a policy adopted by the Railway Board. The Hon'ble High Court drew the conclusion that the present Appellant acted upon the assurance given by the present Respondent (which is an instrumentality of the State) investing its fund for manufacturing longitudinal middle class berths and the work was cancelled on the basis of decision of the Railway Board without any fault or latches on the part of parties to instant appeal. It also noticed that the Railway Board had allotted funds to the tune of Rs.6 Crore for remittance of dues payable towards fitment of additional longitudinal berths. After taking the admitted position as also the facts emerging from relevant communications and documents into consideration, the Hon'ble High Court was of the view that the doctrine of 'promissory estoppel' was squarely applicable with regard to the claim of present Appellant from the present Respondent. As a sequel to this finding, the Hon'ble High Court directed the competent authority of Southern Railway to release the fund allotted to it for payment towards the fitment of longitudinal middle berths in Sleeper Class Railway Coaches on the basis of the claim of present Respondent in its favour, so far as the claim under reference was concerned, within a period of two months and the present Respondent was directed to release the above amount in favour of the present Appellant within a month from the date of receipt of same from the South-Eastern Railway. However, Appellants claim has not been satisfied as the Railways has preferred an appeal against the judgment of Writ Court.

A plethora of judicial precedents have been cited at the Bar as regards the interpretation of clause governing payment on 'back-to-back basis'. We are not inclined to deal with the same as the Writ Court has in principle recognized it and having regard to the same passed directions for release of funds against Southern Railway directing it to release funds allotted to it for payment towards the fitment of longitudinal berths in railway coaches on the basis of claim of present Respondent within two months with further direction to present Respondent to release the same in favour of present Appellant within a month from the date of receipt of same from South-eastern Railway. Having regard to the stand taken by parties before this Appellate Tribunal, we have no hesitation in holding that the Appellant having provided goods and services to the Respondent by executing the Work Order placed upon it by the Respondent for manufacturing and retro-fitment of longitudinal middle berths in sleeper class coaches in terms of MOA governing contractual relations between the parties, the Respondent owes an obligation to pay for goods and services supplied by Appellant through execution of the Work Order placed upon it thereby bringing the obligation within the fold of 'Operational Debt' and that the Appellant holds the status of an 'Operational Creditor' qua the Respondent. Having held so we are constrained to record our agreement with the finding arrived at by the Adjudicating Authority as regards existence of a pre-existing dispute inter-se the parties qua the 'Operational Debt'. It is not in dispute that it was much prior to issuance of Demand Notice under Section 8(1) by the Appellant upon the Respondent culminating in filing of application under Section 9 of the I&B Code against the Respondent (Corporate Debtor) that the Appellant approached the Hon'ble High Court of Calcutta with a Writ Petition seeking reliefs in regard to the same subject matter as against the Respondent and the Ministry of Railways as the Respondent expressed its inability to satisfy the claim and discharge the Operational Debt owed to Appellant on the ground that the Railways had put the project on hold due to change in policy and not released the funds for the works executed. It is manifestly clear that the dispute was raised by the Respondent on the basis of back-to-back clause in MOA despite release of funds by the Railway Board in favour of the concerned Railway Authorities for releasing the same for payment of fitment of longitudinal middle berths. It is noticed in the judgment of the Hon'ble High Court that the Railway Board allotted funds to the tune of Rs.6 crores in the final grant of 2010-11 for remittance of dues payable towards fitment of additional longitudinal berths in AC - 3 Tier and Sleeper Coaches. Keeping this in view and upholding the doctrine of 'promissory estoppel' invoked by the Appellant, the Writ Court directed the competent authority of the Southern Railways to release the funds in favour of present Respondent to the extent of its claim within a given time frame who was, upon receipt of the same, directed to satisfy the claim of present Appellant. It is manifestly clear that the obligation to pay on the part of Respondent - Corporate Debtor was contingent upon the release of funds by the Railways and the Railways not having released funds in favour of respondent inspite of allotment of funds by the Railway Board and directions in the Writ Petition and having embarked upon the path of further litigation by preferring appeal against the judgment of Writ Court, default in discharging the obligation of Operational Debt did not occur. Unless the debt is payable default will not occur. A debt, payment whereof is contingent upon a happening or an event as in the case of back-to-back payment clause in the contract governing relations between the parties, cannot be said to have been defaulted unless such happening or event occurs. It is in this context that the debt from which the obligation to pay arises cannot be said to be undisputed.

In so far as pre-existence of a dispute warranting rejection of application of triggering of Corporate Insolvency Resolution Process under Section 9 of the I&B Code is concerned, be it noticed that the existence of an undisputed debt is the basic edifice upon which the triggering of Corporate Insolvency Resolution Process rests. The Adjudicating Authority acts within its jurisdiction when it insists upon the Operational Creditor to satisfy it that the Operational Debt in respect whereof default is alleged, is payable in law. Admittedly, in terms of the judgment of Writ Court the debt in question is payable to Appellant only after the funds are released by the Railway Authorities in favour of the Respondent as regards its claim and it is only upon such payment being made that the Appellant is entitled to claim the debt. This is also not disputed that the Writ Court judgment has been assailed in appeal. Thus apart from the payments claimed by Appellant being based on back-to-back principle incorporated in MOA, Appellant itself having raised the dispute through the medium of Writ Petition with regard to the part of claim much prior to the issuance of demand notice and the matter being still under judicial scrutiny, no fault could be found with the finding recorded by Adjudicating Authority that there was a pre-existing dispute between the parties qua the Operational Debt or part thereof. The finding is perfectly justified in the facts and circumstances of the case and no exception can be taken to the same.

Having conspectus of the entire gamut of controversy surrounding this case, we are of the considered view that the impugned order does not suffer from any legal infirmity or factual frailty. There being no merit in this appeal, the same is dismissed. Parties are left to bear their own costs.