Kasha E. Sai vs M/s Yarn Udyog

[Per: ShreeshaMerla, Member (Technical)]

Challenge in this Appeal is to the Impugned Order dated 31/03/2023, passed in CP(IB) 316/BB/2021 passed by the National Company Law Tribunal, whereby the ‘Adjudicating Authority’ has admitted the Application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘the Code’), observing as follows:

The Learned Counsel appearing for the Appellant has strenuously contended that the ‘Adjudicating Authority’ has not taken into consideration, the disputes which arose between the Corporate Debtor and the Operational Creditor from the year 2020 onwards, with respect to the Barter Transactions between them. The Barter Arrangement was in respect of the Operational Creditor supplying the Cotton Bales, the Corporate Debtor which in turn spins the cotton into yarn and supplies it to the Operational Creditor. It is submitted that when the disputes arose, the Operational Creditor on 18/07/2020 initiated Arbitration Proceedings before the Micro and Small Enterprises Facilitation Council (MSME Council) seeking recovery of the claimed debt said to have arisen on account of default under Invoices Nos. 85, 94, 102, 111, 112, 113 issued by the Respondent.

It is submitted that the MSME Council rejected the Application vide Order dated 28/09/2021 noting that ‘Adjudication of present Claim involves determination of reciprocal rights and liabilities of Barter Trading as alleged by Respondent by examining witness and voluminous evidence. The Proceedings before the Council are summary in nature and such examination of ‘Trading Transaction’ is outside the means and scope of the Council under Act 2006’. It is submitted that the MSME Council appreciated that the transactions between the Parties was in the nature of the Barter System and would require a trial to determine outstanding liabilities and therefore dismissed the Application. During the pendency of the Proceedings before the MSME Council, the Respondent had issued a ‘Demand Notice’ under Section 8 of the Code on 05/03/2021, but had claimed that the debt was due for default under Invoices Nos. 81, 84, 85, 94, 102, 111, 112, 113, despite having admitted before the MSME Council that Invoices No. 81 and 84 have already been paid to the Corporate Debtor. It is submitted that there was no reply to the Section 8 Notice on account of the illness of the Appellant’s father, who had passed away on 02/04/2021. It is submitted by the Learned Senior Counsel that the ‘Adjudicating Authority’ has erred in concluding that there was a debt and a default without taking into consideration that the Application was barred by Section 10A as the due dates mentioned in the Application pertain to the period under Section 10A of the Code. The Operational Creditor had provided a timeline varying from 11 days to 42 days for payment under each Invoice but in the Rejoinder they had adopted a 30 days period for payment of each Invoice which is incorrect. There are glaring inconsistencies with respect to the Invoice Numbers as pointed out before the MSME Council and the Invoices mentioned in the Application.

The Learned Senior Counsel strenuously contended that the dues claimed are prior to 25/03/2020 and ‘interest’ has been calculated from that date and the date of default written in Section 9 Application is 22/02/2020 and the calculation of interest is from 01/04/2020 and therefore, is hit by Section 10A of the Code.

At the outset, this Tribunal addresses to the issue as to whether the Application is hit by Section 10A of the Code. A brief perusal of the Invoices under which the amounts are said to be in default are detailed as hereunder.

It is an admitted fact that there is a Barter Transaction between the two parties in the sense that the Operational Creditor provides the Cotton Bales and the Corporate Debtor spins it into yarn and sends back to the Operational Creditor and hence there is a running account between the two Parties. It is the case of the Appellant that Invoice Nos. 81 and 84 have been paid much prior to the issuance of the Demand Notice. Hence, Invoice Numbers 85, 94, 102, 111, 112 & 113 are being taken into consideration in the aforenoted table. For better understanding of the case, a sample Invoice that is the First Invoice dated 22/12/2019 is reproduced as herein:

From the aforenoted Invoice, it is clear that it is agreed between the Parties that interest would be charged at 24 % p.a., if payment is not received within 30 days from the Invoice date. Likewise, a bare reading of the aforenoted Invoice shows the interest component to be 24 % p.a. with a ‘default clause’ that if the amount is not paid within 30 days from the Invoice date, interest will be attracted. Therefore, the contention of the Learned Senior Counsel that the calculation ought to be based on 11 days to 42 days, is untenable. The NCLAT, Principle Bench in the matter of ‘Mr. Prashat Agarwal Vs. Vikash Parasrampuria & Anr.’ in Company Appeal (AT) (Ins) No. 690/2020 has held as follows:

From the aforenoted ratio, it is clear that the total amount for maintainability of Claim will include both ‘Principal Debt amount’ as well as the ‘Interest’ on the delayed payment which is stipulated in the Invoice dues. In the instant case, the Principal amount is said to be Rs. 1,65,60,017/- and the interest portion at 24 % as per the second Clause in Invoice No. 2 is Rs. 56,31,027/-. Therefore, this Tribunal is of the considered view that the amount has crossed the threshold of Rs. 1,00,00,000/- and also that the amounts due and payable are for a period prior to 25/03/2020. The date of default mentioned in the Section 9 Application is 22/02/2020. Therefore, it is clear that for any amounts due and payable prior to 25/03/2020, Section 10A cannot be made applicable.

The next issue raised by the Learned Counsel is with respect to a ‘pre existing dispute’ between the Parties as there was a ‘Barter Transaction’ and when the Respondent / Operational Creditor had initiated Arbitration Proceedings under the MSME Council. It is not in dispute that this Application was dismissed with an observation that such kind of trading activities requires voluminous evidences and therefore, cannot be adjudicated by the MSME Council. It is seen from the record that the MSME Council has rejected the Application and there is no Claims / Suit pending in any Court of Law before any Tribunal and there is no Arbitration Proceeding pending prior to the initiation of the Section 8 Notice. Additionally, the Appellant had stated in Para 8 of their Counter, that a payment of Rs. 40,000/- was made on 10/08/2021, 09/09/2021, 12/10/2021 & 22/03/2022 which further establishes that some amounts were paid even subsequent to the filing of the Application before the MSME Council. The Hon’ble Apex Court in the matter of ‘Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd’ reported in [(2018) 1 SCC 353] has addressed to the question of ‘pre existing dispute’ and observed as follows:

This Tribunal is of the considered view that the ratio of the aforenoted Judgment is squarely applicable to the facts of this case as this Tribunal is of the considered view that the ‘Dispute’ raised is a spurious one and is an illusory one. Additionally, it is significant to mention that before the very same ‘MSME Council’, the Appellant / Corporate Debtor in his Reply, in Paras 4 and 5 (Reply to MSME Annexure A4) has clearly admitted that the ‘reason for delay of settlement of outstanding amounts is not wanton and that Company is making all sorts of efforts to settle the outstanding dues as soon as possible’. It is also stated in Para 5 that ‘there is no intention on the part of the Company to delay or deny the actual liability towards the Petitioner Company’. Keeping in view, the clear-cut Admission of Liability, the fact that the amounts are ‘due and payable’ prior to 25/03/2020 and that there is ‘no pre-existing dispute’ as defined under the Code, this Tribunal is of the earnest view that there is no illegality or infirmity in the Order impugned, dated 31/03/2023 in C.P.(IB) No. 316/CHE/2021.

For all the aforegoing reasons, this Company Appeal (AT) (CH) (Ins) No. 187/2023, is dismissed accordingly. No Costs. Connected pending ,Interlocutory Applications’, if any, are ‘closed’.