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Judgment
The present Petition was filed by ‘M/s. COSR VENTURES’ (hereinafter referred as ‘Operational Creditor/Petitioner’) under Section 9 of ‘The Insolvency and Bankruptcy Code, 2016’ (hereinafter referred as ‘IBC’) against ‘M/s. Lumiford Private Limited’ (hereinafter referred as ‘Corporate Debtor/Respondent’). It was alleged that the Corporate Debtor defaulted an Operational Debt to be payable towards the Operational Creditor and that the Corporate Debtor may be put into Corporate Insolvency Resolution Process (hereinafter referred as CIRP). The details of the alleged Operational Debt are as follows: Principal Amount – Rs.2,11,57,192/-Interest – Rs.55,30,506/- (Calculated @24% from 01.04.2022 to 16.06.2023) Total – Rs.2,66,87,698/-Date of Default – 06.05.2022
Facts as narrated on behalf of Operational Creditor
It was submitted that the Operational Creditor is a Partnership Firm registered on the file of Registrar of Firms, Ranga Reddy District and is engaged in the marketing of Electronic Products in the state of Telangana and is also registered as MSME. That the Corporate Debtor is a Company registered on 22.03.2017 registered on the file of Registrar of Companies (RoC), Telangana vide CIN No. U32309TG2017PTC146294 and is engaged in the business of manufacture and trading of video and audio lifestyle products.
It was submitted that the Operational Creditor was appointed as ‘Carrying and Forwarding Agent’ (C&F Agent) for the sale of products of the Corporate Debtor by way of a C & F Agent Agreement dated 10.01.2020. As per the terms of this Agreement, 50% of the costs incurred by the Operational Creditor in lieu of ware house rent and salaries, courier, electricity charges, loading and unloading and all other incidental expenses in relation to the Facilities and Resources provided under the C&F Agreement will be reimbursed by the Corporate Debtor to the Operational Creditor within 10 days of raising a proper invoice. It was further submitted that the Operational Creditor deposited Rs.1,00,00,000/- (Rupees One Crore Only) as a security deposit towards holding the stock of the Corporate Debtor at the warehouse of the Operational Creditor.
Subsequent to this C & F Agreement, a Memorandum of Understanding dated 21.05.2021 (MOU) was entered into between the Operational Creditor and Corporate Debtor. That through this MOU, the Operational Creditor was appointed as the Exclusive Online Distributor for the sale of LED, Audio and Mobile Accessories of the Corporate Debtor to be sold through the online platform Appario Retail Private Limited and Flipkart. It was submitted that as per this MOU, the Operational Creditor will remit an advance of Rs.3 crores and in return the Corporate Debtor will arrange for SKUs (the products which are to be sold) to the Exclusive Online Distributor (the Operational Creditor herein) equivalent to these 3 crores advance. It was submitted that this MOU is an upgradation of the earlier C&F Agreement dated 10.01.2020.
It was submitted that on 15.03.2022, the Corporate Debtor and the Operational Creditor entered into a Termination Agreement under which the MOU was terminated by both the parties. It was submitted that as per the calculations arrived at in this Termination Agreement dated 15.03.2022, the C&F ledger balance (the amounts of Operational Creditor lying with the Corporate Debtor) stood at Rs.1,07,50,967 which also includes the C&F Security Deposit of Rs.1 crore initially deposited by the Operational Creditor with the Corporate Debtor and other receivables to the Operational Creditor. It was submitted that earlier the Operational Creditor also deposited an amount of Rs.1,85,00,000/- on different dates with the Corporate Debtor. That as per these calculations, Rs.2,95,50,967/- became the total upfront deposit made by the Operational Creditor against an amount of Rs.3,00,00,000/- to be made under the MOU dated 21.05.2021 to appoint the Operational Creditor as the Nationwide Exclusive Online Distributor.
It was further submitted that in this Termination Agreement, it was recorded that a stock of value Rs.1,76,95,869/- was held at the godown of the Operational Creditor and that this stock was handed over to the Corporate Debtor on 25.03.2022. That an amount of Rs.34,61,323/-was mentioned as the ledger balance amount under C&F Agreement held by the Corporate Debtor. It was submitted that, the Corporate Debtor promised to pay these amounts of Rs. 1,76,95,869/- and Rs.34,61,323/- (total amounting to Rs.2,11,57,192/-) to the Operational Creditor within 45 days from the date of handing over the unsold stock to the Corporate Debtor.
It was submitted that accordingly, PO and Invoices were exchanged between both the parties and the entire C&F Stock was billed back vide Invoice No.SI/COSR/5702 dated 21.03.2022.
It was submitted that on 16.08.2022, the Operational Creditor and the Corporate Debtor entered into an agreement wherein the Operational Creditor was appointed as the Exclusive Online Distributor of the Corporate Debtor for the sale of products of the Corporate Debtor through online platforms Appario Retail Private Limited and Flipkart. It was submitted that under this agreement, the Corporate Debtor consented to adjust an amount of Rs.1 crore in the form of stock which the Corporate Debtor owes to the Operational Creditor under the earlier agreement dated 15.03.2022.
It was submitted that the Corporate Debtor failed to pay the debt owed to the Operational Creditor as per the Termination Agreement dated 15.03.2022 and that the same became defaulted on 10.05.2022 (being 45th day from the date of Invoice No.SI/COSR/5702). It was submitted that as per the Agreement dated 15.03.2022, the total amount due to be paid by Corporate Debtor is Rs. 2,66,87,698/-(Rs.2,11,57,192/- being the Principal Amount and an interest amounting to Rs.55,30,506/- calculated @24% with effect from 01.04.2022 to 16.06.2023).
It was submitted that the Operational Creditor issued a Demand Notice dated 19.06.2023 in both Form 3 and Form 4 to the Corporate Debtor demanding the payment of the dues of Rs.2,66,87,698/-. That the Corporate Debtor issued a Reply dated 03.07.2023 to this Demand Notice.
Case of the Corporate Debtor
The Corporate Debtor, denying the averments of the Operational Creditor, submitted that the claim amount of the Operational Creditor is not in the nature of an Operational Debt. It was submitted that the security deposit made by the Operational Creditor under the C & F Agreement dated 10.01.2020 is a Financial Debt and not an Operational Debt.
It was submitted that there is a pre-existing dispute between the Operational Creditor and Corporate Debtor prior to the issuance of the Demand Notice. It was submitted that an agreement dated 16.08.2022 was entered into between the Operational Creditor and the Corporate Debtor in respect of settlement of monetary dues.
That as per the ruling of the Hon’ble Supreme Court in Mobilox Innovations Private Limited vs Kirusa Software Private Limited, 2018 (1) SCC 353, the pre-existing dispute also includes the dispute pertaining to the monetary amount of claim.
It was submitted that after terminating the MOU dated 21.05.2021 because of non-adherence of the terms therein, the parties entered into an Agreement dated 16.08.2022 whereby the Operational Creditor was appointed as Exclusive Online Distributor to purchase and distribute the products on Online Platform through platform Appario Retail Private Limited and Flipkart as per the terms and conditions therein. It was further submitted that in this agreement, an adjustment was arrived at between the parties in respect of the dues payable. Relying on Clause 2.1 of this agreement dated 16.08.2022, it was submitted that there was already an agreement between the Operational Creditor and the Corporate Debtor to settle the disputes with respect to the monetary dues and that the same amounts to a pre-existing dispute between the parties.
It was submitted that as per Clause 7 of this Agreement dated 16.08.2022, the parties mutually agreed to adjust the amounts due from the Corporate Debtor under the earlier transactions and that this adjustment was to be in the form of stock. It was submitted that as per this Clause 7, the balance amount as reflected in the Termination Agreement dated 15.03.2022 is to be paid by the Corporate Debtor to the Operational Creditor within one month from the date of execution of the Agreement dated 16.08.2022.
It was submitted that it was agreed in the Agreement dated 16.08.2022 to refer the disputes between the Operational Creditor and the Corporate Debtor to be referred to Arbitration. But that a Demand Notice in Form 3 and Form 4 dated 19.06.2023 was issued by the Operational Creditor to the Corporate Debtor demanding payment of unpaid Operational Debt. That on 03.07.2023, a reply to the said Demand Notice was sent by the Corporate Debtor holding the Operational Creditor liable for the losses caused to the Corporate Debtor on account of deficient services provided by the Operational Creditor.
It was submitted that there are pre-existing disputes between the Operational Creditor and the Corporate Debtor. That an email dated 01.02.2021 was sent by the Corporate Debtor to the Operational Creditor requesting the Operational Creditor to dispatch the inventory lying in the warehouse of the Operational Creditor, but that the Operational Creditor did not respond.
It was submitted that as per the Termination Agreement dated 15.03.2022, the Operational Creditor was to bill back the entire stock to the Corporate Debtor which was held in the warehouse of the Operational Creditor. That the unsold products sent back by the Operational Creditor vide Invoice No. S1/COSR/5702 dated 21.03.2022 were in a deplorable state and that the same is the case in respect of other products which the Operational Creditor undertook to sell. It was submitted that this issue was brought to the notice of the Operational Creditor and that an assurance was given by the Operational Creditor to the Corporate Debtor that the same will be compensated, but that there was no action taken by the Operational Creditor in this regard. It was submitted that the Corporate Debtor, in a meeting with the Operational Creditor asked for the appointment of an arbitrator to resolve the issues, but that the Operational Creditor chose to initiate the present proceedings under IBC.
The Corporate Debtor, also filed an additional counter reiterating the contents of the Counter.
Rejoinder on behalf of the Operational Creditor
It was submitted that the deposit of Rs. 1 crore made by the Operational Creditor do not carry any interest as per the C & F Agent Agreement and that the claim made by the Operational Creditor in the present Petition for an amount of Rs.2.85 crores is inclusive of this one crore rupees. It was submitted that this amount cannot be said to be as a financial debt. It was submitted that this Tribunal admitted the Corporate Debtor herein into CIRP under Section 9 of IBC by an order dated 05.01.2023 in a Petition filed by M/s. Kabamy India LLP. That the facts and circumstances of the said case are covered in the present case.
It was submitted that there is no pre-existing dispute between the Operational Creditor and the Corporate Debtor. It was also submitted that the stock that was billed back by the Corporate Debtor was in good stock and that the Corporate Debtor sold this stock and appropriated the amounts obtained therefrom. It was submitted that the Corporate Debtor never raised any dispute regarding the quality of goods and products which were billed back to the Corporate Debtor. It was submitted that as per Clause 7 of the Agreement dated 16.08.2022, the Corporate Debtor did not pay an amount as agreed.
The Operational Creditor and the Corporate Debtor filed the written submissions and relied on various rulings of different judicial forums. In the light of the contest put forth as above by both the parties, the points that emerge for the consideration of this Tribunal are:
I. Whether an ‘Operational Debt’ of a sum exceeding rupees one crore, due and payable by the Corporate Debor to the Operational Creditor exists? If so, whether the Corporate Debor has defaulted its repayment?
II. Whether there is a pre-existing dispute between the Operational Creditor and the Corporate Debtor relating to termination agreement dated 15.03.2022 prior to the issuance of Demand Notice dated 19.06.2023?
We have heard Mr. Chandra Sen Reddy, Ld. Senior Counsel on behalf of Ms. Harshita Datla, Ld. Counsel for the Operational Creditor and Mr. Jayant K. Sud, Ld. Senior Counsel on behalf of Ms. Priyanka Das, Ld. Counsel for the Corporate Detor, perused the record and the submissions.
POINT I
Whether an ‘Operational Debt’ of a sum exceeding rupees one crore, due and payable by the Corporate Debor to the Operational Creditor exists? If so, whether the Corporate Debor has defaulted its repayment?
The Submissions:
Mr. Chandrasen Reddy, Learned Senior Counsel for operational creditor submits that the, the petitioner/Operational Creditor was appointed as ‘Carrying and Forwarding Agent’ (C&F Agent) for the sale of products of the respondent/ Corporate Debtor by way of a ‘C & F Agent Agreement’ dated 10.12.2020 (First Agreement) and the Operational Creditor deposited Rs.1,00,00,000/- (Rupees One Crore Only) as a security deposit towards holding the stock of the Corporate Debtor at the warehouse of the Operational Creditor. Learned Sr Counsel further submitted that subsequent to this C & F Agreement, a Memorandum of Understanding dated 21.05.2021, appointing operational creditor as ‘Exclusive Online Distributor’ (Second Agreement) was entered into between the Operational Creditor and Corporate Debtor. According to the Ld. Sr. Counsel, as per this MOU, the Operational Creditor will remit an advance of Rs.3 crores and in return the Corporate Debtor will arrange for the products which are to be sold equivalent to these Rs 3.00 crores advance. Learned Counsel further submitted that yet another agreement was signed by both the parties on 15.03.2022 as ‘Termination Agreement’ (Third Agreement) for the MOU dated 21.05.2021 and as per the calculations arrived at in this Termination Agreement dated 15.03.2022, the C&F ledger balance stood at Rs.1,07,50,967 which also includes the C&F Security Deposit of Rs.1 crore initially deposited by the Operational Creditor with the Corporate Debtor and other receivables to the Operational Creditor. Learned Counsel further submits that, the Operational Creditor also deposited an amount of Rs.1,85,00,000/- on different dates with the Corporate Debtor and thus as per calculations in all an amount of Rs. 2,95,50,967/- became the total ‘upfront deposit’ made by the Operational Creditor against an amount of Rs.3,00,00,000/- to be made under the MOU dated 21.05.2021.
Learned Sr. Counsel further submitted that in the Termination Agreement, supra, it was recorded that the stock valuing Rs.1,76,95,869/- lying at the go down of the Operational Creditor and the Operational creditor has handed over this stock to the Corporate Debtor on 25.03.2022, but Corporate Debtor failed to pay the amount of Rs. Rs.1,76,95,869/- beside the sum of Rs.34,61,323/- in all Rs.2,11,57,192/- . Ld. Sr. Counsel contends that as per agreement this amount should be paid within 45 days from the date of handing over the unsold stock to the Corporate Debtor, i.e. by 10.05.2022. Ld. Sr Counsel would further contend that on 16.08.2022, one more agreement was signed between Operational Creditor and the Corporate Debtor appointing the Operational Creditor as ‘Exclusive Online Distributor of the Corporate Debtor for the sale of products of the Corporate Debtor through online platforms Appario Retail Private Limited and Flipkart’ (Fourth Agreement). Learned Sr. Counsel submitted that under this agreement, the Corporate Debtor consented to adjust an amount of Rs.1 crore in the form of stock which the Corporate Debtor owes to the Operational Creditor under the earlier agreement dated 15.03.2022. Ld Sr. Counsel, thus would contend that as per the Termination Agreement dated 15.03.2022 (Third Agreement), the total amount due to be paid by Corporate Debtor is Rs. 2,66,87,698/-(Rs.2,11,57,192/- being the Principal Amount and an interest amounting to Rs.55,30,506/- calculated @24% with effect from 01.04.2022 to 16.06.2023) and as the said amount was not paid, the Operational Creditor had issued a Demand Notice dated 19.06.2023 in both Form 3 and Form 4, to the Corporate Debtor demanding the payment of Rs.2,66,87,698/- being the outstanding due. The Corporate Debtor, though got issued a Reply dated 03.07.2023 to this Demand Notice , did not pay the amount due, hence this petition.
On the contention of the corporate debtor that, the amount claimed by the Operational Creditor is not an ‘Operational Debt’ and at the most it may be treated only as a ‘Financial Debt’, Ld. Sr. Counsel submits that the Corporate Debtor never approached the Operational Creditor for any kind of financial assistance and hence, the question of the outstanding due becoming a ‘Financial Debt’ does not arise. According to the Ld. Sr. Counsel, the relationship between the Petitioner/Operational Creditor and the Respondent/Corporate Debtor was clearly mentioned in Clause 9.3 of the C & F Agreement dated 10.12.2020, which is as below:
“9.3Relationship of the Parties: This Agreement is non-exclusive. The relationship between the parties shall be that of seller and buyer and not that of principal and agent ………………….”
In support of the above submission, Ld. Sr. Counsel placed reliance on Paras 39 to 46 of the ruling in Consolidated Construction Consortium Limited vs Hitro Energy Solution Private Limited, 2022 7 SCC 164, where in it was held that:
“39.In Swiss Ribbons (P) Ltd. V. Union of India [Swiss Ribbons (P) Ltd. V. Union of India, (2019) 4 SCC 17] (“Swiss Ribbons”), the constitutionality of certain provisions of the IBC was challenged, with the focus being on the difference of rights provided to the financial and operational creditors. After observing the difference in the methods through which financial creditors and operational creditors trigger a proceeding under the IBC, the two-Judge Bench of the Court noted that there was an intelligible differentia between financial and operational creditors. The Court held : (SCC pp. 68-69 & 83-84, paras 50-51 & 75)
“50.According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set-up or working of business. Also, financial creditors have specified repayment schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable.
51.Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor’s business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code.
75.Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear. (emphasis supplied)
Ld. Sr. Counsel also relied on the following rulings, in support of his afore mentioned submission.
Ashimara HousingPrivate Limited vs Vibrus Homes Private Limited, 2021 SCC Online NCLT 29041:
“16.At this juncture, we would like to refer to the decision of the Hon’ble NCLAT in the matter of “Joseph Jayananda v. Navalmar (UK) Limited (2021 SCC OnLine NCLAT 116) on the point of advance payment upon which the applicant has placed reliance. The relevant portion of the decision is reproduced below: —
“1.4In the instant case, the monies advanced by the R-1 to the Corporate Debtor were advance payment for work to be done in the future. Admittedly, the work was to be done in terms of the General Agency Agreement between the parties. The Corporate Debtor referred to these amounts as advanced payment in its audited accounts and the objection filed by it before the NCLT. It even claimed that the said amount was “adjusted towards various cost and expenses incurred by the Corporate Debtor Company in the course of business, without raising any doubt about the nature of the Debt. Hence the amounts referred to as above cannot be treated as anything but Operational Debt under the Code. Further, in case of Pioneer (supra) Hon’ble Supreme Court has clearly held that in Operational Debt there is no consideration for the time value of money. The consideration of the Debt is the goods or services that are either sold or availed of from the Operational Creditor. Payments made in advance for goods and services are not made to fund the manufacture of such goods or the provision of such services. The advance payment being made for turnkey projects and capital goods, where customization and uniqueness of such goods are important bu reason of which advance payments are made. The liability or obligation in respect of a claim which is due from any person is defined as Debt under Section 3(11) of the Code. It provides that the Debt includes Financial Debt and Operational Debt. Further, the term ‘Financial Creditor’ and Financial Debt’ is defined under Section 5(7) & 5(8) of the Code. Section 5(20) defines the term ‘Operational Creditor’ as a person to whom an Operational Debt is owed and includes any person who has been legally assigned or transferred. Section 5(21) defines ‘Operational Debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of payment of dues arising under any law for the time being in force and payable to the central government, any state government or any local authority.
27.5… Since the Corporate Debtor was an agent and service provider of the Operational Creditor, the amounts due under the transactions would fall within the ambit of Operational Debt as defined under Section 5(21) of the Insolvency and Bankruptcy Code 2016.”
Mobilox Innovations Private Limited vs Kirusa Software Private Limited, 2018 1 SCC 353:
“5.2.1.Who can trigger CIRP? Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease. The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.”
As regards the ruling in, Sach Marketing Private Limited vs RP of Mount Shivalik Industries, 2021 SCC NCLAT 266, relied on by the Corporate Debtor, Ld. Sr. Counsel submits that, the same is not applicable to the facts of the present case, as there was a payment of interest for some time hence it fell under the definition of Section 5(7) of IBC, whereas in the case on hand the Corporate Debtor never paid any amount towards interest and hence reliance cannot be placed on Sach Marketing Private Limited (supra).
According to the Ld. Sr. Counsel, the Corporate Debtor was put under CIRP in a Petition filed by M/s. Kabamy India LLP under Section 9 of IBC and the same was confirmed by the Hon’ble NCLAT. However, subsequently, the Corporate Debtor compromised with the Operational Creditor therein and thus, came was out of the clutches of CIRP. Ld. Sr. Counsel states that the facts and circumstances in the said case are similar to that of the present case on hand.
Mr. Jayant K. Sud, the Ld. Senior Counsel for respondent would submit that as per second agreement, the Operational creditor was required to pay Rs3.00 crores to corporate debtor and accordingly corporate debtor planned and placed orders for procurement of products but operational creditor paid only Rs 1.85 crores and accordingly corporate debtor supplied products worth Rs 2.80 crores to the operational creditor. Thus, corporate debtor suffered huge losses as the payment of Rs. 3.00 crores were not paid upfront by the operational creditor.
It was further submitted by the Ld. Sr. Counsel, that the claim of the Operational Creditor does not fall under the definition of an ‘Operational Debt’ and the same is utmost a ‘debt simpliciter’ in support of this plea, Ld. Sr. Counsel relied on the ruling in Mr. Maulik Kirtibhai Shah vs United Telecoms Ltd, Company Appeal (AT) (CH) (Ins) No. 268/2023 dated 15.09.2023,where in Hon’ble NCLAT, Chennai Bench held that:
“this Tribunal is of the earnest view that the claims arising under the MOU lost the character of Operational Debt and became a debt simpliciter. In respect of in the definition of Operational Debt cannot be interpreted widely so as to include any agreement between the parties which does not specifically pertain to the supply of goods or services. A wide interpretation would only defeat the scope and objective of the code. Keeping in view, the spirit of the Code, this Tribunal is of the considered view that at best, the claims are contractual claims for which appropriate Civil Proceedings may lie.”
Reliance was also placed on the ruling in Sach Marketing Private Limited (supra), and contended that the ‘security deposit’ of Rs. 1 crore made by the Operational Creditor cannot be treated as an Operational Debt.
Our analysis & findings
Since it is the case of the Petitioner that, on account of breach/contravention of payment terms by the corporate debtor as set out in various conditions of termination agreement dated 15.03.2022 and the Agreement dated 16.08.2022 , has resulted in coming into existence an ‘Operational Debt; exceeding the sum over rupees one crore, we wish first examine the said contention on the bais of the relevant contractual clauses, which are as below.
Condition Numbers 1- 6 of the Termination agreement dated 15.03.2022
1.“The Party to the 1st Part conducted the audit dated 16/02/2022 the value of the unsold stock Rs 1,76,95,869 shall be paid to the Party to the 2nd part within 45 days from the date of handing over the unsold stock to the Party to the 1st part by the party to the 2nd part.
2.The Party to the 1st part shall pay the ledger balance amount of Rs 34,61,323/- to the Party to the 2nd part ON or before 31/03/2022.
3.The Party to the 1st Part shall be represented by its Chief Executive Officer, Mr. Abhijit Bhattacharjee who has entered into agreements with the Party to the 2nd Part till date. The board resolution shall be enclosed with this MOU.
4.The Party of 2nd Part is holding stock of CNF which was earlier transferred by Party of 1st Part on Stock Transfer note under the arrangement vide CNF Agreement dated 10/12/2020. The Party of 2nd Part will arrange to move the said stock immediately at the time of signing of this MOU.
5.That the party of the 1st Part shell raise purchase order LF/PO/21-22/005 Dated 21 March 22 for purchase of unsold stock of LUMIFORD and Party to the 2nd part shall raise invoice S1/COSR/5702 Dated 21 March22 on party to the 1st part for total unsold stock which are in good condition.
6.That the party to the 1st part shall issue a receipt duly signed by the authorized signatory with company seal for the stock taken from the warehouse of the party to the Second part, the Party to the First part shall pay the invoice amount within 45 days from the date of receipt of the stock.”
Para 7 of the Agreement dated 12.08.2022;
“7.The party to the first part owes an amount to the party to the second part as per the MOU dated 15/3/2022 executed by both the parties. As per the MOU dated 15/03/2022 the party to the First part has consented to adjust the part of due amount i.e. Rs 1,00,00,000/- (Rupees One Crore) in the form of stock as and when Party to the First part raises invoices on the Party to the Second based on the purchase order received by the party to the second party from the APPARIO retail private limited and Flipkart. The party to the First part shall adjust the invoice amount raised on the party to the Second part through credit notes to tally the ledger account. The balance amount plus interest as per the MOU dated 15/03/2022 shall be paid by the party to the First part to the party to the Second part within one month from the date of execution of this in the form of cheque/Demand Draft/Electronic Money Transfer/whatever mode through bank money transfer.”
A perusal of Tax invoice dated 21.03.2022 and the e-way bill dated 26.03.2022 issued by operational creditor clearly shows that the operational creditor has returned the goods worth Rs 1,76,95,869 to the corporate debtor in terms of the Termination agreement, supra, but corporate debtor did not issue receipt for the said goods and also did not make payment within 45 days from the date of return of goods as stipulated in the said termination agreement. We also have carefully perused the reply dated 03.07.2023 given by corporate debtor to the demand notice raised by operational creditor on 19.06.2023 and find that corporate debtor has accepted the return of goods worth Rs 1.76 crores and the only objection raised by corporate debtor was that the goods were ‘returned’ by the operational creditor after holding them in a haphazard condition and as such the products were not in a condition to sale. This plea, in our considered view is un acceptable as the corporate debtor admitted that it got conducted audit of the goods and after that only the Termination agreement and the Agreement dated 12.08.2022 were signed wherein no such objection has been raised. Therefore, we hold that, the defence as put forth by the respondent/corporate debtor is a feeble and ingenuine, consequently, we hereby hold that there exists a debt of the sum exceeding rupees one crore.
In so far as the plea of the respondent that at the most the amount due can be treated only as a ‘financial debt’ but not as an ‘operational debt, we wish to state that, financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. On the touch stone of all these attributes, it is very clear that the transactions under question and the default made therein qualify to be an operational debt and not a financial debt as contended by the respondent.
We further find that Operational Creditor entered into four agreements with Corporate Debtor and all the agreements are for the purpose of sale of the products of the Corporate Debtor. The same is evident from the following Clauses of the agreement
“B) THE C&F AGENT has/will have the necessary FACILITIES AND RESOURCES as detailed in ANNEXURE “A” and is desirous of being appointed as C&F AGENT of LUMIFORD for sale of their PRODUCTS as detailed in ANNEXURE “B” in the assigned territory of PAN INDIA. ……………
1.The LUMIFORD hereby appoints the C&F AGENT for Pan India territory for the purpose of sale of their PRODUCTS to the distributors, super stockists, whole salers, etc on behalf of LUMIFORD with effect from 10/12/2020.”
These aforesaid clauses of the agreement read with other clauses of agreements between operational creditor and corporate debtor, supra, clearly establishes that the debt due is an “operational debt” and not a “financial debt”.
We do not find any merit in the submission of respondent that since the advance payment of Rs3.00 crores were not paid upfront, the respondent suffered huge losses, because we find that respondent was already having security deposit of Rs1.00 crore and further OC paid Rs1.85 crores thus making a total payment of Rs 2.85 crores and against which CD only supplied goods worth Rs2.80 crores as per his own submission.
Considering all the above facts and position of law, we decide that there is an ‘Operational Debt’ of a sum exceeding rupees one crore, due and payable by the Corporate Debor to the Operational Creditor and Corporate Debor has defaulted its repayment. The point no 1 is decided accordingly.
POINT -II
Whether there is a pre-existing dispute between the Operational Creditor and the Corporate Debtor relating to termination agreement dated 15.03.2022 prior to the issuance of Demand Notice dated 19.06.2023?
Relying on Clause 5, 6 and 7 of the agreement dated 15.03.2022, Ld. Sr. Counsel for the petitioner submits that, that there is no pre-existing dispute between the Operational Creditor and the Corporate Debtor and the termination agreement is very clear on all aspects of payment etc.
Per contra, the Ld. Senior Counsel for respondent would submit that, that there is a pre-existing dispute between the Operational Creditor and the Corporate Debtor in the subject matter of the claim and that the Operational Creditor cannot invoke the present proceedings. It was also submitted that this record of dispute was brought to the notice of the Operational Creditor byway of a reply to the demand notice of the Operational Creditor.
Ld. Sr. Counsel, also submits that, the Operational Creditor entered into an agreement dated 16.08.2022 with the Corporate Debtor to settle the dues and relying on Clause 2.1 of this agreement, and this settlement of dues is evidence of a pre-existing dispute. In this regard, reliance was placed on Mobilox Innovations (supra) and was submitted that the three pre-requisites to examine to understand the “existence of a dispute” are The monetary amount of operational debt;
The validity of the claim made by the operational creditor;
The examination of disputes between the parties and
whether any suit or arbitration is pending.
Reliance was also placed on Sabarmati Gas Limited vs Shah Alloys Limited, 2023 3 SCC 229:
We carefully perused the agreement dated 16.08.2022 and find that it is a normal MOU signed for conducting business between two parties. We could not find any mention of any dispute and its resolution in the said agreement. We also perused the reply to the demand notice and find that it also does not contain any mention of any pre-existing dispute, however for the first time in reply to the notice, the corporate debtor stated that operational creditor ‘did not deposit Rs 3.00 crores ‘in advance and thus, did not comply point 2.1 of the MOU dated 16.08.2022. Admittedly, even as per details given by corporate debtor in his reply to the demand notice, an amount of Rs 1.85 crores only has been deposited by Operational Creditor from 25.06.2021 to 15.09.2021 and as per termination agreement dated 15.03.2022, the CNF ledger balance was Rs 1.07 crores which includes security deposit of Rs 1.00 crores given under CNF contract. On perusal of point no 7 of the said MOU, we find that due amount of Rs1.00 crore (advance deposit) was to be adjusted in the form of stocks. Thus, total of both these items put together comes to 2.92 crores which is very close to Rs 3.00 crores. We further find that as per the agreement, this advance amount of Rs 3.00 crores was to secure goods of the same value from corporate debtor. We find from the reply given by the corporate debtor to the demand notice that it has supplied products amounting to Rs 2,80, 26,701.00 to the Operational creditor which is not at all more than the amount paid by operational creditor. Therefore, in the light of undeniable facts and events we reject the contention of the corporate debtor that there exists a pre-existing dispute in the matter, prior to the issuance of Demand Notice dated 19.06.2023. The Point no 2 is accordingly decided.
As regards the plea that there is a conflict of interest of counsel who filed the petition, hence the petition is not maintainable. Ld. Sr. Counsel for the petitioner submits that, the said counsel never appeared on behalf of operational creditor but appeared for an IRP and assisted the said IRP in withdrawal of a company petition under Section 12 A, and that the said counsel has given his no objection and operational creditor has appointed another advocate. We have perused the record and did not find any material in support of the plea of the respondent that the petition was originally filed through a counsel who had earlier in some other case has represented IRP in the appeal against the Corporate Debtor. Hence the said plea is hereby rejected.
Therefore, in the light of our discussion and findings on the points above and since the Petition is in order, we hereby, hold that that this Petition satisfies the conditions required for admission.
Hence, the Adjudicating Authority, hereby admits this Petition under Section 9 of I&B Code, 2016, declaring moratorium for the purposes referred to in Section 14 of the Code, with following directions: -
A. The Corporate Debtor, M/s Lumiford Private Limited is admitted into Corporate Insolvency Resolution Process under Section 9 of The Insolvency & Bankruptcy Code, 2016;
B. The Bench hereby prohibits institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, Tribunal, Arbitration Panel or any other authority; transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein; any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); the recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate Debtor;
C. That the supply of essential goods or services to the Corporate Debtor, if continuing, shall not be terminated or suspended or interrupted during moratorium period;
D. Notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concessions, clearances or a similar grant or right during the moratorium period;
E. That the provisions of sub-section (1) of Section 14 shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator;
F. That order of moratorium shall have effect from the date of this order till completion of the Corporate Insolvency Resolution Process or until this Bench approves the Resolution Plan under Sub-Section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, whichever is earlier;
G. That public announcement of initiation of Corporate Insolvency Resolution Process shall be made immediately as prescribed under section 13 of Insolvency and Bankruptcy Code, 2016;
H. That this Bench hereby appoints Mr. Gonugunta Murali, having Registration No. IBBI/IPA-001/IP-P00654/2017-2018/11139, as Interim Resolution Professional, whose contact details are: Email-id: gmurali34[at]gmail[dot]com Address: 16-11-19/4, Saleem Nagar, Near Farahat Hospital , Malakpet ,Hyderabad, Andhra Pradesh ,500036 Mobile :9884504060 as Interim Resolution Professional to carry the functions as mentioned under the Insolvency & Bankruptcy Code.
I. Proposed IRP shall file FORM-2 within three days from the date of receipt of this order. Authorisation for Assignment is valid till 09.11.2024. This information is available in IBBI Website. Thus, there is compliance of Regulation 7A of IBBI (Insolvency Professionals) Regulations, 2016, as amended. Therefore, the proposed IRP is fit to be appointed as IRP since the relevant provision is complied with.
J. The Registry is directed to furnish certified copy of this order to the parties as per Rule 50 of the NCLT Rules, 2016.
K. The petitioner is directed to communicate this order to the proposed Interim Resolution Professional.
L. Registry of this Tribunal is directed to send a copy of this order to the Registrar of Companies, Hyderabad for making appropriate remarks against the Corporate Debtor on website of Ministry of Corporate Affairs as being under Corporate Insolvency Resolution Process.
M. Accordingly, this Petition is admitted.