M/s Kataria Infrastructure Corporation vs M/s Manas Vyapar Private Limited

Per: Sh. Charanjeet Singh Gulati, Member (Technical)

The Present Company Petition (IB)-1139(MB)/2022 has been filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) by M/s. Kataria Infrastructure Corporation (“Operational Creditor/Petitioner”) for initiating Corporate Insolvency Resolution Process (“CIRP”) against M/s Manas Vyapar Private Limited (“Corporate Debtor/Respondent”) for resolving the default in repayment of an Operational Debt of Rs. 1,00,00,000/- (Rupees One Crore Only).

M/s Manas Vyapar Private Limited was incorporated on 26.11.1992, bearing CIN: U99999MH1992PTC06973. The present Company Petition has been filed on 27.09.2022, on the basis of the following set of facts:

The Operational Creditor is involved in the business of purchasing land and other immovable assets like windmill, etc.

It is the case of the Operational Creditor that it entered into an oral agreement for the execution of an “Operation and Management” Contract with the Corporate Debtor for the windmill having particulars as ENERCON made Wind Turbine Convertor, 230 KW, type E-30, with 48M height Tubular Tower, at a windfarm situated in Village Gorera, Near Themda Raj Temple, District Jaisalmer, Rajasthan. Against this contract a sum of Rs. 1,00,00,000/- Crore was advanced by the Operational Creditor to the Corporate Debtor on 21.03.2008. The said agreement was never executed by the Corporate Debtor despite receiving the advance from the Operational Creditor.

The advance made by the Operational Creditor of Rs.1,00,00,000/- was shown under the head “Advance Received Against Project to be implemented” maintained until 2017-2018 in the Financial Statements of the Corporate Debtor. Thereafter, the Corporate Debtor started writing-off Rs. 15,00,000/- every year without the consent of the Operational Creditor.

The Operational Creditor verbally requested the Corporate Debtor to repay the dues, however, the Corporate Debtor neglected and failed to do so. In accordance with Section 8 of the Code and Rule 5 of the Insolvency and Bankruptcy Rules, 2016, the Operational Creditor issued a Demand Notice dated 20.06.2022 in Form 3 along with annexures which was received by the Corporate Debtor at its Registered Office on 08.07.2022 to which no reply was communicated.

The period of 10 days from the receipt of Demand Notice lapsed on 18.07.2022. The Corporate Debtor neither gave a notice of existence of a dispute relating to unpaid operational debt nor any record of the pendency of a suit or arbitration proceeding filed in relation to this dispute, before the receipt of such Demand Notice.

In this back ground and due to failure on the part of the Corporate Debtor to pay the amount of Rs 1,00,00,000/-, the Operational Creditor filed the present petition.

The Corporate Debtor is a going concern engaged in the business of trading and dealing in land and development. They also deal in agricultural lands and products. Over 200 farmers are associated with the Corporate Debtor who directly or indirectly depend on the Corporate Debtor for their livelihood.

The Corporate Debtor further averred following sequence of events in its Reply:

a. Around December 2007/January 2008, a meeting was held among Mr. Vyankatesh Kulkarni of the Corporate Debtor, Mr. Ashok Kataria of the Operational Creditor and Mr. Murtuza Rajkotwala in respect of a land development project at Wada (Maharashtra) belonging to the Corporate Debtor.

b. It was agreed that the Operational Creditor will invest a sum of Rs. 20,00,00,000/-, where the Operational Creditor shall pay a sum of Rs. 5,00,00,000/- in January 2008, Rs. 5,00,00,000/- in April 2008, Rs. 5,00,00,000/- in August 2008 and Rs. 5,00,00,000/- in December 2008. It was agreed that if the Operational Creditor fails to make the aforesaid payments, the amount paid by the Operational Creditor will be forfeited.

c. The Operational Creditor paid Rs.1,00,00,000/- to the Corporate Debtor on 21.01.2008 as part payment of the investment detailed above. However, the Operational Creditor failed to pay any further amount and claimed the refund of Rs.1,00,00,000/- along with interest @ 24% p.a. from the Corporate Debtor. This caused a dispute between the parties to the Oral Agreement.

d. Thereafter, various meeting and discussions took place (2008-2017) between the contending parties, but the dispute could not be resolved. In May/June 2018, there was a meeting between the parties to settle the disputes wherein Mr. Murtuza Rajkotwala was also present and it was verbally agreed that, the Corporate Debtor would pay a sum of Rs.40,00,000/- only as full and final settlement to the Operational Creditor.

e. It was agreed that the remaining amount of Rs.60,00,000/-will be written down in the books of Corporate Debtor and Operational Creditor in the following manner:

f. It was further agreed that the total amount of Rs. 40,00,000/-shall be paid to the Operational Creditor in the following manner:

g. Accordingly, the Corporate Debtor started writing off the amount as aforesaid in the books of accounts.

h. In April-May 2019, the Corporate Debtor apprehended adverse financial issues which would have presumably continued for more than two years, therefore, a meeting of Mr. Vyankatesh Kulakrni of the Corporate Debtor, Mr. Ashok Kataria of the Operational Creditor was arranged in which Mr. Murtuza Rajkotwala was also present. In the meeting, the Corporate Debtor requested to extend the payment schedule as under:

j. In the beginning of May 2020, the Corporate Debtor became aware that Mr. Ashok Kataria expired.

k. On 20.06.2022, the Corporate Debtor received a letter from the Operational Creditor claiming a sum of Rs.1,00,00,000/-The Corporate Debtor apprised Mr. Murtuza Rajkotwala about the abovementioned events. Mr. Murtuza informed the Corporate Debtor that he was not in touch with any representative of the Operational Creditor but Mr. Ashok Kataria. The Corporate Debtor annexed a copy of Mr. Murtuza Rajkotwala’s Affidavit which records his involvement in the sequence of events brought on record by the Corporate Debtor.

l. The Corporate Debtor stated that no formal settlement agreement was ever executed between the parties at the request of the Operational Creditor and Corporate Debtor. Since the original investment agreement under which the Operational Creditor had to invest approximately Rs. 20,00,00,000/- was oral, therefore, even the settlement arrived between the parties was not recorded in writing.

m. Even after repeated reminders, the Operational Creditor has not provided inspection of the documents relied upon by the Operational Creditor in the Present Petition.

The Corporate Debtor raised the following Preliminary Objections to the maintainability of the present Petition: -

a. The alleged debt is not an ‘operational debt’ under the Code, because it admittedly does not arise out of the supply of goods or services to the Corporate Debtor and also that the debt claimed is time barred because it arose sometime in January 2008.

b. The Corporate Debtor is a solvent and profit gaining company. Therefore, it will be contrary to the object and purpose of the Code if the Present Petition is admitted since it is a settled law that the provisions of the Code shall not be used as a recovery mechanism.

c. The Petitioner supressed the fact that both the parties had amicably settled their disputes in presence of Mr. Murtuza Rajkotwala. Pursuant to this settlement, it was agreed between the contending parties that the alleged outstanding due of Rs.1,00,00,000/- would be written down to Rs. 40,00,000/- and this amount was to be paid in two equal tranches of Rs. 20,00,000/- each, payable in FY 2023 – 2024 and 2024 – 2025 respectively. Therefore, the Operational Creditor can only claim Rs. 40,00,000/- which is below the threshold requirement of Rs. 1,00,00,000/- prescribed under the Code.

d. The claim of Rs. 1,00,00,000/- is based on an oral agreement sometime in January 2008. An oral agreement is required to be proved by an evidence and allowing the opposite party (Corporate Debtor) to cross examine the Petitioner’s Witness. Since, this Tribunal only exercises summary jurisdiction under the provisions of the Code, the Present Petition requires a detailed trial to be conducted by a Civil Court of competent jurisdiction.

Through the Additional Affidavit, the Operational Creditor brought on record and annexed copies of Financial Statements of the Corporate Debtor from FY 2007 – 2008 to FY 2020 – 2021 and submitted that, the amount payable to the Operational Creditor has been continuously acknowledged in the Balance Sheets of the Corporate Debtor of Rs.1,00,00,000/- until FY 2017 – 2018, dated 28.09.2018, which is valid acknowledgment for the purpose of Section 18 of the Limitation Act, 1963. Further the period of three years for the purpose of computing the limitation as per Article 137 of the Limitation Act, 1963 expires on 11.09.2023 after giving effect to the exclusion of period between 15.03.2020 until 28.02.2022 as per order dated 10.01.2022 passed by the Hon’ble Supreme Court, whereas the Present Petition was filed on 27.09.2022, therefore, this petition has been filed within limitation.

The Operational Creditor relied on the Hon’ble NCLAT, Principal Bench, New Delhi judgment dated 07.02.2022 in the matter of BDH Industries Limited vs Mars Remedies Private Limited [Company Appeal (AT) (Ins) No. 936 of 2020] to support its contention that existence of an express agreement is not necessary to prove loan/disbursement under IBC.

The Operational Creditor further relied on NCLT, Hyderabad vide their judgement dated 11.08.2017 in the matter of Quinn Logistics India Private Limited vs Mack Soft Tech Pvt. Ltd [CP(IB)No.97/7/HDB/2017] where the Company Petition was admitted in the absence of a written agreement as the Balance Sheets of the Corporate Debtor itself showed the outstanding amount in the name of the Petitioner therein, in the Balance Sheets. The Hon’ble NCLAT, New Delhi in Mack Soft Tech Pvt. Ltd Vs. Quinn Logistics India Private Limited [Company Appeal (AT) (Ins.) No. 143 of 2017] held that it was not necessary to interfere with the judgment passed by the NCLT, Hyderabad.

The Operational Creditor submitted that even write-off of a debt owed to a creditor cannot extinguish the debt. The Operational Creditor relied on a Hon’ble Supreme Court Judgment dated 11.05.2006 in the matter of Salim Akbarali Nanji vs Union of India & Ors; and further relied on a Hon’ble Supreme Court Judgment dated 04.02.2022 in the matter of Consolidated Construction Consortium Ltd Vs Hitro Energy Solutions Pvt Ltd.

The submissions made by the Corporate Debtor are extracted in brief here in under:

a. As per Section 238A of the Code, the provisions of the Limitation Act, 1963 are applicable to the proceedings before this Court. The Hon’ble Supreme Court in the matter of B.K. Educational Services Pvt. Ltd. vs. Paras Gupta & Associates, (2019) 11 SCC 633, at Para No. 42, held that Section 137 of the Limitation Act would attract for proceedings viz. applications filed under Section 7 & 9 of the Code. It was further observed that the right to sue accrues when a default occurs and if the default has occurred three years prior to the date of filing of the Application, the Application would be barred as per section 137 of the Limitation Act, 1963.

b. The Petition being filed on 27.09.2022 is time barred. The Petition is filed after more than three years from the alleged date of default i.e. 31.03.2018, therefore, by virtue of Article 137 the Present Petition is time barred.

c. The Corporate Debtor submitted that the decision of Hon’ble Supreme Court Judgment in Suo Moto Writ Petition (Civil) 3 of 2020 relied on by the Operational Creditor, is completely misplaced and untenable. The Corporate Debtor submitted that as per the order, for the limitation expired 15.03.2020 to 28.02.2022 were required to file their respective pleading on or before 30.05.2022, but the Present Petition has been filed on 27.09.2022, the Petitioner should have filed the Petition before the completion of 90 days from 01.03.2022 i.e., on or before 30.05.2022.

d. The aforesaid sum of Rs.1,00,00,000/- was advanced towards the Operation and Management of windmill. The Corporate Debtor has no nexus to the Operation and Management of the windmill, rather it is engaged in the business of trading and dealing in Land & Development.

e. The entire claim of the petitioner being based on an ‘oral arrangement’ is first required to be established by evidence.

f. The Operational Creditor had parted with Rs.1,00,00,000/- in the year 2008 and for past 14 years has not even once addressed any correspondence in this behalf.

g. The case of advancing the money towards purported work does not fall within the definition of Operational Debt as per Section 5(21) of the IBC, 2016.

h. The email ID as per the NeSL records does not belong to the Corporate Debtor as per the Master Data uploaded with the Registrar of Companies, therefore, the Operational Creditor is liable for punishment under Section 75 of IBC, 2016 for providing false information.

Heard Learned Counsel for both the parties and perused the material available on record.

In the Present Petition the Operational Creditor has supported its submissions with evidence by annexing the following;

Accordingly, and in view of the above documents, the receipt of amount of Rs. 1,00,00,000/- is established and which is not in dispute.

The Operational Creditor issued a Demand Notice in Form – 3 dated 20.06.2022 to the Corporate Debtor for an amount of Rs. 1,00,00,000/- as on 18.06.2022. From the track report attached with the Form – 3, it is evident that the Demand Notice was served at the Registered Office of the Corporate Debtor. However, no reply was given by the Corporate Debtor. Further, the facts are not in dispute that no payment has been made by the Corporate Debtor and therefore default is also established.

The Corporate Debtor contended that the claim of Rs.1,00,00,000/- by the Operational creditor is based on an oral agreement sometime in January 2008. It being a settled law that an oral argument is required to be proved by evidence and allowing the opposite party to cross examine the witness. In the present case existence of an ‘Oral Agreement’ if at all arrived, has not been corroborated with any subsequent event or action on the part of Operational Creditor or Corporate Debtor and has not been further established by any contemporaneous evidence. Therefore, contention of Corporate Debtor regarding the Oral Agreement merely remains as a bald assertion.

The Corporate Debtor contended that the debt in question is not an ‘operational debt’ because it does not arise out of any supply of goods or services to the Corporate Debtor. For ready reference provisions of section 5(21) are reproduced here:

As per the Demand Notice and submissions made by the Operational Creditor, the advance of Rs. 1,00,00,000/- was made to operate and manage the windmill having particulars as ENERCON made Wind Turbine Convertor in a windfarm, situated in Village Gorera, near Themda Raj Temple, District Jaisalmer, Rajasthan. The ‘Operations and Management” Contract was never executed by the Corporate Debtor. It is noted that the receipt of the said sum has been credited in the books of accounts of the Corporate Debtor under the caption ‘Advance Received Against Project to be implemented’ which has not been denied by the Corporate Debtor. Advance towards implementation of project could nothing be other than money received for implementation of the project in future and it connotes ‘services’ to be rendered towards implementation of the project. Therefore, as per the definition of ‘operational debt’ laid down in the Code, the debt falls in the category of operational debt. As the amount in question was paid as advance in respect of a service that is operating and managing a windmill. The Operational Creditor relied on the Hon’ble Supreme Court Judgment dated 04.02.2022, in the matter of Consolidated Construction Consortium Ltd Vs Hitro Energy Solutions Pvt Ltd; (2022) 7 SCC 164; wherein it was held that a debt in relation to supply of services, even though it is an advance, shall be considered as an Operational Debt. Accordingly, an amount of Rs.1,00,00,000/-which was advanced against a service to be rendered in future would fall in the ambit of definition of Section 5(21) the Code.

The Corporate Debtor submitted that, its Balance Sheet showed an amount of Rs.85,00,000/- as on 31.03.2019 after the amount of Rs.15,00,000/- was written-off. The amount of Rs.85,00,000/- is less than the threshold of Rs.1,00,00,000/-which is mandatory to maintain a Petition under the Code, therefore, there exists no debt due and payable to the Operational Creditor. In this regard, we feel it is necessary to refer to the Judgment of Hon’ble Supreme Court in the case of Salim Akbarali Nanji Vs Union of India & Ors; (2006) 5 SCC 302, the relevant part of judgement is as follows:

Accordingly, this Bench is of the considered view that, the unilateral write off by the Corporate Debtor is nothing but an Internal Accounting Procedure followed and in the present case, such write-off would not impact the claim of the Operational Creditor adversely.

The Corporate Debtor contended that the debt claimed by the Operational creditor is time barred as it arose sometime in January 2008. In this regard it is seen that the Operational Creditor has annexed copies of Corporate Debtor’s Financial Statements from Financial Year 2007 – 2008 to Financial Year 2017-2018 and has submitted that the claim of Rs.1,00,00,000/- account was continuously acknowledged in the Corporate Debtor’s Balance Sheet, subsequent to F.Y. 2017 – 2018 the Corporate Debtor started to write-off the amount of Rs.15,00,000/- annually. The details are tabulated herein under: -

Therefore, the abovementioned entries in the books of the Corporate Debtor would serve as an acknowledgement of the debt and would renew the period of limitation accordingly.

As per the provisions of Section 18 of the Limitation Act, 1963, the entry of unilateral write-off of Rs. 15,00,000/- and mention of balance from the original sum received of Rs. 1,00,00,000/-would serve as a valid acknowledgement of debt. In CIT v. Shri Vardhman Overseas Ltd., 2011 SCC OnLine Del 5599, the Delhi High Court held: (SCC OnLine Del Para 17)

The conjoint reading of the judgement in the case of Salim Akbarali Nanji Vs Union of India & Ors (Supra) and CIT v. Shri Vardhman Overseas Ltd. (Supra), make it clear that the unilateral write – off by the Corporate Debtor of Rs. 15,00,000/-would not indicate that the claim amount of Rs. 1,00,00,000 has depleted in any way. After perusing the relevant paragraphs of the abovementioned judgments, it is evident that a fresh period of limitation would commence when the debt was acknowledged in the books of Accounts of the Corporate Debtor for the year ending 31.03.2021. This Balance Sheet for the year ending 31.03.2021 has been signed by the Director; Mr. Vyankatesh Kulkarni. Hence, the limitation, in this case would only expire on or after 31.03.2024, whereas the present petition was filed on 27.09.2022 and therefore is within the limitation.

Further, for computing the period of limitation we rely on the decision of Hon’ble Supreme Court in Suo Moto Writ Petition (Civil) 3 of 2020, even if the limitation is computed from 31.03.2018 until when the Corporate Debtor in its Balance Sheet has shown full outstanding of Rs.1,00,00,000/-, then the period of limitation begins from 31.03.2018 and expires on 31.03.2021. The Hon’ble Supreme Court in Suo Motu Writ Petition (C) No. 3 of 2020 have directed that;

In view of the above directions of the Hon’ble Apex Court period from 15.03.2020 until 28.02.2022 shall be excluded, which in this shall have the effect of extending period of limitation until 15.03.2023, whereas this Petitioner has been filed on 27.09.2022 and therefore in within limitation.

The contention of the Corporate Debtor is that the limitation can only extend up to 90 days beyond 28.02.2022 is not found to be the correct application of the Directions of the Hon’ble Supreme Court and the same would have to be applied, where the exclusion of period from 15.03.2023 to 28.02.2022 may not be possible under provisions of specific applicable law.

As regards the affidavit of Mr. Murtuza Rajkotwala, we are of the considered opinion that such affidavit brought on record by the Corporate Debtor to substantiate the Oral Agreement between the Operational Creditor and Corporate Debtor is neither Contemporaneous nor could be substantiated in the summary proceedings before us. The said affidavit was made and filed on 21.12.2022 immediately after the Present Petition was filed and when one the person i.e. person on behalf of the Operational Creditor who supposedly was part of such discussion is no more and has expired in May ,2020. Furthermore, the Corporate Debtor has not brought any other evidence on record to support the sequence of events and Mr. Murtuza Rajkotwala’s Affidavit, therefore, the Bench is of the opinion that the submissions made based on such affidavit by the Corporate Debtor is of no consequence to the present proceedings.

The corporate debtor has also submitted that it is solvent and a going concern and as such cannot be entered into CIRP. In this regard it is stated that despite acknowledgement of the debt and consequent default, the Corporate debtor has not made the payment to the Operational Creditor and so much so, has not even replied to the demand notice issued under section 8 of the IBC. Under such facts, the contentions of it being solvent and is going concern cannot absolve it from the consequences under IBC, if the application filed by the operational creditor is otherwise complete and valid. We refer to the law laid down in the Hon’ble Supreme Court in the matter of Vidarbha Industries Power Limited Vs. Axis Bank Limited (Civil Appeal No. 4633 of 2021) decided on 12.07.2022 stated that: -

Further we refer to the Hon’ble Supreme Court, in the mater of Innoventive Industries Limited vs. ICICI Bank and Another (2018)1 SCC 407 dated 31.07.2017 held as follows:

The Application made by the Operational Creditor is complete in all respects as required by the law. The Debt and default in this case is established. Further the debt in this case of Rs. 1,00,00,000/- and meets the threshold of section 4(1) of the IBC. Also the petition is filed within limitation and no pre-existing dispute has been reported. Considering the above facts and circumstances, the Tribunal admits this Petition and orders the initiation of CIRP against the Corporate Debtor.

a. the 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 other authority;

b. transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

c. any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

d. the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor.

The Company Petition No. 1139 of 2022 is admitted.