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Judgment
JUSTICE M. VENUGOPAL, MEMBER(J)
INTRODUCTION:
The ‘Appellant/”Operational Creditor’ has filed the instant Company Appeal No. (AT)(CH)(INS) No. 04/2022, being aggrieved with the order dated 29.09.2021 in IBA/13/4/2020 passed by the ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench No. II, Chennai).
The ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench No. II, Chennai) while passing the impugned order dated 29.09.2021 in IBA/13/4/2020 (filed by the Appellant/Applicant/’Operational Creditor’ under Section 9 of the I & B Code, 2016 read with Rule 6 of the Insolvency & Bankruptcy (Application to the Adjudicating Authority) Rules, 2016 wherein at paragraphs 14 to 19 had observed the following:
“14.Upon perusal of the typed set of documents filed along with the Application, it is seen that the Operational Creditor has only listed out the details of 1110 Nos of invoices along with the Application, however has failed to enclose the copy of those invoices per se and in the absence of those invoices which sets out the date, the seal of the Operational Creditor and other details, Application which are filed by the Operational Creditor are required to be treated as incomplete. It is also required to be noted that the Applicant even though in his Application has averred in Part – IV of the Application that as per the Books of Accounts that a sum of Rs.14,41,728/- is balance outstanding, however has miserably failed to place on record the copy of the said Ledger Account in the typed set filed alongwith the Application. All these documents are least required for the Adjudicating Authority to properly adjudicate the Application on hand and the present application filed by the Operational Creditor is bereft of all these details and hence on the said count itself, the present application is required to be dismissed.
15.Further, the nature of transaction which transpired between the parties would show that at first the Operational Creditors will supply the materials to the Corporate Debtor and the Corporate Debtor would convert the said materials into finished products and in turn supply the same to the Operational Creditor. Thus, in the present case, it is seen that both the Operational Creditor and the Corporate Debtor have been supplying materials mutually exclusive with one and another and in the said circumstances, the Applicant alone cannot be treated as an ‘Operational Creditor’ in respect of the Corporate Debtor.
16.At this juncture, it is relevant to refer to the recitals as found in the Master Contract entered into between the parties on 11.11.2013 which is as follows:
“WHEREAS MAIL (Operational Creditor) is engaged in the business of manufacturing and selling Automotive components such as Brakes, suspension and Steering Systems (hereinafter refer to as ‘MAIL Products’); and
WHEREAS Supplier (Corporate Debtor) is engaged in the business of manufacturing and selling auto parts or accessories and incidental materials and general materials required to production of such parts or accessories (hereinafter called as “Ordered Items”)
WHEREAS MAIL wishes to purchase from Supplier and Supplier wishes to manufacture and sell for MAIL “ Ordered Items” (as herein defined) fro , all in accordance with the terms and conditions of this Agreement. (emphasis supplied)
17.As per the said recitals, it is required to be noted that it is the Operational Creditor who has decided to purchase from the Corporate Debtor and the Corporate Debtor wishes to manufacture and sell for the Operational Creditor the ‘Ordered Items”. At this stage, it is necessary for this Tribunal to decide on the issue as to whether the Applicant herein qualifies to be an Operational Creditor in relation to the Corporate Debtor. In order to better address the issues, the following definitions under IBC 2016 is required to be taking into consideration:
Section 3(6) “claim” means
a)A right to payment, whether or not such right is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
b)Right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgement, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
Section 3(11) “debt” means a liability to obligation in respect of a Claim which is due from any person and includes a financial debt and operational debt;
Section 3(12) ‘default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not (Paid) by the debtor or the corporate debtor, as the case may be;
Section 5(20) ‘operational creditor’ means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;
Section 5(21) ‘operational debt’ means a claim in respect of the provision of goods or services including employment or a debt in respect of the 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;
18.It is required to be noted that for a ‘debt’ to qualify as an ‘Operational Debt’, it has to undergo the following percolation process;
a)The amount in default should fall within the definition of ‘claim’ as defined under Section 3(6) of IBC, 2016.
b)Such a ‘Claim’ should be capable of being treated as a ‘debt’ as defined under Section 3(110 of IBC, 2016.
c)And such ‘debt’ should fall within the confines of ‘Operational Debt’ as defined under Section 5(21) of IBC, 2016.
d)And the said ‘Operational Debt’ must be owed by the Corporate Debtor to the Creditor, who can then be considered as an Operational Creditor under Section 5(20) of IBC, 2016
19.Thus, for a person to qualify as an Operational Creditor he must have supplied the goods or rendered services to the Corporate Debtor, which is not the proposition in the present case and on the other it is the Corporate Debtor who has supplied the service to the Operational Creditor of which it is claimed to be deficient. Thus, it is quite clear that only a supplier of goods or provider of services who has provided such goods or services can claim to be an ‘Operational Creditor’ and not in the reverse (i.e.) a person who availed the services or received the goods from the Corporate Debtor and in relation to the said transaction a ‘Claim’ had arisen. and consequently dismissed the Application without costs.
APPELLANT’S CONTENTIONS:
The Learned Counsel for the Appellant submits that the Appellant is an ‘Operational Creditor’ of the Respondent/’Corporate Debtor’ and it claimed a sum of Rs. 14,41,728/- till date of filing as outstanding amount and in fact, the ‘Appellant’ is a supplier of Wheel Cylinder, Body casting to the Respondent/’Corporate Debtor’ as input to get assembled. Furthermore, the Respondent/’Corporate Debtor’ used to supply End Plugs and Adaptors to the Appellant after assembling Appellant’s supplied materials.
The Learned Counsel for the Appellant contends that the Appellant & Respondent had entered into a Master Contract dated 11.03.2013 between them under which the ‘Appellant’ will decide whether supplies are provided to the ‘Corporate Debtor’ with payment or without payment which are called ‘Paid Company Supplies’ and ‘Free Company Supplies’. In regard to the Paid Company Supplies, the Respondent/’Corporate Debtor’ has to make payment.
It is represented on behalf of the Appellant that in the normal course of ‘Business’ the Appellant and Respondent used to set off their respective receivable against their respective supplies and pay the balance to each other. Further in year 2015 and 2016, due to Respondent’s financial crisis, it requested the Appellant’ an extended and flexible terms towards payment for their purchases from the ‘Appellant’, As such the Appellant used to pay on time for their purchases from ‘Corporate Debtor’ but allowed extended time to the ‘Corporate Debtor’ for the purchased made by the ‘Corporate Debtor’ from the ‘Operational Creditor’.
The Learned Counsel for the Appellant points out that as the quality of materials supplied by the Respondent/Corporate Debtor’ was of inferior quality, as also there was a huge delay in delivery had caused huge business and goodwill loss to the Appellant’s customers and hence the ‘Appellant’ discontinues purchases from the Respondent from 2017.
It is the version of the ‘Appellant’ that there was an unpaid amount of Rs. 14,41,728/-, standing as outstanding from the Respondent towards the paid supplies made by the Appellant for the period between 01.05.2017 to 10.12.2017.
The Learned Counsel for the Appellant takes a stand that during the period between 01.05.2017 to 10.12.2017, the ‘Appellant’ supplied materials to the Respondent/Corporate Debtor amounting to Rs. 2,69,95,970 but received only Rs. 2,55,54,242/- and the balance of Rs. 14,41,728/- remains unpaid by the Responded till date despite several requests. In this period the ‘Appellant’ had raised about 1100 Invoices.
The Learned Counsel for the Appellant points out that the ‘Adjudicating Authority’ should not have come to a conclusion that non-filing of Invoices would make the Application filed by the ‘Appellant’ as an incomplete one.
On behalf of the Appellant, a plea is advanced that the ‘Adjudicating Authority’ should have considered that just because the ‘Appellant’ had received goods from Respondent, shall not disqualify it, to be an ‘Operational Creditor’.
The Learned Counsel for the Appellant brings to the notice of this ‘Tribunal’ that the ‘Appellant’ had caused ‘Demand Notice’ in form 3 dated 23.05.2019 to the registered Office of the Respondent and his Director. The said ‘Demand Notice’ sent to the registered Office of the Respondent was returned unserved and the ‘Demand Notice’ sent to the Managing Director was served on 25.05.2019.
According to the ‘Appellant’, the Respondent had issued a reply dated 08.06.2019, after the statutory, mandatory period of 10 days received on 12.06.2019 and the Respondent had not disputed or refuted the subject debt in a said reply.
The Learned Counsel for the Appellant submits that the ‘Adjudicating Authority’ should have considered that the Respondent had not denied their liability in the reply issued by it.
The other argument advanced on the side of the Appellant is that the ‘Adjudicating Authority’ should have considered that the Appellant had made ‘paid supplies’ to the Respondent under the terms of the Master Contract dated 11.11.2013 for which the ‘Corporate Debtor’ has to make payment and in regard to the said ‘paid supplies’, the Appellant qualifies as an ‘Operational Creditor’.
While summing up, the Learned Counsel for the Appellant submits that the ‘Adjudicating Authority’ came to the wrong conclusion that given the nature of business of the ‘Appellant’ it cannot be treated as an ‘Operational Creditor’ and hence prays for setting aside the impugned order passed by the ‘Adjudicating Authority’ and to allow the ‘Appeal’, in the interest of justice.
EVALUATION:
Before the ‘Adjudicating Authority’, the Appellant’/Operational Creditor in its application dated 20.12.2019 to initiate CIRP [under Rule 6 of the Insolvency & Bankruptcy (Application to ‘Adjusting Authority, Rules 2016)] under part IV ‘Particulars of ‘Operational Debt’ had mentioned that the total amount of debt was Rs. 14,41,728/- and the said amount was an unpaid amount, standing as ‘outstanding’ from ‘Corporate Debtor’ towards Operational Creditor’s supplies to the Corporate Debtor’ for the period from 01.05.2017 to 10.12.2017.
The Appellant/Operation Creditor had proceed to mention in its Application that the ‘Debt’ fell due on 11.12.2017 and that the ‘Demand Notice’ in form -3 dated 23.05,2019 sent to the registered Office of the ‘Corporate Debtor’ and Director was returned unserved and the ‘Demand Notice’ to the Managing Director Mr. Janartnan Mohanakrishnan was served on 25.03.2019. In fact, the ‘Corporate Debtor’ in its reply dated 08.06.2019 (after the mandatory period of 10 days received on 12.06.2019) had not disputed or refuted the subject ‘Debt’. The said payment of Rs. 14,42,728/-was due from 11.12.2019, as no payments were made thereafter.
The Respondent/Corporate Debtor through its Managing Director before the ‘Adjudicating Authority’ had filed a counter to IBA No. 134 of 2020, interalia, stating that till date no payment was made to the ‘Operational Creditor’ by the ‘Corporate Debtor’. Further, the understanding between the Appellant/’Operational Creditor and the Respondent/Corporate Debtor is that the the Appellant/Operation Creditor would supply the materials and ‘Corporate Debtor’ would convert the same into product and supply the same to the ‘Operational Creditor’. However, no payment would be made to the ‘Operation Creditor’ and the ‘Operational Creditor’ would deduct the cost the materials supplied and pay the balance to the ‘Corporate Debtor’.
The clear cut stand of the Respondent/Corporate Debtor is that the Corporate Debtor and the ‘Operational Creditor’ had entered into an ‘Understanding Agreement’ and by the said ‘Agreement’ the ‘Operational Creditor’ is to inform the ‘Corporate Debtor’ before six months as regards the stopping of business. But the ‘Operational Creditor’ had stopped the business with ‘Corporate Debtor’ in December, 2017 and no information was given to the ‘Corporate Debtor’ by the ‘Operational Creditor’. In short, the act of ‘Stopping of business’ was taken in an unilateral manner which would not bind the ‘Corporate Debtor’
Moreover, the ‘Corporate Debtor’ was of the opinion that it need not pay any amount as no payment was made by the ‘Corporate Debtor’ to the Operational Creditor’ till date. Indeed, the ‘Operation Creditor’ never raised the issue of pending payment with the ’Corporate Debtor’ till the issuance of ‘Demand Notice’ on 23.05.2019. The ‘Operational Creditor’ filed an Affidavit stating that there is no dispute which cannot be considered as there is no dispute. The ‘Operational Creditor’ had violated the provisions of the ‘Understanding Agreement’ and as such had no right to invoke the provisions of the I & B Code against the ‘Corporate Debtor’. However, the ‘Operational Creditor’ is to pay the ‘compensation’ as prayed for in the Reply to the ‘Demand Notice’.
The Appellant (in Form 3) had issued a Demand Notice seeking payment in respect of unpaid operational debt due from the Respondents/ M/s Chennai Clamptech Designer Pvt Ltd dated 23.05.2019 claiming a sum of Rs.14,41,728/- in respect of the ‘Debt’ and the break-up figure is value of supply Rs.2,69,95,970/- and the amount received Rs.2,55,54,242/- and the balance to be paid is Rs.14,41,728/-. The Date of Default is 11.12.2017.
As a matter of fact the Appellant in Form 3 (Form of Demand Notice) at Sr. No.6 and 7 had mentioned the following
| 6. | PROVISION OF LAW CONTRACT OR OTHER DOCUMENT UNDER WHICH DEBT HAS BECOME DUE | 1.Section 3(1) of IBC, 2016(Debt) 2.Sec.4(21) of IBC, 2016 (Operational Debt in respect of provision of goods). 3.Various Invoices (appx. 1110 Nos) from 01st May, 2017 to 10th December, 2017. 4.Account Statement in the books of M/s Mando Automotive India Pvt Ltd. |
| 7 | LIST OF DOCUMENTS ATTACHED TO THE APPLICATION IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT AND THE AMOUNT IN DEFAULT. | 1.Account Statement in the books of M/s Mando Automotive India Pvt Ltd from 01.05.2017 to 31.12.2017 2.Legal Notice dated 3.10.2018 3.Email dated 21.10.2018 for proof of deliver of Legal Notice dated 3.10.2018 vide email. |
For the Notice dated 23.05.2019 of the Appellant, the Respondent/Corporate Debtor had issued a Reply (through its Managing Director on 08.06.2019) inter alia mentioning that “ …….our company has
invested huge sums in the land and building and due to gradual slowdown of your take off and business volume we had incurred huge losses to meet out Fixed Expenses planned based on your business volume which was against your assurance. Our company incurred losses due to your assurance only and we are entitled to make a counter claim of Rs.1.5 crores towards our investments and loss of employment. Therefore, you are requested to withdraw the petition filed under Insolvency and Bankruptcy Code, 2016 and pay an amount of Rs.1.5 crores towards losses due to your assurance.”
Be it noted that Bankruptcy Notice sets the entire process in motion leading to Bankruptcy. In an application under Section 9 of the Code, the Adjudicating Authority is to analysis whether a Notice of Dispute was received by an ‘Operational Creditor’ or whether there is a record of ‘dispute’ in the Information Utility.
An ‘Adjudicating Authority’ is to ascertain whether the Dispute raises a ‘plausible contention’ which requires ‘more examination in the form of an investigation’ and it not a ‘Dispute which is a patently weak legal argument or an assertion of fact. The ‘Adjudicating Authority’ need not go into the ‘Dispute’ on a threadbare basis or in its merits.
Section 5(21) defines ‘operational debt’ meaning ‘a claim in respect of the provisions of goods or services including employment or a debt in respect of the 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’.
Section 3(6) defines claim meaning
c)A right to payment, whether or not such right is reduced to judgement, fixed, disputed, undisputed, legal, equitable, secured, or unsecured.
d)Right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgement, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
Before the ‘Adjudicating Authority’, the Appellant/Operational Creditor alongwith the application had only mentioned the details of 1110 Nos of invoices but had not enclosed the copies of the said invoices and as such the application was treated as an incomplete one by the ‘Adjudicating Authority’. Even the copy of the ledger account was not placed on record before the ‘Adjudicating Authority’.
One cannot remain oblivion to the prime fact that in the case on hand, the Appellant/Operational Creditor and Respondent/Corporate Debtor were supplying materials mutually and under such circumstances the Appellant/Applicant singly to be considered as an ‘Operational Creditor’ qua the ‘Corporate Debtor’.
In fact, it cannot be brushed aside that the Appellant had received the services/goods from the Respondent/Corporate Debtor and in that context, the claim arose between the parties.
A ‘Debt’ may not be due if it is not payable in law or in fact. The application must be complete with a view to enable an ‘Adjudicating Authority’ to admit the same.
To put it succinctly, while scrutinising an application under Section 9 of the Code, an Adjudicating Authority is to determine (a) whether there is an ‘operational debt’ as per Section 4 of the Code (b) whether the material/documentary evidence submitted with the application indicates that the aforesaid ‘debt’ is due and payable and the same was not paid. (c) whether there is existence to a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed prior to the receipt of the Demand Notice of the unpaid ‘operational debt’ pertaining to a dispute as per Hon’ble Supreme Court decision in Mobilox Innovations Pvt Ltd V. Kirusa Software Pvt Ltd reported in AIR 2017 SC 4532.
If anyone of the above said conditions is lagging behind, then the application is to be rejected in the eye of law. It is to be remembered that an adjudicating authority is to follow the particular mandate of Section 9 (5) of the Code, and admit or reject the application based on the ingredients enumerated in Section 5 of the Code as per Hone’ble Supreme Court decision in K. Kishan V Vijay Nirman Co Pvt Ltd reported in (2018) 146 CLA 1 (SC)
In view of the upshot, this Tribunal considering the facts and circumstances of the present case and also on going through the impugned order passed by the Adjudicating Authority in IBA/134/2020 dated 29.9.2021 comes to a consequent conclusion that the application project by the Applicant/Operational Creditor before the Adjudicating Authority is devoid of necessary qualitative and quantitative details, coupled with the candid facts that the Appellant is not an ‘operational creditor’ pertaining to the Respondent/Corporate Debtor and viewed in that perspective, the conclusion arrived at by the ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench II, Chennai) in dismissing the application in IBA/134/2020 is free from legal infirmities. Resultantly, the Appeal fails.
DISPOSITION:
In fine, the Comp. App.(AT)(CH)(Ins) 4/2022 is dismissed. No costs.