M/s. Metals And Metal Electric Private Limited vs M/s. Prince Foundations Limited

Per: Justice Sharad Kumar Sharma, Member (Judicial):

The Appellant, in the status of being an operational creditor, had initiated a proceeding under Section 9 of I&B Code against the Respondent, by filing an application in Form-5, as prescribed under Rule 6(1) of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In Part-IV of the said application, the date of default has been shown as to be of 22.02.2022. The proceedings under Section 9 of I&B Code, was contested by the Respondent and the Application was dismissed by the Impugned Order dated 21.02.2023, as passed in CP(IB)/100/CHE/2022 on the grounds that the date of default as mentioned in the Application is later than the date of demand notice, most of the invoices are barred by limitation and that the demand notice did not mention any date of default which is not in consonance with provisions of Section 8 and that 9(3)(b) affidavit has not been attached with the Application.

The Appellant contends that the notice of demand was issued by him on 18.02.2022, containing the details of the transactions and the invoices and the financial liabilities accruing from them and that full particulars of the unpaid invoices had been given in Row-7 of the demand notice of 18.02.2022. She has submitted that the format of demand notice used by her did not contain any earmarked space for recording the date of default, that Section 8 of I&B Code dated 18.02.2022, doesn't prescribe for specific mention of the date of default in the demand notice, that the said notice has been prescribed under Rule 5 (1)(b) of the said Rules to be in the shape of Form-4, that Form-4 statutorily doesn't prescribe for a specific mentioning of the date of default for the purposes of initiation of the proceedings under Section 9 of I&B Code and it only prescribes for attaching copy of invoice and therefore non-mention of the date of default does not make his demand notice invalid.

It was submitted that when the Appellant had filed an application under Section 9 of I&B Code, in Form-5 as per Rule 6 (sub rule 1), seeking for initiation of the proceedings under Section 9 of I&B Code, The Respondent argued before the Learned Tribunal that in column-2 of Part-IV of the said application, the amount claimed to be in default was mentioned as to be Rs. 1,11,45,932, for which the date of default was shown to be 22.02.2022, that the demand notice was issued on 18.02.2022, under Rule 5(1) of the Rules, 2016 and that the date of default i.e., (which is claimed to be 22.02.2022) cannot be a date later to the date of issuance of notice itself i.e., 18.02.2022, because demand notice is to be issued only in the event of default and therefore, the proceedings under Section 9 of I&B Code, would be vitiated.

In response to the argument extended by the Respondent, the Learned Counsel for the Appellant has tried to draw the attention of this Appellate Tribunal to Rule 5 of the Rules, 2016, which prescribes the form and manner of issuance of the demand notice by the operational creditor. The relevant provisions contained under sub rule 1 of Rule 5, which are extracted here under:

She submits that, Rule 5(1) prescribes the form in which the notice of the demand is to be issued by the operational creditor and as per its provisions, the demand notice may be delivered either as a demand notice in Form-3 "Or'' as a copy of the invoice attached with the notice in Form-4 and that if it is delivered in Form-4 which is invoice-based, there will not be any need for specific mention of date of default. She argues that, in the instant case, the notice of demand dated 18.02.2022, is invoice based and therefore it will have to be treated as to be a notice under Form-4, which under law doesn't contemplate of making any reference to the date of default and hence in the absence of their being any clause prescribed in the said format of notice, non-mentioning of the default date will not be fatal to the proceedings. She has further argued that Form-3 prescribed under Rule 5 (1) (a), particularly mandates providing of record of default with the information utility, whereas, Form-4, prescribed under Rule 5(1)(b) doesn't call for mentioning of any date of default, primarily because the default is easily ascertainable from the invoices. Form-4 as provided under I&B (Application to the Adjudicating Authority) Rules, 2016 is extracted here under:

In order to elaborate her argument, the Learned Counsel for the Appellant has drawn the attention of this Appellate Tribunal to the notice of demand of 18.02.2022, which according to its content, she submits that, it will be falling to be a notice under sub clause (b) of sub rule 1 of Rule 5 of the Rules, 2016, and that as it is notice, which is invoice based, in view of the particulars that has been given in column 7, particular reference of the date of default becomes irrelevant for the purposes of initiation and commencement of the proceedings under Section 9 of I&B Code. She submits that, since the birth of the proceedings is as per Form-4, where reference of date of default is not relevant nor it is mandatory under the format to be specifically provided, in that eventuality, the Application in Form-5 which has been issued as per Rule 5 (1)(b) will continue to remain valid for the purposes of initiation of proceedings under Section 9 of I&B Code, even if the Appellant has referred the date of default in part IV column 2, as to be 22.02.2022 and it will have no adverse bearing as far as the proceedings of Section 9 of I&B Code are concerned.

In elaboration to her argument, she submits that, the issue regards, that the notices contemplated under Rule 5 in the shape of Form-3 and Form-4 are independent and distinct to one another, since the splitting of the provisions has been made by the use of word "or" in between sub clause (a) and clause (b) of sub rule 1 of Rule 5 of Rules, 2016. She submits that, the said aspect came up for consideration before the Principal Bench, in the judgment reported in 2020 SCC Online NCLAT Page 445 Neeraj Jain Vs. Cloudwalker Streaming Technologies Private Limited and the Learned Tribunal while dealing with the issue had framed the point of determination which was considered in Para 9 of the said judgment, which is extracted here under:

The point with which we would be concerned presently, would be that as contained under point of determination as contained therein, which has been answered by the Principal Bench in Para 43, 44, 45 & 46 of the said judgment. The Principal Bench has quite clearly and in distinct term has observed, that the use of word "or" in Section 8 of the Code which is to be read with Rule 5, cannot be interpreted as such that, the I&B Code has provided a choice or a discretion to an operational creditor intended to provide escape route from submission of the invoice and answered the said question in Para 47 in the matters of Neeraj Jain (Supra), which has made it clear that the choice of issuance of demand notice under Section 8 (1) of I&B Code, could be made either in Form-3 or in Form-4, as prescribed in Rule 5(1) of the Insolvency and Bankruptcy (Application to adjudicating authority) Rules, 2016. Paras 43, 44, 45, 46 & 47 are Extracted here under:

We see no reasons to take a different view than what has been considered by the Principal Bench, with regards to distinction in Form-3 and Form-4 provided under Rule 5 of Rules and its purpose. Supporting her argument on the basis of the aforesaid determination made by the Principal Bench, she contends that, if her notice of demand of 18.02.2022, itself is taken into consideration, as it has been issued under Rule 5 and considering it in the light of the contents of the said notice, particularly that, as given in column 7, it is invoice-based and it will have to be treated to be a demand notice in Form-4, in which a specific reference of the date of default is not mandated as per the form as provided under Rule 5(1)(b), which has been extracted herein above. In these eventualities, she has submitted that the reason which has been adduced by the Tribunal while rejecting the application under Section 9 of I&B Code, by making observations in Para 1 of the impugned order, pertaining to the date of default occuring at a date subsequent to the date of demand notice will have no bearing when the law itself doesn't contemplate, reference of the date of default to be made in the application itself, which is the birth place of the proceedings under Section 9 of I&B Code. Thus, the observation made in the impugned order for arriving at a conclusion as to be a reason to reject, the application under Section 9 of the I&B Code, itself is fallacious and cannot be sustained.

Further, Learned Counsel for the Appellant has contended that, the reason which has been assigned by the Learned Tribunal to declare majority portion of the amount claimed as time-barred is not sustainable. She has stated that after going through the list of invoices provided in the Application, Learned Tribunal has determined that, each of the invoices as detailed prescribes are to be paid within 7 days from the date of the invoice and in that eventuality, the majority portion of the demand raised by the applicant/appellant would be barred by limitation as most of the invoices have been raised between 31.08.2017 to 18.12.2018, which will be time barred as on date of demand notice and that the amount covered by remaining invoices falling due to be paid would be falling below the threshold. But the Learned Counsel for the Appellant has drawn our attention to the terms and conditions of each of the invoices and the last being that of 10.08.2020, which contains the following conditions:

She has further stated that, clause 2 of the aforesaid terms and conditions as provided in the invoices has to be compositely read so as to give a logical interpretation as to, whether each of the invoices could be independently read for the purposes of determining limitation and attracting the bar of threshold limit as contemplated under Section 4 of I&B Code. She has argued that, the aforesaid clause 2, contemplates that the amount covered under a particular invoice is to be paid within 7 days from the date of delivery, and since the date of 'delivery' for each of the invoices would be a variable factor, it will not be correct to compute limitation from a period of 7 days from the date of the invoice and since there is a provision of paying the dues with interest @ 24 percent, beyond the 7 days period, the date of default will become variable, and default will arise only when the payment is demanded and not paid. In that eventuality, the transactions will be of a continuous nature and the limitation will have to be computed from the last transaction which is on 10.08.2020, in which case the application having been filed on 27.04.2022 will not be barred by limitation as per Section 137 of Limitation Act.

We see logic in the argument extended by the Counsel for the Appellant, that this particular clause contained in the invoice, which equally binds the parties, by providing for payment beyond 7 days period with interest, makes the invoices as to be the running invoice though they prescribe for payment of the amount within 7 days of the delivery and because of it, expiry of 7 days from the date of invoice and should not be taken into consideration for the purposes of computing limitation period for each invoice and to treat them as barred by limitation.

Learned Counsel for the Appellant has further submitted that as per the provisions contained under Section 9 of I&B Code, which contemplates initiation of CIRP proceedings by the operational creditor, the conditions for rejection of the application has been prescribed in sub section 5(ii) of Section 9 is extracted here under:

Upon the aforesaid conditions, we are of the view that, none of the conditions prevailed, which could be cited for the purposes of rejection of the application, at the hands of the adjudicating authority, as the application thus preferred didn't suffer from any of the discrepancies as specifically identified by the legislature under Section 9(5)(ii). Hence, when the statute has assigned the conditions under which the application under Section 9 of I&B Code could be rejected, and if it doesn't fall to be within those conditions as provided under Section 9(5)(ii) of I&B Code, any other reasoning cannot be assigned by the Learned Tribunal to reject an application under Section 9 of I&B Code. Further, discrepancy in the date of default is a rectifiable defect and the statute permits Learned Adjudicating Authority to allow the Applicant to make new corrections/amendments, if necessary.

Thus the very reasoning, which has been assigned in the impugned order while rejecting the Application that, there was no mention made of the date of default, in the face of the provision of invoice-based demand notice in Form-4 and in the face of non-consideration of the terms and conditions of the invoices, do not appear to be logical. Hence the impugned order is hereby quashed. All pending Interlocutory Applications would stand closed. The matter is remitted back to the Learned NCLT, Chennai, for a fresh decision on the application under Section 9 of I&B Code, preferred by the appellant exclusively on its merits.