M/s. Woven And Knit vs M/s. Prodo Technologies Private Limited

The Applicant submitted that it had a running business relationship with the Respondent commencing from July 2023, whereby the Applicant regularly supplied various goods to the Respondent in the course of its business operations. The said supplies were made pursuant to confirmed purchase orders and were duly accepted and received by the Respondent without demur or protest at the time of delivery. The Applicant continued to provide goods and services in good faith based on the commercial understanding and representations made by the Respondent.

That in pursuance of the said business relationship, the Applicant raised various tax invoices reflecting the quantity, description, rate, and value of goods supplied to the Respondent. The total value of goods supplied amounted to ₹2,28,44,148/- (Rupees Two Crore Twenty-Eight Lakh Forty-Four Thousand One Hundred and Forty-Eight Only) against which, the Respondent made part-payments totalling ₹80,80,000/- (Rupees Eighty Lakh Eighty Thousand Only) on various dates. However, despite repeated requests and reminders, the Respondent failed to clear the outstanding dues amounting to ₹1,47,64,148/- (Rupees One Crore Forty-Seven Lakh Sixty-Four Thousand One Hundred and Forty-Eight Only) exclusive of interest at the rate of 24% p.a., which remains unpaid and due.

That the Applicant made persistent efforts to recover the outstanding amount from the Respondent, but to no avail. In the course of such efforts, the Operational Creditor addressed specific written communications to the Corporate Debtor on three separate occasions, vide emails dated 23.07.2024, 04.09.2024, and 22.09.2024, wherein it demanded release of the long-pending operational dues. Despite repeated follow-ups and clear assertions of default in the aforesaid emails, the Corporate Debtor failed to respond or make payment of the admitted outstanding amount.

Pursuant to the above, in compliance with the statutory requirement under Section 8(1) of the Insolvency and Bankruptcy Code, 2016, the Operational Creditor caused to be issued a demand notice dated 30.09.2024 through its Advocate to the Corporate Debtor, demanding payment of ₹1,47,64,148/- with an interest of ₹26,57,546/- (Rupees Twenty Six Lacs Fifty Seven Thousand Five Hundred Forty Six Rupees Only). The Corporate Debtor, despite receipt of the said demand notice, which can be evidenced by the postal receipts and tracking reports annexed with the Application, did not respond to the said demand notice and has failed to remit the outstanding dues payable to the Applicant.

The Respondent/Corporate Debtor, Prodo Technologies Private Limited, has filed its Reply Affidavit denying the contentions of the Applicant/ Operational Creditor and submitted that the Application filed by the Operational Creditor is not maintainable under the provisions of the Insolvency and Bankruptcy Code, 2016 and is liable to be dismissed on the ground that there exists a genuine and bona fide dispute regarding the quality of goods supplied and reconciliation of accounts between the parties.

The Corporate Debtor admits that a commercial relationship existed with the Operational Creditor for the supply of textile goods beginning from July 2023. However, the Corporate Debtor submitted that it began to experience severe financial distress from December 2023, owing to a sudden withdrawal of investor commitments, which severely impacted its cash flow and working capital position.

It is submitted that a portion of the goods supplied by the Operational Creditor were defective and did not conform to the quality parameters agreed between the parties. The Corporate Debtor had conveyed these concerns orally through telephonic conversations. Despite repeated assurances from the Operational Creditor that the issues would be resolved, no corrective action was ever taken.

The Corporate Debtor further submitted that the parties had a running account arrangement, and payments amounting to ₹80,80,000/- were made to the Operational Creditor across various transactions. These payments have not been acknowledged or adjusted in the Application.

The Corporate Debtor submits the Operational Creditor has selectively reproduced invoices while omitting several transactions and payments, thereby creating a misleading impression of default.

The Corporate Debtor also contests the claim of interest at the rate of 24% per annum as being excessive, arbitrary, and without any contractual foundation.

The Respondent further submitted that the Application is a misuse of the provisions of the Code, which is not intended to be invoked for mere recovery of dues.

We have heard the arguments of the Ld. Counsel appearing for the Applicant and Respondent, and perused the records.

The Applicant, very interestingly, in Part IV of the Application though has mentioned that the Applicant had issued a Section 8 Notice to the Corporate Debtor, however, made no mention that the Section 8 Notice was served on the Corporate Debtor and whether the Corporate Debtor gave a reply to the Section 8 Notice.

Be that as it may, the Corporate Debtor appeared before this Adjudicating Authority on 13.02.2024, accepted Notice and sought time to file Reply Affidavit.

It is pertinent to place on record that the Respondent has filed a vague Reply affidavit. The Respondent in the Reply Affidavit, on one hand has stated that the allegations and claims made in the Application are vehemently denied and that the Application is liable to be dismissed because of the mala fide intentions of the Applicant/Operational Creditor to arm-twist the Respondent. While on the other hand, the Respondent/Corporate Debtor has stated that the Corporate Debtor was facing financial stress in December, 2003 and some of its investors backed out from financing/investing in the Company and therefore, it became difficult for the Company to meet the requirements of its working capital.

The said Reply Affidavit also states that the Company is gradually meeting its financial liabilities, but the debt owed to the Company by other vendors/clients is much higher than the debt owed by the Company to its Creditors.

The Respondent also stated in the Reply Affidavit that the Corporate Debtor raised concerns about the quality of the goods supplied by the Operational Creditor and failed to meet the agreed specification, and these concerns were communicated to the Operational Creditor through oral communications over telephone calls.

It is further stated that, in addition to quality disputes, the Operational Creditor failed to reconcile payments received from the Corporate Debtor. The Corporate Debtor has been continuously paying the Operational Creditor, and partial payment amounting to Rs. 80,80,000/- has been made by the Corporate Debtor out of the total amount of Rs. 2,28,44,148/-

Interestingly, it is seen that the Corporate Debtor has not raised any objection or taken any ground about the receipt of the Section 8 notice or whether any response to the Section 8 notice was given by it. However, the Corporate Debtor has not placed on record any document to show that it had raised any dispute prior to the issuance of the Section 8 notice.

In view of the foregoing, it is relevant to note that the existence of a commercial relationship between the parties is not in dispute. The Corporate Debtor has acknowledged making part payments amounting to ₹80,80,000/- out of the total invoiced amount of ₹2,28,44,148/-. The Operational Creditor has also fairly admitted receipt of the said sum and, after adjusting the part payments of ₹80,80,000/-, the Operational Creditor has confined its claim to the balance principal sum of ₹1,47,64,148/-, exclusive of interest. This mutual acknowledgment of transactions and partial payments fortifies the authenticity of the underlying invoices and discredits any allegation that the Applicant’s claim is inflated.

The Corporate Debtor has vaguely alleged that the goods supplied were defective and did not conform to agreed specifications. However, these assertions are wholly unsupported by any contemporaneous documentary evidence such as quality reports, debit notes, written complaints, or any acknowledgment from the Operational Creditor. The only reference to such concerns is said to have been made over telephonic communications, which lack evidentiary value in the absence of supporting material.

Moreover, it is significant to note that the Corporate Debtor did not respond to the three emails dated 23.07.2024, 04.09.2024, and 22.09.2024, wherein the Operational Creditor had specifically demanded payment of outstanding dues and asserted default. The Corporate Debtor also remained silent upon receipt of the Section 8 demand notice dated 30.09.2024. This continued silence, both prior to and after the issuance of the demand notice, undermines the credibility of any claim of a genuine or pre-existing dispute.

The contention/plea of a pre-existing dispute raised for the first time in the Reply Affidavit appears to be an afterthought. In proceedings under Section 9 of the Code, it is incumbent on the Corporate Debtor to demonstrate the existence of a plausible and bona fide dispute through material placed on record which predates the Section 8 notice. In the present case, the Respondent has failed to discharge this burden.

As regards the claim for interest at the rate of 24% per annum, it is observed that the said rate has been expressly stipulated in the tax invoices raised by the Operational Creditor. The Corporate Debtor has not denied receipt of these invoices nor placed any agreement or contrary terms on record. In commercial transactions, where interest terms are reflected on tax invoices and there is no objection contemporaneously raised by the recipient, such terms are binding unless otherwise shown.

In light of the above, the Reply Affidavit filed by the Corporate Debtor is found to be general and evasive in nature, lacking any substantive defence or credible dispute. The defences raised are not supported by documentary proof and fail to rebut the presumption of default as contemplated under Section 9 of the Code.

In the present case, there is debt more than the threshold limit of Rs. 1 crore, there is a default in repayment of the said debt and there is no pre-existing dispute with respect to this debt, and also the application is filed within limitation as the year of default being 2023 and the date of filing of application being on 22.11.2024, which is within three years of the limitation period. Further, all other conditions for admission of application under Section 9(5)(i) of the Code against the Corporate Debtor, have also been found to be fulfilled and the Application is complete in all respect, thus, we find this application as being fit for admission under Section 9(5)(i) of the Code for starting CIRP against the Corporate Debtor.

Therefore, we are of the view that the present application under Section 9 of the IBC, 2016 ought to be admitted.

The Application bearing (IB)-825(ND)/2024 filed by the Applicant under Section 9 of the Code read with Rule 6 of the Adjudicating Authority Rules for initiating CIRP against the Respondent is hereby admitted.

We declare a moratorium in terms of Section 14 of the Code. The necessary consequences of imposing the moratorium flow from the provisions of Section 14(1)(a), (b), (c) & (d) of the Code. Thus, the following prohibitions are imposed:

It is made clear that the provisions of moratorium shall not apply to transactions which might be notified by the Central Government or the supply of the essential goods or services to the Corporate Debtor as may be specified, are not to be terminated or suspended or interrupted during the moratorium period. In addition, as per the Insolvency and Bankruptcy Code (Amendment) Act, 2018 which has come into force w.e.f. 06.06.2018, the provisions of moratorium shall not apply to the surety in a contract of guarantee to the corporate debtor in terms of Section 14(3)(b) of the Code.

Section 9(4) of the Code does not mandate the Operational Creditor to propose the name of a Resolution Professional along with the application to act as the Interim Resolution Professional (IRP) for the Corporate Debtor.

In pursuance of Section 13(2) of the Code, we direct the IRP, as the case may be to make a public announcement immediately with regard to the admission of this application under Section 9 of the Code. The expression immediately means within 3 (three) days as clarified by Explanation to Regulation 6(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

During the CIRP period, the management of the Corporate Debtor shall vest in the IRP/RP, in terms of Section 17 of the IBC. The officers and managers of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP within one week from the date of receipt of this order, in default of which coercive steps will follow. There shall be no future opportunity given in this regard.

The IRP is expected to take full charge of the Corporate Debtor’s assets, and documents without any delay whatsoever. He is also free to take police assistance and this Adjudicating Authority directs the Police Authorities to render all assistance as may be required by the IRP in this regard.

The Operational Creditor is directed to deposit a sum of Rs. 2,00,000/- (Rupees Two Lakhs only) with the IRP to meet out the expenses to perform the functions entrusted to him. However, this amount shall be subject to adjustment by the Committee of Creditors, based on the accounts maintained by the IRP upon the conclusion of the CIRP.

The IRP/RP is further directed to submit periodic progress reports to this Adjudicating Authority at the conclusion of each quarter.

In accordance with the provisions of the Code, the Registry is directed to communicate a copy of the order to the Operational Creditor, the Corporate Debtor, the IRP and the Registrar of Companies, NCT of Delhi and Haryana, by Speed Post and by email, at the earliest but not later than seven days from today. The Registrar of Companies shall update his website by updating the status of the Corporate Debtor and specific mention regarding admission of this application must be notified.

The Registry is further directed to send a copy of this order to the Insolvency and Bankruptcy Board of India (“IBBI”) for their record.