Mr. Abhijit Bhattacharjee vs M/s. Cosr Ventures

(Hybrid Mode)

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

The Appellant in his admitted status of being a Corporate Debtor, questions the impugned Order of 10.06.2024 that has been passed by the Ld. NCLT Hyderabad Bench in CP (IB) No. 167/9/HDB/2024, which has ultimately resulted into allowing of an application preferred under Section 9 of the I & B Code, 2016, by the Respondent/Operational Creditor, resulting into initiation of the CIRP process as against the Appellant.

Ld. Senior Counsel for the Appellant contends that the impugned order directing admission of the corporate debtor into CIRP is bad in the eyes of law on account of the following;

The facts of the case that has been brought before this Appellate Tribunal by the parties to the appeal are that the Appellant is the suspended director of the Corporate Debtor (CD), M/s Lumiford Private Ltd., the CD is a MSME unit engaged in manufacturing of high-quality electronic items like TV, earphones, headphones and bluetooth audio speakers, and the Respondent/Operational Creditor (OC) is a partnership firm engaged in marketing of electronic items and they had a long-standing business relationship. They entered into Carrying & Forwarding Agent Agreement on 10.12.2020, wherein the CD appointed Respondent No. 1 as a carrying and forwarding agent for the sale of its products to the distributors, super stockists and wholesalers on its behalf.

The terms of the said C&F agreement dated 10.12.2020, stipulated that the Agreement will be for a tenure of one year till 10.12.2021 unless terminated earlier, by either party by giving a two months’ notice, that the said agreement may be extended for such period under mutual consent, that the Respondent No. 1 herein will pay Rs. 1 Crore to the Corporate Debtor as security deposit for the purposes of carrying out the obligations under the agreement, that the Corporate Debtor will pay commission to the Respondent-1 on basis of monthly sales and will reimburse 50% of Warehousing and related expenses within 10 days invoice raised by the respondent and that in case of termination of the agreement, the OC / Respondent-1 will have lien over the stock of the CD for the unpaid dues and the CD will be under obligation to settle all claims within 60 days of termination with 24% interest per annum and security deposit till it is fully refunded.

During the currency of the aforesaid C&F agreement, Respondent-1 approached the CD for appointment as the exclusive online distributor for the products of the CD and accordingly, the parties decided to end the said C&F arrangement and to enter into a Memorandum of Understanding (MoU) by virtue of which, Respondent-1 was appointed to act as the exclusive online distributor for the sale of products manufactured by the CD through the digital platforms of APPARIO Retail and Flipkart. The parties executed the said MoU on 21.05.2021.

The terms and conditions of the said Memorandum of Understanding dated 21.05.2021 inter alia stipulated that the Operational Creditor / Respondent-1 will remit an advance amount of Rs. 3 Crores to the Corporate Debtor and that CD will supply certain identified products equivalent to the said amount to Respondent-1 from time to time for distribution through online channels of APPARIO Retail and Flipkart under the terms and conditions of the said MoU, that the agreement shall continue to be in force unless terminated by either party with 60 business days’ prior written notice to the other party, that in case of termination the CD will audit the stock in hand at the warehouse of the OC and will lift the saleable products and settle the amount within 60 days from the receipt of such products (SKU) and that in case of disputes arising from this agreement, it will be resolved through mutual discussion and the unresolved disputes will be referred to for Arbitration and the award passed by the sole Arbitrator / Arbitral Tribunal shall be final and binding upon the parties.

In accordance with the terms of the said MoU, respondent-2 (OC) became the exclusive online distributor of the CD and transferred a sum of Rs. 1,85,00,000/- towards the advance to the CD. Further, as per mutual agreement, the C&F account, was closed and the net amount to the tune of Rs. 1,07,50,967/- payable to the OC as per the ledger as on 21.05.2021 (the date of closure of the said account), was adjusted by the CD towards the advances payable by the Respondent-1. Thus, the total advance paid by the Respondent-1 / OC to the CD stood at Rs. 2,92,50,967/- as against the agreed amount of Rs. 3 crore to be paid as advance. This arrangement between the parties continued till they decided to terminate the MoU on 15.03.2022 by entering into a Termination Agreement.

The termination clause as it was agreed in the MoU under clause 9.1 is extracted hereunder: -

The Termination Agreement dated 15.03.2022 records that the parties had consented to terminate the MoU because of non-fulfilment of obligations on both sides, that the CD conducted the physical audit of the unsold stock and arrived at a value of Rs. 1,76,95,869/- for such stock, that the OC will hand over such stock to CD and the CD shall pay the aforesaid amount to the OC with 45 days of handing over of the stock and that the CD will also pay the ledger balance amount of Rs.34,61,323/- to the OC on or before 31.03.2022. The relevant Clauses 1 and 2 of the termination agreement dated 15.03.2022 are extracted hereunder: -

Condition Numbers 1-6 of the Termination agreement dated 15.03.2022

"The Party to the 1^st 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 2^nd part within 45 days from the date of handing over the unsold stock to the Party to the 1^st part by the party to the 2^nd part.

The Party to 1^st part shall pay the ledger balance amount of Rs 34,61,323/- to the Party to the 2^nd part on or before 31/03/2022.

The Party to the 1^st Part shall be represented by its Chief Executive Officer, Mr. Abhijit Bhattacharjee who has entered into agreements with the Party to the 2^nd Part till date. The board resolution shall be enclosed with this MoU.

The Party of 2^nd Part is holding stock of CNF which was earlier transferred by Party of 1^st Part on Stock Transfer note under the arrangement vide CNF Agreement dated 10/12/2020. The Party of 2^nd Part will arrange to move the said stock immediately at the time of signing of this MoU.

That the party of the 1^st Part shall raise purchase order LF/PO/21-22/005 Dated 21 March 22 for purchase of unsold stock of LUMIFORD and Party to the 2^nd part shall raise invoice Sl/COSR/5702 Dated 21 March 22 on party to the 1^st part for total unsold stock which are in good condition.

That the party to the 1^st 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 2^nd part, the Party to the 1^st part shall pay the invoice amount within 45 days from the date of receipt of the stock.

The aforesaid extract of the termination agreement dated 15.03.2022, which has been duly signed by the Appellant herein, would amount to a clear admission of liability, which would be payable by the Corporate Debtor to the Operational Creditor, as per the admitted terms and conditions of the agreements which were binding inter-se business relationship.

However, the CD defaulted on payment of the aforesaid sums amounting to Rs. 2,11,57,102/- (1,76,95,869 + 34,61,323) to the OC by the stipulated date, that is, 10.05.2022 and made a partial payment of Rs.5,00,000/- only on 07.06.20222. Further, the CD and the OC entered into another agreement on 16.08.2022whereby the CD admitted and acknowledged the debt of Rs.2,11,57,102/- and undertook to repay part of the debt by supply of stock and to repay the balance with interest within one month.

Since the CD did not act as per its assurances, the OC issued a demand notice under section 8 of I&B Code to the CD on 19.06.2023. The CD replied to the said notice on 03.07.2023 stating that the unsold stock received by it was in a damaged condition and hence it is not liable to pay the demanded amount. Subsequently, the OC / Respondent-1 herein, filed the application under section 9 of the Code before Ld. NCLT, Hyderabad and on 10.06.2024, Ld. NCLT allowed the said application and directed commencement of CIRP against the CD vide the impugned order. The said impugned order is under challenge by the Appellant in the instant Appeal.

The ground taken by the Appellant in his pleadings and during the course of argument is that the unsold stock, which was delivered to him by the OC as per the terms of the Termination Agreement, was received in a damaged state. This runs contrary to the observation that were made in the audit report of the Audit conducted by the CD itself and the recordings made in the Termination Agreement, which have been signed by the Appellant. The Appellant themselves conducted the stock audit in accordance with Clause 9.1 of the Memorandum of Understanding dated 21.05.2021 and thereafter after submitting the said audit report on 16.02.2022, have undertaken to remit the amount within 45 days as per the Termination Agreement. In the said audit report, the CD had never raised the issue of the damaged condition of the unsold stock. In fact, in the condition-5 of the Termination Agreement as extracted above, it has clearly been mentioned that the total unsold stock are in good condition.

Apart from it, when there is a clear acknowledgement of the liability as per Clause 1 and 2 of the termination agreements dated 15.03.2022, based upon the audit report of 16.02.2022 and when the stock, on the basis of the audit report dated 16.02.2022, was admittedly delivered on 25.03.2022 and no comments have been made then or thereafter till the receipt of the demand notice by Respondent-1 (OC), the stand being taken by the Appellant in the instant company appeal alleging that the stock which was returned to be unsold, were not in a good condition is altogether carving out a new case, which is contrary to the records submitted by the Appellant.

Besides that, the Appellant would be bound by its own terms and conditions of the Memorandum of Understanding dated 21.05.2021 and termination agreement dated 15.03.2022, owing to the fact that after the conduct of the audit for the purposes of return of the unsold stock as per clause 19.1 of Memorandum of Understanding, it was agreed that the Respondent No. 1 would duly issue a receipt signed by the authorized signatory with the company seal for the stock taken from the warehouse of the 2^nd party and shall pay the invoice amount within 45 days. The binding nature of the said condition too stands admitted by the Appellant.

What is more surprising is that the Appellant has been consistently harping upon, that there had been a dispute with regards to the amount, and the liability to pay, the default and various other features, for the purposes of determining the amount as reflected in the notice of demand under section 8(1) of the Code as issued by the Respondent, on 19.06.2023 without showing any document in support of his contentions.

On the contrary, the Ld. Counsel for the Respondent has referred to the amount paid by the CD on 07.06.2022 to the tune of Rs. 5 lakh, towards the total outstanding due of Rs. 2,11,57,192/-, stating that this would amount to be an acknowledgement of the amount due to be paid and a proof that there was no dispute regards admitted liability and there was no pre-existing dispute.

The Ld. Counsel for the Respondent has further contended that there happens to be no dispute with regards to the liability because in the subsequent agreement of 16.08.2022, which was exclusively an agreement for an online distribution, the Appellant had admitted the fact pertaining to the conditions contained under the agreement of termination dated 15.03.2022, which finds a reference in Clause 7. On a simpliciter reading of the aforesaid clause, the Corporate Debtor has admitted that it owes an amount to be paid to the 2^nd party as per the MoU of 15.03.2022 executed between the parties and has expressed the consent to adjust the part of the amount in the form of stocks to the 1^st party.

The relevant Clause 7, is extracted hereunder: -

"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".

This too will amount to be an acknowledgement of the liability to pay the amount due as per the notice of 19.06.2023.

The Ld. Counsel for the Respondent-1 has further submitted that in reply to its email dated 21.10.2022 regarding payment of the outstanding amount, the Corporate Debtor had stated by email dated 02.11.2022 that they are taking steps to clear the outstanding amount. The relevant statement reads as “We had hoped to complete all the formalities within six months, during our discussions but due diligence as a significant process is taking time thereby delaying the infusion of funds. We are certainly on the job, and our commitment to clearing the outstanding remains with the same determination that was there during our discussion”. This email communication by the Appellant of 02.11.2022 would once again amount to be an admission of liability and an amount of debt due to be paid by the Corporate Debtor to the Respondent/Operational Creditor.

Primarily, Ld. Sr. Counsel for the Appellant has confined himself to describing the controversy as a case of pre-existing dispute on account of termination of the MoU which itself established the dispute and a case where elaborate fact-finding and appreciation of evidence including deciphering a number of successive agreements was required which should have been done by a civil court / Arbitration Tribunal and not by NCLT which has summary jurisdiction, based on which he has contended that Ld. NCLT has erred in taking up the proceedings under Section 9 of the I & B Code, 2016 and in passing the impugned order. The question therefore arises as whether the proceedings under section 9 of the Code, or for that matter even the proceedings contemplated under Section 7 or 95 of the Code are the proceedings which are "summary in nature" and further, where an elaborate appreciation of facts and evidence is required, whether Ld. Adjudicating Authority should not venture into it and advise the parties to approach the appropriate forum to settle their dispute. This is the issue which is to be answered by this Appellant Tribunal.

We are of the view that in any of the proceedings of the CIRP, whether it is being taken under Section 7, 9 or 10 of the I & B Code, 2016, or for that matter even under Section 95 of the I & B Code, 2016, wherever there is an aspect of debt and default, it becomes a germane factor to be considered and determined conclusively, before a CIRP process is directed to be commenced. Even a prima facie determination of debt and default would require determination of facts and analysis of the documents and such other evidence, which are brought on record by the parties to support their contention of a default committed by the Corporate Debtor and Ld. NCLT or even this Appellate Tribunal is bound to analyse such records and pleadings and to appreciate such evidence. This will not in any way amount to encroaching into the jurisdiction of civil courts. It cannot be said that the law creates any restriction on the Ld. NCLT to, not to scrutinize the documents and assign its rationale based upon an interpretation to be given to the contents of the document or to the stand taken by the parties to the proceedings, for the purposes to arrive at a conclusion as to whether an element of default, exists or not, which is required to justify commencement of the CIRP process. Similar would be the case at hand, where an email communication points to an admission of liability and an assurance made by the Corporate Debtor to remit the amount or the efforts made by them to pay the amount, and Ld. NCLT relies on it to arrive at the finding that the said email amounts to an admission of liability of debt and on that basis proceeds to pass orders for commencement of Section 9 proceedings, it cannot be contended that the Ld. NCLT should not have scrutinized those documents and relied upon them to order commencement of CIRP under Section 9 of the I & B Code, 2016 and instead should have directed the parties to approach a civil court to determine the rights and liabilities of the respective parties.

In the instant case, the terms of C&F agreement dated 10.12.2020, the terms of the Memorandum of Understanding dated 21.05.2021 and the terms of the Termination Agreement are not disputed by either party. On a conjoint reading of all these documents, the admission of debt and default at the hands of the Corporate Debtor is clearly established. If based upon this analysis, Ld. Tribunal comes to a conclusion that, there exists an element of default, and passes an order for commencement of the CIRP process. It cannot be said that, the Ld. Tribunal has erred at law in any manner, by deciding the matter in a summary proceeding. This concept of summary proceedings, which has been raised by the Ld. Senior Counsel for the Appellant, in the instant company appeal is a feature which is unknown to law or unknown to the process of the I & B Code, 2016, or the rules framed thereunder. Nowhere under the Code itself and under the Rules framed thereunder, Ld. Tribunal is restricted from making effort to scrutinize the evidence and to read a document so as to come to a conclusion as to whether the facts and circumstances presented on recorded warrant passing of the order directing commencement of CIRP.

We are of the view that any adjudicatory body which decides a right or a liability or which fastens upon to decide a liability of a party to the proceedings or denies a right to a party to the proceedings, is duty bound, judicially, to consider the documents on record, analyse it and then to justify its finding for either allowing or rejecting the application under Section 9 of the I & B Code, 2016. If the case at hand is taken into consideration, the Ld. Tribunal has looked into the documents and has recorded its finding. It cannot be said that the Ld. Tribunal had exceeded its jurisdiction by carving out a case outside the ambit of being of summary proceedings, more particularly when most of the facts and figures were apparent from the documents relied by the parties to the proceedings and the contents of which were not denied.

If the Ld. Tribunal proceeds to record a finding based upon an admission made by the Corporate Debtor owing to their own email dated 02.11.2022 assuring to pay the amount, that certainly will not amount to that the Ld. Tribunal has exceeded in the exercise of its jurisdiction to conclude that commencement of the proceeding under Section 9 of the I & B Code, 2016 is justified.

Ld. Senior Counsel for the Appellant has tried to contend that since the correspondences between the parties reveal repeated negotiation which was being carried between the parties to settle the dispute, it establishes that the dispute is a pre-existing one and hence the debt and default have not been established. We are of a considered view that, when demand notice or a reply thereto, reflects that the efforts are being made between the parties to settle the outstanding amount by negotiation or an offer of negotiation, the said references will only indicate an admission of an existence of debt and default. Otherwise, if there was no debt in default, or if the Corporate Debtor wants to deny the contents of the demand notice, it will not venture into any efforts of negotiation. Negotiations itself will be synonym to the admission of default. In that view, under these circumstances and particularly, when read with the successive agreements on record, it could be said that, when almost the controversy at hand was an admitted controversy and it required only a limited assessment of the documents, it could not be said that the Ld. Tribunal had exceeded in the exercise of its jurisdiction as perceived by the Ld. Sr. Counsel for the Appellant by alleging that the proceedings under Section 9 of the I & B Code, 2016, is a summary proceedings and therefore, Ld. NCLT should not have ventured into detailed appreciation of the evidence and records. Hence this question, as argued by the Ld. Senior Counsel for the Appellant, is answered against him.

Ld. Senior Counsel for the Appellant has contended, that there happens to be a pre-existing dispute. The literal connotation of the word “dispute” in itself imbibes that there has had to be a controversy which requires a judicial determination, particularly when a fact is claimed by a party and it is disputed by the other. Thus dispute will be a matter which has to be agitated before an appropriate forum for settling of a liability or a right claimed by a party. Accordingly, pre-existing dispute will not be a cursory dispute between the parties. It will be an intricate dispute which has been already been agitated at any other forum for its adjudication to qualify as a pre-existing dispute, which is not the case at hand. And even if it is presumed that there happens to be a collateral proceeding for resolving of a dispute, which is marginally related to the facts under consideration in the proceedings under Section 9 of I & B Code, 2016, code, that in itself cannot be taken as to be a pre-existing dispute to debar the initiation of proceedings under Section 9 of I & B Code, 2016. If this philosophy, as agitated by the Ld. Senior Counsel for the Appellant, is permitted to be perpetuated, in that eventuality, none of the proceedings contemplated under law for initiation of the CIRP under section 9 of I & B Code, 2016, would be able to succeed, because it would be a very convenient stand to be taken by the Corporate Debtor that, there exists a pre-existing dispute and Section 9 proceedings cannot be initiated against it. The pre-existing dispute has to be an established dispute, which requires an elaborate deliberation or which is under elaborate deliberation before any adjudicatory forum or a forum available under law. Since in the instant case, the rights interceded between the parties were quite explicit, as per the own claims and the defence taken by the Respondent, it cannot be said that, at any juncture of the proceedings there was a pre-existing dispute which could have made the impugned order to be bad in the eyes of law.

Besides that, if the Appellant was intending to take the advantage that there existed a pre-existing dispute, then it was all the more necessary for the Appellant to have established, beyond doubt as to how the facts and figures as it engaged consideration and reflected from their own communications on record it could be said that there was a pre-existing dispute which is not the case at hand because the main facts and figures have already been admitted by the CD in their communications made with the OC.

The Ld. Senior Counsel for the Appellant had attempted to cast a doubt to the proceedings under Section 9 of the I & B Code, 2016, while giving an interpretation to the contents of their reply to the demand notice. The reply to the demand notice dated 03.07.2023 in itself doesn't reflect an absolute denial by the Corporate Debtor of its liability to pay the amount under the terms of the agreement dated 10.12.2020, the MoU dated 21.05.2021 and the termination agreement dated 15.03.2022. The termination agreement very clearly sets out the amount that needs to be paid by the CD. The subsequent agreement of 16.08.2022, entered into between parties, also confirms the dues to be paid by the CD and attempts to work out a modality as to how it can be repaid by the CD. The relevant part as contained in Clause 7 of the agreement dated 16.08.2022 is extracted hereunder: -

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 very feeble attempt has been made by the Ld. Senior Counsel for the Appellant that there is a pre-existing dispute because the unsold stocks have been returned in damaged condition and the CD is not liable to pay for the same. Though we have already dealt this with in the aspect preceding paragraph of this judgment as regards to the goods which were returned under the terms of the agreement and as regards to its quality, we need to reiterate that the CD ought to have dealt with the said issue at the inception itself, if at all the issue was a real issue. But that was not done by the Appellant at any prior point of time. Rather, it was admitted by the Corporate Debtor that, the goods which were returned under the agreement were in an absolutely good condition as per Clause 19.1of the Audit report itself which has got its sanctity in the eyes of law. Hence, the question of pre-existing dispute as argued by the Ld. Senior Counsel for the Appellant doesn't exist under the facts and circumstances of the instant company appeal and hence is not accepted.

The basic elements which require consideration to determine the existence of any element of a pre-existing dispute has had to be established in the light of the ratio laid down by the judgment as reported 2018 Volume 1 SCC Page 353, Mobilox Innovations Private Limited v. Kirusa Software Private Limited, which has provided that, to understand the concept of existence of a dispute, there has had to be a satisfaction of three major elements, i. the monetary amount of operational debt, ii. the validity of the claim, and iii. examination of the dispute between the parties that whether any suit or arbitration is pending.

In that regard, a reference may be made to the judgment as reported in 2023, Volume 3, SCC, Page 229, Sabarmati Gas Limited v. Shah Alloys Limited. In the case at hand, the aforesaid principles of determination of a pre-existing dispute do not stand satisfied, for the reason being that since there has been an admission of a monetary liability by the Corporate Debtor, it cannot be said that it was a disputed amount. Besides that, since the validity of the claim itself is admitted by the reply sent by the Corporate Debtor by the way of the email communication dated 02.11.2022 there could not have existed any pre-existing dispute. Besides, in the absence of there being any other independent suit or proceedings pending for settlement of rights, it can be reasonably said that, in the instant case, there was no pre-existing dispute which ought to have been taken as to be the basis for rejecting/admitting Section 9 application.

The judicial concept of the summary proceedings under law, envisages reading of available evidence on record, evidence produced by parties by way of an affidavit and the documents that are essential to determine the rights and liabilities before arriving at a conclusion. A case will be kept out of the ambit of a summary proceedings, only when it requires a detailed recording of an evidence or a scrutiny of the statement of the witnesses or issuance of a commission to collect facts and evidence to decide the case. In fact, the colour which has been assigned by the Appellant to the proceedings under Section 9 of the I & B Code, 2016, holding it to be summary in nature is contrary to the procedures contemplated under Part XVIII of the NCLT Rules of 2016, which in consonance to Rule 135 it entails a consideration for detailed evidence too, if at all it is required by the Court or the Tribunal to come to a proper conclusion for deciding a case before it.

The scope of Part XVIII of the rules takes the proceeding under Section 9 of the I & B Code, 2016, or for that matter, any proceedings for initiation of CIRP to be the outside the ambit of a summary proceedings as canvassed by the Ld. Senior Counsel for the Appellant.

Hence, the ‘company appeal’ lacks ‘merit’ and the same is accordingly ‘dismissed’. All the pending ‘interlocutory’ applications would stand ‘closed’.