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Judgment
ORDER
Oral Judgment : Justice Sharad Kumar Sharma, Member (Judicial):
After elaborate and analytical arguments advanced with the assistance of the learned counsels for the parties, and based on their respective contentions, the subject matter that emerges for consideration, and to which the Appellant has taken exception, is the impugned order dated 04.06.2024, rendered in CP (IB) No. 69 / 9 / HDB / 2023, by virtue of which, the application filed by Respondent No. 2, Mytrah Energy (India) Private Limited, under Section 9 of the I & B Code, 2016, has been admitted, leading to the commencement of CIRP proceedings, against the Corporate Debtor, M/s. Naolin Infrastructure Private Limited.
To summarize the controversy we are called upon to examine and which forms the genesis of the dispute the following questions arise:
Whether there was an admitted amount due to be paid to the Applicant, as referred to in the application filed under Section 9 of the Code, by the Appellant;
Whether there was an admitted and established default; and
What modalities were required to be adopted for determining the aspect of default, which is the central issue in controversy.
The controversy presented by the learned counsel for the Appellant is that civil works were awarded to the Corporate Debtor vide two Purchase Orders (POs) as far back as 08.09.2021. The said Purchase Orders specified the date for completion of work, and time was made the essence of the contract, as mutually agreed upon. The work was required to be completed by 31.12.2021.
It is further stated that, the Purchase Orders were amended on 05.04.2022, modifying the payment terms to 75% of the purchase value as advances, against submission of the Proforma Invoice and extending the date of completion to 30.07.2022.
Elaborating further, the Corporate Debtor is stated to have submitted the Proforma Invoice on 07.04.2022, in accordance with the understanding between the parties, and this was also produced before the learned Adjudicating Authority for determination of the above three primary questions. It is undisputed that the Operational Creditor made payment to the tune of Rs.2,30,11,558/- on 25.05.2022 by RTGS, against the Proforma Invoices issued, and had requested issuance of a cheque for ₹2.34 crores, subject to the conditions stated in the invoices, it is an admitted fact that, in compliance, a cheque dated 07.07.2022 was issued by the Corporate Debtor on 10.07.2022.
On 10.08.2022, JSW Neo Energy Limited, in compliance with SEBI (Acquisition and Takeover) Regulations, agreed to acquire Mytrah Energy (India) Private Limited, and filed a written declaration intimating the acquisition of the Operational Creditor with effect from 10.08.2022. It is the contention of Appellant that the said Assignment is unregistered.
Although, deadline for completion of awarded works expired on 30.07.2022, the Work Contract dated 08.09.2021 remained in force for performance of the works, and allegedly upon request of the Operational Creditor, the Corporate Debtor issued an undated cheque for ₹2.34 crores on 15.10.2022 in favour of Mytrah Energy Vayu (Som) Pvt. Ltd. (Respondent No. 2), as a security for the advance given, subject to the condition that the project completion date would be, subject to the condition that the project completion date would be extended to 10.11.2022. The Corporate Debtor also issued a letter dated 15.10.2022 narrating the same. Despite this extension, the work allegedly remained incomplete, leading the Respondent/Operational Creditor to issue a demand notice under Section 8 of the I & B Code, 2016, on 16.12.2022, for refund of the advance given against the Purchase Order.
Upon perusal of the communication dated 15.10.2022, it appears to relate exclusively to issuance of the cheque of ₹2.34 crores, by M/s. Naolin Infrastructure Private Limited, drawn on Karnataka Bank in favour of M/s Mytrah Vayu (Som) Private Limited, in consideration of the payment of advance to the tune of ₹2,30,11,558/- paid on 25.05.2022, by the letter to the CD in accordance with the terms of Purchase Order dated 07.04.2022.
In a nutshell, the facts that may be summarized from the contents of the said letter are as follows:
That there existed a contractual obligation binding inter se among the parties, particularly upon the Appellant, who had issued Cheque No. 892786, amounting to ₹2.34 crores, drawn on Karnataka Bank Limited, in favour of M/s Mytrah Vayu (Som) Private Limited, the Purchaser in consideration of the advance payment of ₹2,30,11,558/- paid to the Appellant on 25.05.2022.
The Appellant admitted the exchange of the amount referred to in the said communication; and
That the deadline for completion of work, as mentioned in the Demand Notice dated 16.12.2022, stood extended until 10.11.2022.
The notice under Section 8 of the I & B Code was issued by the Respondent (Operational Creditor), thereafter on 16.12.2022, for amount of ₹2,34,08,250/- with interest @ 24% per annum. The date of default mentioned therein was 30.07.2022 and 15.10.2022. The Appellant contested the contents of the demand notice issued under Section 8 of the I&B Code, 2016, on 16.12.2022, by filing a reply on 03.01.2023, alleging that the stated due is not an Operational Debt, that the delay in completion of work was due to non-handing over of site, that the Contract is yet to be terminated and hence there is no default and that without prejudice it is ready to execute the Project.
Subsequent to this, M/s Mytrah Vayu (Som) Private Limited filed an Application under Section 9 of the I & B Code, 2016, on 08.02.2023, seeking commencement of CIRP against the CD on the ground that they defaulted in making payment of a sum of ₹2,65,63,554/- said to be due and payable till the date of issue of demand notice. The Appellant, Corporate Debtor contested the proceedings stating that the Debt is disputed, the Operational Creditor did not handover the Site, he has suffered loss because of non-cooperation of the OC, OC is using IBC for recovery proceedings, that the case filed by OC on account of dis-honouring of cheque has been quashed by Hon’ble High Court and that OC has illegally assigned the debt in favour of M/s. Mytrah Energy. However, the arguments extended by the learned counsel for the Appellant before the learned NCLT, Hyderabad Bench, did not find favour, and the Section 9 application under the I & B Code was admitted into CIRP proceedings, against which the present Appellant has filed this Company Appeal.
The arguments of the learned counsels for the respective parties have been considered. They submitted that if the terms of the contract and the documentation executed in the context of the Work Order are examined, it becomes apparent that a Cheque bearing No. 892904 dated 07.07.2022 for an amount of ₹2.34 crores was given by Appellant to Respondent No. 2, which would be deemed to be as a security, against the advance payment of ₹2,30,11,558/- paid on 25.05.2022. The communication dated 07.07.2022 must be read in rational conjunction with the letter dated 15.10.2022. Though the communication dated 07.07.2022 contemplated completion of work by 30.07.2022 and this date has been taken as date of default in the demand notice, it cannot strictly be attributed as the date of default. This is because the letter itself provided that in the event of delay in completion or non-completion of work due to reasons not attributable to the Purchaser, the Contractor would be liable to refund amounts corresponding to uncompleted or delayed work, which means that in case work is delayed because of action of Purchaser / Force Majeure, date of default has to be re-determined accordingly.
The undertaking given by the Appellant vide its letter dated 07.07.2022 is given below:
``The completion date for scope of works is 30.07.2022. In the event of any delay in completion or non-completion of scope of works due to any reason, non-attributable to Purchaser, the Contractor shall be liable to refund the amount for the works which have not been completed or delayed. We further confirm and undertake that,
(i)The Bank account from which the Cheque has been issued shall not be closed during the validity period of the Cheque.
(ii)We shall not issue any stop payment advice to our Bank towards the Cheque issued by us; and
(iii)The Cheque has been duly signed by the authorized signatories of the Contractor as per the Bank Account records. We hereby undertake to indemnify in case of any violation of any of the undertakings mentioned herein this letter.’’
It implies that the Appellant stood committed to refund the advance received against the Purchase Order for the works not completed / delayed.
As already referred to above, the letter dated 15.10.2022, issued by M/s Naolin Infrastructure Private Limited (Corporate Debtor) through its Authorized Signatory, was based substantially on the same terms and conditions as the communication dated 07.07.2022. Two aspects become apparent:
That there was an extension of Credit (in form of advance) by the Respondent to the Appellant, a fact admitted by the contents of the said letters.
That the undertakings given in both communications amount to an admission of debt.
The only remaining question to be considered in the dispute is the exact date of default. If the communication dated 07.07.2022 is considered in its entirety, the default could be deemed to arise on the completion date as originally stipulated i.e., 30.07.2022. However, if the undertaking in the letter dated 15.10.2022 is considered, it amounts to an assurance by the Appellant to complete the scope of work by 10.11.2022. If that was the extended completion date, then the date of default would necessarily be 10.11.2022 in case the Appellant was unable to complete the Project by that date. Thus, under no circumstances would 30.07.2022 be the date of default; instead, the date of default would be the extended date, i.e., 10.11.2022, under the same terms and conditions, including the undertaking to indemnify in case of violation of any terms mentioned in the communication of the Appellant dated 15.10.2022.
The learned counsel for the Respondent submitted that the manner in which the learned counsel for the Appellant has interpreted the contents of the Notices under Section 8 of the I & B Code, 2016, dated 16.12.2022, for the purpose of determining the “date of default” and the allegation that the Section 8 notice was issued as an “advance notice” is absolutely incorrect and contrary to the record. According to the Appellant’s own case, the date of default referred to in the Section 9 application has been construed as 10.11.2022, based on the communication of extension provided via the letter dated 15.10.2022. Therefore, any notice issued under Section 8 of the I & B Code demanding the defaulted amount necessarily had to be dated after the expiry of the extended deadline of 10.11.2022.
The demand notice was consequently issued by the Respondent / Operational Creditor, due to the default in complying with the extended timeline, and was issued on 16.12.2022 under Section 8 of the I&B Code. It is seen that, demand notice was issued after the occurrence of default; exact date of default will not matter because, as long as the demand notice is issued within the limitation period, variation in date of default will not vitiate the CIRP proceedings. In certain cases variation has not been allowed because, Creditors had tried to get around limitation, Section 10A restriction etc. That is not the case agitated by Appellant.
Another important feature that requires consideration for determining whether there was an admission of liability. It is seen that the Corporate Debtor, while acknowledging the debt and the liability to pay dues, had itself issued cheques for the amount owed to the Operational Creditor. When these cheques were presented for encashment before the Bank, they were dis-honoured and returned on 25.01.2023. Issuance of the cheque itself amounts to an admission of liability, as it involves tendering a negotiable instrument an aspect that has not been denied by the Appellant.
On the issue of dis-honour of the cheque, an independent criminal proceeding was initiated under Section 138 of the Negotiable Instruments Act. However, the pendency of such proceedings will have no relevance or bearing on the present Company Appeal. The Appellant had also initiated parallel proceedings by way of Criminal Petition No. 8703 of 2023 before the Hon’ble High Court of Telangana under Section 482 of the Cr.P.C., challenging proceedings drawn against him under Sections 406 and 420 of the IPC. The Hon’ble High Court quashed those proceedings via order dated 27.09.2023. However, even this quashing order will have no bearing on the present proceedings under Section 9 of the I & B Code, 2016. Which must be considered independently, as criminal proceedings do not affect civil insolvency proceedings. Merely because a criminal complaint under Section 138 of the Negotiable Instruments Act is pending regarding dis-honour of the cheque, the rights of an Operational Creditor to initiate proceedings under Section 9 of the I&B Code are not curtailed. In the instant case, the Section 9 application was filed on 08.02.2023, and the pendency of the Section 138 proceedings will not cloud or override such rights.
During the course of arguments in this Company Appeal, the learned counsel for the Appellant raised two new grounds:
He submitted that the work to be carried out under the Work Contract could not be executed within the prescribed time frame because the site was not handed over.
In our opinion, since this assertion has been strongly refuted by the learned counsel for the Respondent who contends that Appellant has failed to produce any evidence, the issue of non-handover of the Site and its bearing upon proceedings under Section 9 of the I&B Code ought to have been raised by the Corporate Debtor at the first available opportunity when filing objections before the learned Adjudicating Authority the Appellant cannot take this plea for the first time at the appellate stage. The question of non-handover of the site is a question of fact that requires evidence.
In any case, scope of work as per Purchase Order (Page 89), general terms and conditions Clause – I shows that clearing vegetation, development of roads, clearing of required land and handling right of way is the responsibility of the Appellant. Therefore, non-handing over of the Site cannot be a plea. Further, Appellant in his communication has never referred to these issues while reiterating his commitment to complete the work. Since the Appellant was aware of this fact but did not raise it at any earlier stage of the proceedings, except now in this Company Appeal, the said plea cannot be treated as a defence to contend that the impugned order admitting the CIRP proceedings under Section 9 of the I & B Code, 2016, is bad.
The learned counsel for the Appellant further attempted to create doubt regarding the entire proceedings by referring to various email communications on the record of the Company Appeal, which were said to have been sent by the Operational Creditor to the Corporate Debtor. Invariably, the responses sent by the Corporate Debtor to these emails contained assurances regarding remittance of the amount due on account of non-performance of work under the contract and in view of the observations made in the letter dated 15.10.2022, these assurances, given in response to the Operational Creditor’s emails, constitute an implied admission of debt and default under the I & B Code.
On the question of the implications of non-handover of the site, this issue has never been raised as a ground in reply to the notice under Section 8 of the I&B Code, 2016. The same applies to the argument regarding the email communications, which the Appellant now alleges are doubtful because they were sent from a different email address than that of the Operational Creditor. More importantly, the Appellant has not denied the contents of these email communications and has, in fact, responded to them. Therefore, the emails sent by the Operational Creditor demanding payment of the dues owed by the Appellant would amount to admission of debt and default facts that are established from the pleadings and evidence on record.
While considering the questions framed earlier for deciding the issue in controversy relating to admission of the Section 9 Application under the I&B Code, it becomes essential to examine the matter in light of the questions framed by the learned Tribunal, particularly regarding the modalities for determining “Operational Debt” under the definition provided in the Code. Operational Debt is defined under Section 5(21) of the I&B Code, 2016, which reads as follows:
“(21)“operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 5[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”.
Considering the definition of operational debt, the parameters required for determining whether a claim qualifies as operational debt must align with the definition itself.
The learned counsel for the Appellant had argued before Ld. NCLT as to whether an “advance amount” paid in furtherance of execution of a contract would constitute operational debt for purposes of proceedings under Section 9 of the I & B Code, 2016. The learned Tribunal, while analysing and recording findings on this issue, relied upon the principles laid down by the Hon’ble Supreme Court in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions Pvt. Ltd., (2022) 7 SCC 164, particularly paras 50.1, 50.2 and 50.3, which are extracted below:
“50.1.First, Section 5(21) defines 'operational debt' as a "claim in respect of the provision of goods or services". The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver. Such an interpretation is also supported by the observations in the BLRC Report, which specifies that operational debt is in relation to operational requirements of an entity.
50.2.Second, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the 2016 Application Rules makes it abundantly clear that an operational creditor can issue a notice in relation to an operational debt either through a demand notice or an invoice. As such, the presence of an invoice (for having supplied goods or services) is not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt. This is made even more clear by Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 which provides an operational creditor, seeking to claim an operational debt in a CIRP, an option between relying on a contract for the supply of goods and services with the corporate debtor or an invoice demanding payment for the goods and services supplied to the corporate debtor. While the latter indicates that the operational creditor should have supplied goods or services to the corporate debtor, the former is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and corporate debtor, including ones where the operational creditor may have been the receiver of goods or services from the corporate debtor.
50.3.Finally, the judgment of this Court in Pioneer Urban (supra), in comparing allottees in real estate projects to operational creditors, has noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services. Indeed, the decision notes that "[e]xamples given of advance payments being made for turnkey projects and capital goods, where customization and uniqueness of such goods are important by reason of which advance payments are made, are wholly inapposite as examples vis-à-vis advance payments made by allottees. Hence, this leaves no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.”.
It has been observed that, in light of para 50.3 of the above judgment, this issue is no longer res integra. It now stands settled that any amount paid as advance payment for goods or services under the terms of a contract (or otherwise) constitutes operational debt. Therefore, the contention raised before the learned Tribunal that the proceedings were not maintainable because the “advance amount” is not operational debt has been rightly rejected. The impugned order appropriately applies the principles laid down by the Hon’ble Supreme Court in Consolidated Construction Consortium Ltd. (supra), holding that an advance amount falls within the ambit of operational debt.
The aforesaid implication of operational debt has also been attempted to be correlated by the Appellant by raising an objection that the site in question was handed over to the Appellant at a belated stage. This aspect was considered in detail by the Learned Tribunal while making its observations in paragraph 8 of the impugned order. It was observed that the plea regarding non-handover of the site by the Operational Creditor was not sustainable before the Learned Tribunal, nor was any attempt made to substantiate this allegation with evidence. The Learned Tribunal held that the plea was vague and related merely to advances, and such a vague plea could not be construed to satisfy the theory of non-handover of the site.
Another question that came up for consideration before the Learned Tribunal was concerned with the effect of registration of a Deed of Assignment, as argued by the learned counsel for the Corporate Debtor. It was submitted that registration of the Assignment Deed was mandatory. This issue, however, is no longer res integra, as it has already been settled that registration of an Assignment Deed is not a condition precedent under the I & B Code. In the present case, the Deed of Assignment dated 29.03.2023, executed between Mytrah Vayu (Som) Private Limited (the original Applicant under Section 9) and Mytrah Energy (India) Private Limited, had the effect of assigning the debt to the latter. The nature and effect of such an assignment do not require registration under the Code for the assignee to step into the shoes of the original applicant under Section 9.
The Learned Tribunal relied on the judgment in CFM Asset Reconstruction Pvt. Ltd. v. M.G. Finvest Pvt. Ltd., in COMPANY PETITION IB (IBC) NO. 115/PB/2022 by NCLT, New Delhi Bench, wherein it was held that assignment of debt is essentially a transaction between the creditor and the assignee, and such assignment is recognised by the Code as a valid mode of transfer of rights under Section 5(7) of the I&B Code, which states:
``Section 5(7) - "financial creditor" means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to;’’
Therefore, registration of the Assignment Deed is not a precondition under law or the I & B Code for conferring the right to maintain proceedings under Section 9. Accordingly, this argument of the Appellant was rejected, based on the principles laid down in paragraph 10 of CFM Asset Reconstruction Pvt. Ltd. The relevant portion is extracted below:
``10. We are of the considered view that the assignment of debt essentially being a transaction between the creditor and the assignee and assignment being recognized by the Code, 2016 as a valid mode of transfer of rights across the ambit of section 5(7) of the Code, therefore, the entity who received the said assignment of debt falls within the fold of “financial creditor”.Further, the hon'ble National Company Law Appellate Tribunal in Lalan Kumar Singh v. Phoenix ARC P. Ltd. [2018 SCC OnLine NCLAT 835; (2020) 221 Comp Cas 122 (NCLAT).] , observed that the declaration of assignment agreement is essentially a civil proceeding. The relevant extract is reproduced below (page 130 of 221 Comp Cas):
“In the present case we find that the appellant has sought declaration that the assignment made by HSBC to ‘Phoenix’ as illegal, which can be raised only in a civil suit. The appellant is trying to convert the proceedings under the ‘I and B Code’ as civil proceedings akin to a trial which is not the legislative intent.”
Yet another judgment of the Principal Bench, Lalan Kumar Singh v. Phoenix ARC Pvt. Ltd., 2018 SCC OnLine NCLAT 835, laid down similar principles as those in CFM Asset Reconstruction Pvt. Ltd. For brevity, relevant paragraphs 19 and 21 are reproduced below:
``19. In the present case we find that the appellant has sought declaration that the assignment made by the HSBC to "Phoenix" as illegal, which can be raised only in a civil suit. The appellant is trying to convert the proceedings under the "I and B Code" as civil proceedings akin to a trial which is not the legislative intent.
20.…………………………….
21.The objective of the I and B Code is to ensure re-organization and insolvency resolution of the corporate persons, partnership firms and individuals, in a time-bound manner for maximisation of value of assets of such persons to promote entrepreneurship, availability of credit and balance of interest of all stakeholders. The assignment cannot be challenged in the petition under section 7 and that too by a party who had the knowledge of "assignment deed" as back as in the year 2012, as noted above, the Debts Recovery Tribunal, Chandigarh, when it requested and never challenged the same before a court of competent jurisdiction.’’
The last issue argued by the learned counsel for the Appellant concerns the effect of initiation of proceedings under Section 9 of the I & B Code when a notice under Section 138 of the Negotiable Instruments Act, 1881, and a criminal complaint have already been issued. The issue regarding the effect of pendency of proceedings under Section 138 NI Act is now settled. The mere pendency or continuation of criminal proceedings under Section 138 or writ proceedings or an application under Section 482 Cr.P.C. has no bearing on proceedings under Section 9 of the I&B Code.
The Learned Tribunal relied upon the judgment of the Hon’ble Supreme Court in Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corporation of India Ltd., 2023 LiveLaw (SC) 195, which clarifies that proceedings under the NI Act are penal in nature, whereas proceedings under the I & B Code pertain to insolvency and are civil in nature. The two operate in different spheres.
Thus, the mere institution or pendency of proceedings under Section 138 NI Act cannot terminate or affect proceedings under Section 9 of the I & B Code, which must be independently decided. Furthermore, the cheque that was issued and later dis-honoured relates to the admitted amount due. The dis-honour of the cheque, a fact not denied, constitutes an admission of liability, though any criminal consequences arising under Section 138 NI Act will be separate and independent. Relevant paragraphs 16 and 18 of Ajay Kumar Radheyshyam Goenka (supra) are extracted below:
``16. We have no hesitation in coming to the conclusion that the scope of nature of proceedings under the two Acts and quite different and would not intercede each other. In fact, a bare reading of Section 14 of the IBC would make it clear that the nature of proceedings which have to be kept in abeyance do not include criminal proceedings, which is the nature of proceedings under Section 138 of the N.I. Act. We are unable to appreciate the plea of the learned counsel for the Appellant that because Section 138 of the N.I. Act proceedings arise from a default in financial debt, the proceedings under Section 138 should be taken as akin to civil proceedings rather than criminal proceedings. We cannot lose sight of the fact that Section 138 of the N.I. Act are not recovery proceedings. They are penal in character. A person may face imprisonment or fine or both under Section 138 of the N.I. Act. It is not a recovery of the amount with interest as a debt recovery proceedings would be. They are not akin to suit proceedings.
17.…………
18.We are unable to accept the plea that if proceedings against the company come to an end then the Appellant as the Managing Director cannot be proceeded against. We are unable to accept the plea that Section 138 of the N.I. Act proceedings are primarily compensatory in nature and that the punitive element is incorporated only at enforcing the compensatory proceedings. The criminal liability and the fines are built on the principle of not honouring a negotiable instrument, which affects trade. This is apart from the principle of financial liability per se. To say that under a scheme which may be approved, a part amount will be recovered or if there is no scheme a person may stand in a queue to recover debt would absolve the consequences under Section 138 of the N.I. Act, is unacceptable.’’
For the reasons as assigned above by us in the aforesaid Judgment, we are of the view that owing to the undertaking, which has been mentioned in the communication of 07.07.2022 and reiterated in the letter dated 15.10.2022, and other email communication, which have been brought on record, they all compositely will amount to be an admission of the liability and payability of an Operational Debt and particularly in the context of the letter that was issued on 15.10.2022, where the Appellant had sought an extension of the payment of debt, which amounts to be an apparent admission of the liability or the debt payable to the Financial Creditor. Owing to the aforesaid and for the reasons, which we have assigned in the Judgment, we are of the considered view that the impugned order, which has been rendered by the Learned Tribunal dated 04.06.2024, does not call for any interference in the exercise of our Appellate Jurisdiction under Section 61 of the I & B Code, 2016. Hence, the Company Appeal would stand closed. All pending Interlocutory Applications, if any, would stand closed.