Mr. Surendra Kanaiyalal Shah (Proprietor of Shah Photo Film Company) vs Magicon Impex Private Limited

PER: SH. L. N. GUPTA, MEMBER (T) Mr. Surendra Kanaiyalal Shah, Proprietor of Shah Photo Film Company (for brevity, the ‘Applicant/Financial Creditor’) has filed the present petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (for brevity, the ‘IBC, 2016’) read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a prayer to initiate the Corporate Insolvency Resolution Process against M/s Magicon Impex Private Limited (for brevity, the ‘Respondent’).

The Respondent namely M/s Magicon Impex Private Limited is a Company incorporated on 27.07.2004 with CIN U32201DL2004PTC 127870 under the provisions of the Companies Act 1956 having its Registered Office at B1/625, 2^nd Floor, Main Road Janakpuri, New Delhi -110058, which comes within the jurisdiction of this Tribunal. The Authorized Share Capital of the Respondent Company is Rs.10,50,00,000/- and the Paid-up Share Capital of the Company is Rs.4,34,00,000/- as per Master Data.

It is stated by the Applicant that it owns a warehousing facility that was availed by the Respondent for the purpose of clearing, storing, handling, and forwarding its goods. For this purpose, the Respondent and the Applicant entered into an Agreement dated 25^th March 2019 (commencement date 28^th February 2019), whereby the Applicant was appointed as the “Consignment & Freight Agent” for the Gujarat region for the entire product range of Mobile handset, accessories, spare parts etc. and any other products selected by the Respondent. The duration of the Agreement was decided to be one year from the date of commencement, i.e., 28.02.2019. It is further stated that -

As per Clause 8 of the said Agreement dated 25.03.2019, the Applicant was required to make a security deposit with the Respondent to cover the average inventory maintained by the Applicant. Initially, the amount of the security deposit was set to Rs.50,00,000/- which was later increased to Rs.70,00,000/- by the Respondent. The Applicant duly paid the security deposit of Rs.70,00,000/- vide bank transfer between 01.04.2019 and 15.06.2019. It was also agreed between both parties that the said deposit will be refundable and treated as an Investment on which the Respondent shall provide 1% return per month payable after receipt of the whole security amount. In addition, the Applicant shall also be entitled to a commission of 1% per month of monthly turnover.

As per clause l0(b) of the said Agreement, either of the party was entitled to terminate the agreement by giving the other 30 days’ notice in advance without any liability to pay compensation, however, such termination would not affect the right of the other party to claim for its payment. Further, in terms of clause 10(e), if the said Agreement is terminated by the Agent, i.e., Applicant herein, then the Respondent was required to release the security deposit to the Applicant after deducting any amount recoverable from the Applicant, within 45 days from the date of termination. Due to dissatisfaction from the business with the Respondent, the Applicant served notice of termination on the Respondent on 11.11.2019. Thus, the Agreement stood terminated on 11.12.2019 in terms of clause 10 (b) of the said Agreement.

The Respondent lost substratum and could not adhere to the terms of the Agreement dated 25.03.2019 and failed to return the security deposit amount along with interest to the Applicant, which at present stands outstanding to the tune of Rs.1,11,63,151/-.

On issuance of the notice, the Respondent filed its reply and stated that (i) There was no Demand notice, under Section 8 of IBC 2016, served to the Respondent by the Applicant, (ii) The present Application does not meet the minimum threshold requirement and is barred by Res judicata, (iii) The Applicant had claimed interest under the suspension period falling under Section 10A of IBC, 2016, and (iv) An amount of Rs. 20,00,000 was asked to be retained by the Applicant to the Respondent vide e-mail dated 17.12.2019.

The Applicant also filed its rejoinder stating that (i) There is no statutory requirement of issuing a Demand notice under Section 8 of IBC 2016, in a Section 7 proceeding, (ii) The earlier Application was not adjudicated on merits. Hence, Res judicata does not apply, (iii) The claim of the Applicant along with interest is above Rs. 1 Crore. Therefore, the petition is not barred by the threshold, and (iv) The date of default is prior to the Section 10A period. Hence, the petition is maintainable.

It is averred by the Applicant that earlier, it had filed another petition under Section 7 bearing no. CP-(IB) No. 88/ND/2021 against the same Respondent, which was dismissed vide order dated 27.05.2022 on the ground that the application did not satisfy the threshold limit of Rs.1 Crore, whereas the present application is filed for Rs.1,11,63,151/-.

Hence, before proceeding ahead, we would like to examine Whether both Petitions were filed for the same transaction. In this context, we first visit Part-IV of CP-(IB) No. 88/ND/2021 (which was dismissed vide order dated 27.05.2022) which reads thus:

Now, we also visit the Part-IV of the instant petition, which reads thus:

On a conjoint reading of Part-IV of CP-(IB) No. 88/ND/2021 and Part-IV of the instant petition, it is observed that the principal amount claimed in both the petitions remains the same i.e., Rs.70,00,000/- and even the date of default relied on i.e., 25.01.2020 is the same in both the petitions. Evidently, both petitions are filed for the same transaction.

Now, a question arises what is the change in the circumstances by which the claim amount of Rs.80,05,672/- under CP-(IB) No. 88/ND/ 2021 due on 25.01.2020, has increased to Rs.1,11,63,151/- in the present petition while the date of default remaining intact or unchanged.

We notice that the petitioner has provided the computation of the default amount in both the petitions, hence we would like to examine the same. Accordingly, first, we refer to the computation of default as provided in the earlier CP-(IB) No. 88/ND/2021, which reads thus:

Now, we refer to the computation of default as relied on in the present petition, which reads thus:

On a simultaneous reading of the “computation of the debt amount in default” in both the petitions, we observe that as per the column titled “Interest up to the date of Demand Notice” was Rs.17,88,303/- in the last CP-(IB) No. 88/ND/2021, which in the instant petition has been revised upwards to Rs.49,45,782/-. The difference between the two amounts claimed on account of Interest by the Petitioner comes to Rs.31,57,479/-. However, on perusal of the instant petition, we observe that the Petitioner has not specified the period for which the said interest is calculated and claimed.

However, in the interest of justice, we would still like to examine the transaction and find out Whether there is any unpaid “Financial Debt” subsisting “of more than Rs. 1 Crore”?

It is noticed that the Applicant has annexed the “Record of Financial Information-Form C” of Information Utility/NeSL to establish that there is an outstanding debt of Rs.1,11,63,151/-, which is in the nature of a Financial Debt. The said document of NESL is reproduced overleaf, for immediate reference:

Thus, we find that though the “Record of Financial Information” of the Information Utility/NeSL reveals a default of a Financial Debt amounting to Rs.1,11,63,151/-, it does not indicate the basis of treating/classifying the default amount as “Financial Debt” and the basis of computation of the amount especially when we have observed that the Petitioner has preferred two petitions and revised the amount of Interest claimed upwards to Rs.49,45,782/- in the second petition, while the amount of principal remaining constant at Rs.70,00,000/-.

Therefore, we would still like to examine the transaction between the parties. As contended by the Petitioner, in terms of the Agreement dated 25.03.2019, it had made a Security Deposit of Rs.50,00,000/- with the Respondent. The relevant Clause of the Agreement dated 25.03.2019 is reproduced below:

It is also pleaded by the Applicant that the said amount of the Security Deposit was increased to Rs.70,00,000/-. Though the Petitioner has not annexed any proof of the disbursement, however, the disbursement of the security deposit amount has not been denied or disputed by the Respondent. Therefore, we assume that the said amount of Rs. 70,00,000 was disbursed by the Applicant to the Respondent.

At this juncture, we consider it appropriate to visit the relevant clauses of the Agreement dated 25.03.2019, prescribing the tenure/duration of the Agreement as well as the Remuneration structure. The Clause 2 of the Agreement regarding “duration” reads thus:

On perusal of the above, it is observed that the Agreement dated 25.03.2019 was valid only for a period of one year with effect from 28.02.2019 and could be terminated, with or without any reason, by either of the parties by giving 30 days’ notice in writing.

Now, we visit the “Remuneration” Clause of the Agreement dated 25.03.2019 which specifies interest/commission payment/return on Security Deposit. The relevant Clause 9 along with Schedule – I of the Agreement reads thus:

On perusal of the above, it is observed that the Petitioner as an “agent” of the Respondent had a minimum assurance of 24% per annum return on the security deposit amount (inclusive of 1% interest and 1% commission on sale) applicable from the date of receipt of the whole security deposit.

Thus, it is observed that the “return on the security deposit” had two components i.e., (a) interest, and (b) commission on the sale. Undisputedly, “interest” can be claimed as a “Financial Debt”, however, we would like to examine, whether the “commission on sale” can be claimed as Financial Debt. Accordingly, we refer to the definition of “Financial Debt” as given under Section 5(8) of IBC 2016, which reads thus:

On a perusal of the definition (ibid), it is observed that “financial debt” has the following essential ingredients -

Thus, the portion of the unpaid debt claimed by the Petitioner herein towards the Security Deposit along with interest is undoubtedly a Financial Debt. However, the portion of unpaid debt claimed in respect of the “commission of sale” has neither the time value of money nor is covered under any type of transactions specified under sub-clauses 5(a) to 5(i). Hence, in our considered view, the “commission on sale” is not a Financial Debt, and therefore, the Petitioner cannot claim the same as unpaid financial debt.

Though normally this Adjudicating Authority does not indulge itself in computing the quantum of debt, however, in the interest of justice, we would like to find out Whether the Petitioner meets the minimum threshold requirement of having a “Financial Debt” of more than Rs. 1 Crore, especially in the backdrop of the first petition viz., CP-(IB) No. 88/ND/2021 of the Petitioner getting dismissed being barred under Section 4 of the IBC 2016.

As observed earlier, the petitioner disbursed an amount of Rs.70,00,000/- as Security Deposit in terms of the Agreement dated 25.03.2019, which was valid for a period of 01 year. This implies that the Petitioner was entitled to receive interest payment only for up to 1 year. Since the rate of Interest as per the aforesaid Agreement was agreed upon as 1% per month, therefore, we would like to calculate the amount of interest receivable @12% per annum by the Petitioner. Accordingly, the interest amount payable comes to the tune of (Rs.70,00,000 x 12 x1/100) Rs.8,40,000/-. When we add to this, the principal amount of the security deposit of Rs.70,00,000/- deposited by the Petitioner with the Respondent, the total amount of the unpaid Financial Debt i.e., principal + interest comes to Rs.78,40,000/- only, which is when we have not deducted the part payment on account of interest/commission made by the Respondent to the Petitioner.

In view of the above, the maximum financial debt entitlement of the Petitioner comes to Rs. 78,40,000/- only, which is less than the minimum threshold amount prescribed under Section 4 of IBC 2016, therefore, we find that the present petition is not maintainable. Accordingly, the Petition is dismissed.

Before parting with the Judgement, we would however like to observe that in such matters where the category and the quantum of debt are ambiguous, the Record of Default of Information Utility cannot be taken as gospel truth. Though the “Record of Financial Information” of the Information Utility revealed a default of a “Financial Debt” amounting to Rs.1,11,63,151/-, we could find that the amount of Financial Debt at the most could be Rs 78,40,000/- only and the amount claimed as “commission on sale” is not a Financial Debt.

We further observe that the earlier Petition -(IB) No. 88/ND/2021 filed by the Petitioner for the same cause of action/transaction was dismissed on the ground of not meeting the threshold in terms of Section 4 of IBC, 2016 and the Petitioner has again filed the present petition by inflating its claim without any justification as noted in Para 11 above, we consider it appropriate to impose a cost of Rs 1,00,000/- ( one lakh) only to be deposited by the Petitioner in the Prime Minister’s Relief Fund within 15 days of this order. The receipt of the deposit shall be uploaded on the DMS of this Tribunal under intimation to the Registrar/ Court Officer.

A copy of this order be supplied to the parties. A copy may also be sent by the Court officer to IBBI as well as NeSL – the Information Utility.