Parimal Vakharia Couture vs Kiaasa Retail LLP

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 (‘IBC’ in short) by the Appellant arises out of the Order dated 19.04.2022 (hereinafter referred to as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Court III) in CP(IB) No.3123(MB)/2019. By the Impugned Order, the Adjudicating Authority has dismissed the Section 9 petition filed by the Appellant seeking to bring the Corporate Debtor under the rigours of Corporate Insolvency Resolution Proceedings (‘CIRP’ in short). Aggrieved by this impugned order, the present appeal has been preferred.

The Learned Counsel for the Appellant/Operational Creditor, submitting the facts necessitating the filing of this appeal has submitted that they supplied garments to the Corporate Debtor, Kiaasa Retail LLP on the basis of orders received from the Corporate Debtor for the period October 2018 to February 2019. Goods were delivered within the given time-frame and no disputes or complaints was raised by the Corporate Debtor before or after the supply of goods and not even before the Adjudicating Authority. It has also been submitted that after some initial denial, the invoices raised have been acknowledged by the Corporate Debtor and that there has been no denial with regard to receipt of the goods delivered by the Operational Creditor. It is further submitted that the confirmation of accounts by the Corporate Debtor duly signed and sealed clearly indicates that debt has been established. It has also been claimed that the audited balance sheet of the Corporate Debtor for the year ending March 2020 acknowledges the debt.

Further adding that payment for the garments having become due from the Corporate Debtor and having remained unpaid, the Appellant/Operational Creditor left with no other choice but to take legal recourse issued demand notice on 09.05.2019 claiming a total due amount of Rs.1,30,67,415.26 including an interest amount of Rs.7,21,935.26 and thereafter filed a Section 9 application on 01.08.2019 before the Adjudicating Authority. It was further submitted that though the Adjudicating Authority in the impugned order noted the acknowledgment of debt by the Corporate Debtor but it erred in concluding that there was no specific admission of liability made in the said acknowledgement. Furthermore, there being no dispute in existence before the issue of the demand notice, the Adjudicating Authority by rejecting the Section 9 petition failed to appreciate the facts in the correct perspective that the defence raised by the Corporate Debtor is a sham based on concocted documents.

The Learned Counsel for the Respondent while making his submissions admitted that they received the demand notice dated 09.05.2019 and that reply to the said notice was sent on 20.05.2019. Going into the background of their relationship with the Operational Creditor, it is submitted that as the loan account of Parimal Vakharia Couture, the Operational Creditor was to be declared Non-Performing Asset, it sought help from the Corporate Debtor through a property broker, one Naveen Dalal. The said broker arranged a deal between the Operational Creditor and the Corporate Debtor. The terms and conditions of this business arrangement in the form of a draft Memorandum of Understanding (‘MoU’ in short) was exchanged with the Operational Creditor vide email dated 18.10.2018 with the intervention of the said Naveen Dalal. While admitting that the draft MoU was not signed between the two parties, it was asserted that there was a clear intention to abide by the terms and conditions set therein by both the parties on how to move ahead with the business arrangement.

Elaborating further that Clause 1 of this draft MoU entailed that the Operational Creditor was to supply goods to the Corporate Debtor on Sale or Return basis with the brand name of the Corporate Debtor, it has been vehemently contended that the Corporate Debtor was therefore under no obligation to pay any sum to the Operational Creditor until the goods supplied by them were actually sold out. Moreover, neither the MoU clauses nor the invoices make any mention of bill being payable within 30 days from the date of invoice. It is also submitted that 4440 pieces of garments were received from the Operational Creditor. However, as the material supplied by the Operational Creditor could not be sold despite best efforts made by the Corporate Debtor, the Corporate Debtor was not required to pay any amount for the unsold items. It was also added that clause 9 of the draft MoU also provided that the Corporate Debtor will release refundable security deposit of Rs.30 lakhs towards stock to the Operational Creditor and that payment of Rs.16 lakhs was made to the Operational Creditor by the Corporate Debtor in three tranches on 10.01.2019, 02.03.2019 and 01.05.2019.

Narrating subsequent developments, it is submitted that the Operational Creditor entered the office of the Corporate Debtor on 01.05.2019 threatening and demanding payment for the goods sent by them. This incident compelled the Corporate Debtor to seek police intervention which led to the signing of a settlement between the two parties. By virtue of this agreement between them before the police on 01.05.2019, it was submitted by the Learned Counsel for the Respondent that the Corporate Debtor had agreed to pay further amount being the value of unsold stock on sale or return basis with the undertaking that they will pay the said amount after sale of the said goods and that if the goods could not be sold, they will return them to the Operational Creditor before 15.10.2019. However, the Operational Creditor instead of giving the Corporate Debtor time and opportunity to comply to the settlement agreement, instead chose to issue a demand notice within a few days from the date of settlement. It has also been contended by the Corporate Debtor that frivolous and wrongful claims were made in the demand notice by the Operational Creditor with a view to harass and extort money from the Corporate Debtor. It was submitted that the Corporate Debtor denied any liability or dues payable to the Operational Creditor in their reply to the demand notice and in their written statement before the Adjudicating Authority.

We have duly considered the detailed arguments and submissions advanced by the Learned Counsel for both the parties and perused the records carefully.

We find that the Appellant has denied that any understanding was entered into between the Operational Creditor and Corporate Debtor by which garments were to be supplied on Sale or Return Basis by the Operational Creditor. It has been contended that no agreement or MoU with such terms and conditions were executed in this regard with the Corporate Debtor. Further the purported exchange of emails in respect of any such MoU with the Corporate Debtor has been denied and it was strenuously contended that the Appellant was not a party to the said email correspondence. It has also been stated that the alleged MoU not having been signed, it has no value. Therefore, it was asserted that the claim made by the Corporate Debtor that goods were sold to them on Sale or Return basis lacks foundation.

On the other hand, the assertion of the Operational Creditor that they have no knowledge of Naveen Dalal has been contested by the Learned Counsel for the Corporate Debtor to be a false averment. It was pointed out that there is record of clear exchange of email between the Operational Creditor and Naveen Dalal. It may be useful at this stage to take cognizance of pages 43-44 of the Appeal Paper Book (‘APB’ in short) wherein there is a record of email sent on 18.12.2018 by the husband of the Operational Creditor to Naveen Dalal stating that the terms and conditions contained in the draft MoU proposed to be entered between the Corporate Debtor and Operational Creditor were acceptable and that certain modifications thereto were also suggested by the Operational Creditor. We find that the draft MoU at item 1 states: “That the second party will supply ready made stitched ladies wear goods to the first party on sale or return basis in the brand name Kiaasa.” (The first party here is the Corporate Debtor and the second party the Operational Creditor.) We also observe that Naveen Dalal was asked to move further on the draft MoU by an email dated 18.12.2018 as reproduced below:

Coming to the impugned order we find that the Adjudicating Authority has not made any observations on the above email dated 18.12.2018 relating to the draft MoU except noting that the Corporate Debtor has relied on this email in support of their contention that goods were purchased on Sale or Return basis. At the same time, we find that the Adjudicating Authority has also noted the contention of the Operational Creditor that the alleged emails with Naveen Dalal which have been relied upon by the Corporate Debtor to establish that goods were supplied on Sale or Return basis has nothing to do with the Operational Creditor and therefore not binding on them. In all fairness, the Adjudicating Authority beyond taking cognizance of the contentions of the two sides on the emails in question has not made any further observations on the emails.

We now come to the first issue raised by the Operational Creditor that the Corporate Debtor having signed the copy of the ledger account in the books of accounts of the Operational Creditor showing an outstanding balance is estopped from raising any defence. It was also submitted that copy of the ledger showing a closing balance of Rs. 1,26,72,387/- from 01.04.2018 to 28.02.2019 was placed before the Adjudicating Authority. It is also the case of the Appellant that since the Corporate Debtor had signed the account confirmation statement in March 2019, it is a clear admission of debt.

We find that the Adjudicating Authority has dwelled at length on this aspect as to whether there is substance in the contention of the Appellant of there being a clear acknowledgement of liability on the part of the Corporate Debtor. The relevant finding of the Adjudicating Authority is as extracted hereunder:

Furthermore from the submissions made by the Learned Counsel for the Respondent, we note that it has been contended that the ledger account of the Corporate Debtor in the books of the Operational Creditor for the period 01.04.2018 to 28.02.2019 as placed at page 41 of APB cannot be treated as admission of liability since the ledger account is not signed by any of the partners of the Corporate Debtor. Asserting that none of the two signatures therein are that of the partners as per Company Master Data, the Learned Counsel of the Respondent has stated that the reliability of the ledger account has been correctly disregarded by the Adjudicating Authority. We therefore do not find any reasons to disagree with the Adjudicating Authority that the ledger account not bearing the signature of the Corporate Debtor and being undated cannot be taken as an admission of liability.

As regards the issue of acknowledgment of dues in their audited financial statement of 31.03.2020 of an amount of Rs.1,23,46,986/- as has been claimed by the Appellant, the Learned Counsel of the Respondent refuted the claim and has cogently explained that since the goods were purchased from the Operational Creditor on Sale or Return basis, liability had to be created in the book. For every entry there has to be a corresponding entry. Thus goods purchased but not sold were included in the opening stock on 01.04.2019 amounting Rs.7,33,59,575/- as also shown in the closing stock of Rs. 9,19,09,309/- as on 31.03.2020 as at page 101 of APB.

We now come to the next issue raised by the Appellant that the alleged settlement dated 01.05.2019 based on an unsigned calculation sheet should not have been accepted by the Adjudicating Authority to be a ground of dispute existing between the two parties. It has been emphatically argued that the Adjudicating Authority should not have relied on unsigned documents as settlement documents. The Learned Counsel for the Appellant strongly resisted the defence put forth by the Corporate Debtor that a settlement was arrived at in the presence of police personnel. It was argued that the alleged settlement paper executed between the Operational Creditor and the Corporate Debtor was not signed by the Operational Creditor and therefore not binding on them. Even the calculation sheet on which the settlement has been premised is unsigned. The Learned Counsel for the Appellant further stated that in any case even the alleged settlement document also indicates that an amount Rs.26.29 lakhs has been accepted as outstanding due by the Corporate Debtor which thus shows that dues have been acknowledged.

Advancing their arguments, the Learned Counsel for the Corporate Debtor has contended that in the agreement entered into between the parties before the police on 01.05.2019, the amount of Rs.26.29 lakhs was not an acknowledgement of dues. This amount was the value of unsold stock received on Sale or Return basis and agreement to pay was made with the undertaking that payment would be done after sale of the said goods and that if the goods could not be sold, they will return them before 15.10.2019. On the pointed query made during the pleadings as to why the goods of the Operational Creditor were not returned, it was clarified that that it was because the Operational Creditor had gone back on the said settlement by issuing a demand notice. However, it was added that the Operational Creditor were free to take the goods back anytime but that they never collected them.

We have seen the Impugned Order and note that the Adjudicating Authority having considered at length the contentions of both the sides held that the alleged settlement deed which is a bone of contention between the two parties is in the nature of pre-existing dispute which needs thorough investigation and therefore beyond the scope of the Adjudicating Authority in terms of the judgement of the Hon’ble Supreme Court in (2018) 1SCC 353 Mobilox Innovations Pvt Ltd vs Kirusa Software Pvt Ltd (‘Mobilox’ in short). It would be useful to peruse the relevant excerpts of the impugned order from paragraphs 6 to 8 as extracted hereunder:

It is well settled that in a Section 9 proceeding, the Adjudicating Authority is not to enter into final adjudication with regard to existence of dispute between the parties regarding the operational debt. What has to be looked into is whether the defence raises a dispute which needs further adjudication by a competent court. From the available material on record in the APB and after hearing the rival contentions of both the parties as noted in the preceding paragraphs, we are of the view that the Adjudicating Authority has correctly recorded the finding that there exist disputes between the two parties even prior to the date of demand notice both in respect of the terms and conditions of their business transactions and outstanding dues payable to the operational creditor.

In the Mobilox judgement, the Hon’ble Apex Court while interpreting Sections 8 and 9 of IBC lays down the guiding principle that the dispute must exist before the receipt of the demand notice or issue of invoice. It may be useful to notice the relevant part of the judgement as reproduced below:

If we apply the above cited test laid down by the Hon’ble Supreme Court to the facts of the present case, it is clear that the defence was raised by the Corporate Debtor both in their reply to demand notice as well as in their detailed reply filed in Section 9 application and the nature of dispute raised was such that it required adjudication by competent court. The Adjudicating Authority has therefore correctly applied the ratio of the Mobilox judgement and rejected the Section 9 application on the ground of pre-existing disputes between the parties and that the matter requires thorough investigation.

For the foregoing reasons, we are of the view that the Adjudicating Authority has rightly rejected the application of the Appellant filed under Section 9 of IBC. We are satisfied that the impugned order does not warrant any interference. There is no merit in the Appeal. The Appeal is dismissed. No order as to costs.