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Judgment
[P E R : Rajeev Bhardwaj]
This application under Section 9 of the Insolvency and Bankruptcy Code (IBC) has been filed by M/s. R.K. Lala, a partnership firm, (Operational Creditor/OC) seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against M/s.Ramky Infrastructure Limited (Corporate Debtor/CD), in respect of the operational debt claim of Rs. 1,71,51,528/-which fell due on 31.08.2020.
2. Application:
The OC, M/s.R.K.Lala (formerly a Sole Proprietorship firm), is a Partnership firm registered as MSME, represented by its Partner, Mr. Prateek Lala, through authorization dated 02.06.2022.
In the year 2010, CD secured a contract for the construction of a Medical College in Raigarh, Chhattisgarh, under Work Order No. 1043/SAC Raigarh, dated 20.01.2010, with a contract value of Rs. 106,35,83,238/-
Through an agreement dated 21.03.2012, the CD sub-contracted the electrical work to the OC which is part of the Work Order. As per the agreement, the OC was required to provide a bank guarantee worth 5% of the gross bill. However, instead of providing the guarantee, the OC consented to a 5% deduction from both the running and final bills.
The CD was required to repay 50% of the deducted amount two years after the completion of the work, with the remaining 50% to be paid three years after the work's completion.
As per the Running/Final Bill on page 61 (Annexure 6) of the application, the date of completion of the work is 31.08.2017. The due date for payment of the total performance guarantee amount of Rs. 1,71,51,528 (performance guarantee amount) was 31.08.2020.
On 01.01.2019, through a partnership deed, M/s.R.K.Lala transitioned from a Sole Proprietorship to a Partnership firm, with the business of the Sole Proprietorship being incorporated into the Partnership firm starting from 01.04.2019. One of the partners, Mr. Ramesh Kumar Lala expired after execution of partnership deed and the legal representatives have the option to step into the shoes of deceased partner, if so desired. Therefore, the agreement between the Sole Proprietorship (now a Partnership firm) and the CD is legally valid.
The OC, through emails dated 20.02.2020 and 01.10.2021 requested the release of performance guarantee amount worth Rs. 1,01,51,528/-.
Following the CD's default, the OC issued a demand notice on 21.04.2022 under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, read with Section 8 of the IBC, 2016. The CD received the notice on 26.04.2022, but no response was received.
On 13.10.2022, the OC filed a request under the Right to Information (RTI) Act with the Public Works Department (PWD), Raigarh Division (Chhattisgarh), seeking information regarding the performance guarantee. In response, the PWD via letter dated 10.11.2022, informed the OC that the performance guarantee deposited by the CD had been returned in two tranches, two years after the completion of the work as follows:
50% was returned on 28.05.2019.
50% was returned on 14.02.2020.
It is alleged that the CD is now attempting to evade its obligation to pay the performance guarantee amount to the OC.
3. Counter
The CD has denied the contents of Part IV of the petition, stating that all the legitimate dues were cleared and no liability exists.
The CD has relied on Section 10A of the IBC, which stipulates that no application can be filed under Sections 7, 9, or 10 of the IBC if the default occurred on or after 25.03.2020, for a period of 6 months, extendable up to one year.
The CD referred to the Supreme Court's ruling in Ramesh Kymal vs. Siemens Gamesa (2021) 3 SCC 234, highlighting the phrase “shall ever be filed,” which underscores the legislative intent that no application can be filed for defaults occurring after 25.03.2020 for a period of 6 months, extendable up to one year. The default on 31.08.2020 falls within the period covered by Section 10A of the IBC.
There are also discrepancies between the alleged claim amount in Form-1 and the interest calculated, as the interest pertains to a period during the embargo under Section 10A of the IBC, which is not permissible. Furthermore, as of the date of the demand notice, no unpaid debt exists.
The CD further referred to Rule 20 (1A) of the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 through Notification No. IBBI/2022-23/GN/REG085 dated 14.06.2022, to assert that the OC failed to provide the Record of Default in Form 5 (demand notice), thus violating Rule 20(1A) of these regulations.
Section 9(3)(d) of the IBC mandates that the Record of Default must be provided in the petition, as indicated by the word “shall.” Since the OC failed to do so, the petition is incomplete.
Thus, the CD asserts that the present petition has been filed with malicious intent to extort amounts from the CD.
4. Rejoinder
The CD's claims regarding a violation of the IBC are baseless. Section 9(3)(d) of the IBC explicitly states that "...a copy of any record with an information utility confirming that there is no payment of an unpaid operational debt by the Corporate Debtor, if available...," and Section 125(3) similarly provides that "An operational creditor may submit financial information utility in such form and manner as may be specified." The words “if available” and “may” clearly indicate that submitting a record of default is not mandatory.
While the CD's assertion lacks proper consideration, the required record of default has been filed as Annexure 1 of Rejoinder. The OC also relies on Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy & Anr. [Civil Appeal No. 1650 of 2020] to emphasize the validity of submitting additional documents
The CD was fully aware of the due date for the payment of the performance guarantee, as stipulated in the Contract Agreement dated 21.05.2015. Therefore, it constitutes a predetermined debt known to the CD. The interpretation of Section 10A of the IBC presented by the CD is incorrect. Section 10A was introduced to address the financial distress caused by the Covid-19 pandemic and must be interpreted harmoniously.
The CD has also failed to appreciate the ratio of Ramesh Kymal vs. M/s. Siemens Gamesa Renewable Power Pvt. Ltd. [Civil Appeal No. 4050 of 2020]. The relevant paragraphs that lay down the ratio decidendi are as follows:
"24.We have already clarified that the correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated..."
"25....Hence, the embargo contained in Section 10A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision..."
Previously, a Section 9 petition under the IBC was filed on 18.05.2018, bearing CP (IB) No. 332 of 2018, seeking the initiation of CIRP against the CD for non-payment of dues related to the executed work order. Upon filing of joint memo by both the OC and CD in view of the settlement, the petition was dismissed. The earlier petition evidences that the CD has been a defaulter prior to covid and is unjustly taking benefit of Section 10A.
The OC denied the claims made by the CD in their counter and reaffirms the facts as outlined in the original application.
We have heard both the learned counsels for the parties and have also perused the entire records.
Undisputedly, the Public Works Department (PWD), Raigarh Division, awarded Work Order No. 1043/SAC/Raigarh dated 20.01.2020 to the CD for the construction of a Government Medical College Building at Raigarh, amounting to Rs. 1,06,35,83,258/-. The CD sublet the electrical portion of the construction, valued at Rs. 19,98,07,138/-, to Mr. R.K. Lala, Proprietor, (now replaced by the OC) under an agreement dated 21.05.2012 (Annexure A-4). The electrical work was completed on 31.08.2017. As per the agreement, the OC was required to furnish a Performance Security in the form of a Bank Guarantee (BG) equivalent to 5% of the gross bill (running and final). In the absence of a BG, the CD was authorized to deduct 5% of the total bill amount. The agreement also stipulated the release of the guarantee amount in two stages: 50% after two years of completion and the remaining 50% after three years, subject to rectification of any defects. The relevant clause of the agreement, Annexure A-4 is 15(A), which is reproduced below:
“15(A) Performance Guarantee: THE PARTY will be responsible for performance of work carried out by them for a period of 36 months beyond the completion of work as per Special Condition of NIT (Annexure G) for which performance security in the shape of BG is to be furnished @5% amount of the gross bill (running and final) of each payment, this performance guarantee will be in addition to the normal security deducted as per clause 1 of the agreement. If party fails to submit Bank Guarantee of %5 amount of the Gross bill, then 5% amount will be deducted from the running and final bill”.
After two years of completion 50% Bank Guarantee will be released and balance after completion of 3 years after rectification of defect if any pointed out by the client.
The issues which need our consideration are Due debt, Applicability of Section 10(A) and Intimating record of default with the Information Utility:
Due debt:
The OC has claimed principal amount of Rs. 1,71,51,528/- as of 31.08.2020 along with interest from 31.08.2020 to 21.04.2022.
The agreement (Annexure A-4) does not contain any clause regarding the payment of interest. In the absence of an explicit agreement on interest, the claim for interest cannot be sustained. This is also supported by the decision of the Hon’ble NCLAT in Krishna Enterprises v. Gammon India Ltd., Company Appeal (AT)(Insolvency) No. 144 of 2018, decided on 27.07.2018, which held that interest can only be included in the debt, if explicitly agreed upon by the parties. Therefore, only the principal amount can be considered as the debt.
Regarding the principal amount of Rs. 1,71,51,528/-, Clause 15 of the agreement (Annexure A-4) stipulates that 50% of the amount would become payable after two years (i.e., by 01.09.2019) and the remaining 50% after three years (i.e., by 01.09.2020). The OC has claimed the entire amount in the demand notice (Annexure A-8) dated 21.04.2022, along with supporting documents such as the final bill (Annexure A-6) and emails (Annexure A-7) dated 01.10.2021 and 29.01.2020.
The final bill (Annexure A-6) indicates a security deposit of Rs. 76 lakhs (5% of the gross bill). However, the bills at Pages 88-89 of the application show inconsistent amounts for the performance guarantee and withheld amounts. For instance, the bill at Page 88 mentions a performance guarantee of Rs. 1,01,51,528/- and a withheld amount of Rs. 70 lakhs, while the bill at Page 89 records a performance guarantee of Rs. 9,20,664/-. These discrepancies cannot be reconciled with the security deposit of Rs. 76 lakhs mentioned in the memorandum of payment at Page 87. Additionally, the OC’s emails dated 29.01.2020 and 01.10.2021 (Annexure A-7) demand payment of a performance guarantee amounting to Rs. 1,01,51,528/-, further complicating the matter. The OC has failed to provide a clear explanation of the exact amount of the performance guarantee held by the CD, while the CD has denied any such liability.
The OC’s failure to reference the performance guarantee amount in the earlier CP (IB) No. 332/9/HDB/2018, filed for non-payment under the same contract, raises doubts about the genuineness of the claim. The joint settlement memo (Annexure A-11) dated 10.12.2018 indicates that the parties had amicably resolved the dispute, with the CD paying Rs. 2,14,48,278/- as a “full and final settlement.” This suggests that all disputes arising under the agreement dated 21.05.2012 were settled, and no further claims can be made. Thus, there is dispute about the debt.
About raising the dispute even when no reply to the demand notice has been filed, we fully agree with the plea of the learned counsel for the CD who has relied upon the decision of the Hon’ble NCLAT, Delhi in Brand Realty Services Limited v. Sir Hohn Bakeries India Private Limited, Company Appeal (AT) (Ins.) No. 958 of 2020 emphasizing that mere non-issuance of reply to the demand notice doesn’t preclude the CD from bringing relevant material before the Adjudicating Authority to establish pre-existing disputes.
Thus, the OC has failed to prove the exact amount of debt owed by the CD and that the debt amount meets the threshold limit required for initiating the insolvency proceedings due from the Corporate Debtor.
Section 10(A) :
Section 10-A of IBC explicitly prohibits the initiation of CIRP for defaults occurring between March 25, 2020, and March 25, 2021. The legislative intent behind this provision is clear and unambiguous - to provide relief to corporate debtors facing economic distress due to the COVID-19 pandemic. Consequently, any default falling within this period must be excluded when calculating the total outstanding debt.
As per the petition and demand notice, the date of default is August 31, 2020, which falls within the prohibited period under Section 10-A. Therefore, CIRP cannot be initiated for this default.
Learned counsel for the CD has relied upon the decision of the Hon’ble Supreme Court in Ramesh Kymal vs. Siemens Gamesa Renewable Power Private Limited (2020) 3 SCC 22, to argue that in light of the explicit statutory provision and its objective, the OC cannot recover any debt for defaults occurring between March 25, 2020, and March 25, 2021.
Per contra, Mr.Amir Bavani, learned counsel for the OC contends that Section 10-A is not applicable to pre-determined debts. He has strenuously argued that the performance guarantee constitutes a pre-determined debt, which was known to the CD even before the onset of the COVID-19 pandemic. According to the OC, the objective of Section 10-A was to provide relief for financial distress caused by the pandemic, and the debt in question was already due prior to this period. The OC has also referred to paragraphs 24 and 25 of the Ramesh Kymal judgment to emphasize that the interpretation of Section 10-A must considers the object of the ordinance and the extraordinary circumstances under which it was promulgated.
The Hon’ble Supreme Court in Ramesh Kymal vs. Siemens Gamesa Renewable Power Private Limited (2020) 3 SCC 22 has provided a clear interpretation of Section 10-A, including its first proviso and explanation. The relevant paragraphs (27, 28, and 29) are reproduced below:
27.Adopting the construction which has been suggested by the Appellant would defeat the object and intent underlying the insertion of Section 10A. The onset of the Covid-19 pandemic is a cataclysmic event which has serious repercussions on the financial health of corporate enterprises. The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date. The proviso to Section 10A stipulates that "no application shall ever be filed" for the initiation of the CIRP "for the said default occurring during the said period". The expression "shall ever be filed" is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified. The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020.
28.The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation. Reading the provisions together, it is evident that Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Acceptance of the submission of the Appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020.
29.We have already clarified that the correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.
(own emphasis)
The Hon’ble Supreme Court has explained that the expression "no application shall ever be filed" means that for any default arising between March 25, 2020, and March 25, 2021, no application under Sections 7, 9, or 10 of the IBC can be filed. This interpretation clearly brings the present application within the prohibited period.
However, learned counsel for the OC has attempted to shift the date of default by arguing that a portion of the amount became due before the period covered under Section 10-A. In the Ramesh Kymal case, a similar argument was rejected by the Hon’ble Supreme Court. In that case, the learned counsel for the OC had argued that the actual date of default was January 21, 2020, and the second date of default was March 23, 2020. The Court held this argument untenable, as it was contrary to the disclosure made by the OC in the demand notice, which stated that the date of default crystallized on April 30, 2020. The Court also rejected the plea that the amount was pre-determined, noting that in the Ramesh Kymal case, the amount claimed was known to the Corporate Debtor before the filing of the petition, and Section 10-A was not even part of the IBC at that time. The petition was filed on May 11, 2020, and Section 10-A was inserted on June 5, 2020, with retrospective effect from March 25, 2020.
Another decision relied upon by the learned counsel for the OC is Beetel Teletech Ltd. v. Arcelia IT Services Pvt. Ltd. [Company Appeal (AT) (Insolvency) No.1459 of 2022], but it has no applicability in the present case. It was held that if the default occurred prior to the period mentioned in the Section 10A of the IBC and continues during Section 10-A period, then it doesn’t the bar the initiation of CIRP.
Further, it is also not for this Authority to conduct any enquiry whether the financial health of the Corporate Debtor was affected by the onset of the covid 2019 pandemic as held by the Hon’ble Supreme Court in Para No.30 of the Ramesh Kymal case supra.
In light of the above, the present application falls within the prohibited period under Section 10-A of the IBC, and no CIRP can be initiated for the default in question.
Intimating record of default with the Information Utility:
Under Section 9 of the IBC, the OC is required to file an application in Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Item No. 4 of Form 5 mandates the OC to furnish particulars of the record of default with the Information Utility (IU), if available, and attach a copy of such record. It says:
“Record of default with the Information Utility, if any (attach a copy of such record)”
The above particulars are to be filed in view of Section 9 (3)(d) and Section 215 of the IBC and Regulation 20(1A) of Insolvency and Bankruptcy Board of India (Information Utilities) Regulation 2017. Section 9 (3)(d) provides:
(3)The operational creditor shall along with the application furnish— ……
(d)a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available.
Section 215(3) of the IBC says that for the submission of financial information and the dues by the operational creditor, the information is to be submitted. It says:
“An operational creditor may submit financial information to the information utility in such form and manner as may be specified”.
Regulation 20(1A) has been inserted in Insolvency and Bankruptcy Board of India (Information Utilities) Regulation 2017 vide Notification No.IBBI/ 2022-23/GN/REG085 dated 14.06.2022, which is reproduced below:
“(1A) Before filing an application to initiate corporate insolvency resolution process under section 7 or 9, as the case may be, the creditor shall file the information of default, with the information utility and the information utility shall process the information for the purpose of issuing record of default in accordance with regulation 21.”
The use of the word "confirming" in Section 9(3)(d) indicates that the record of default from the IU is merely evidentiary in nature. It serves to confirm the non-payment of the operational debt. The record of default from the IU is a supporting piece of evidence and not a strict requirement for initiating insolvency proceedings under Section 9 of the IBC. The OC can rely on other forms of evidence to establish the existence of an unpaid operational debt, and the Adjudicating Authority is to consider the overall facts and circumstances of the case. This interpretation aligns with the procedural and facilitative nature of the IBC, ensuring that technicalities do not hinder the resolution of genuine disputes.
Thus, the non-production of the record of default from the IU is not fatal to the OC's case. The OC is also not deemed to have withheld information, and the application cannot be rejected solely on this ground
Even otherwise, this information has already been supplied alongwith the rejoinder, Annexure A-1. The rejoinder has been accepted by this Authority and in view of the judgement of the Hon’ble Supreme Court in Dena Bank (now Bank of Baroda) v. C.Shivakumar Reddy and Anr (Civil Appeal NO.1650 of 2020), this document is part of the pleadings and accordingly, the plea of the Corporate Debtor is without any merit.
As a consequence of our findings above, CP(IB) No.66/9/HDB/2023 is dismissed, as we come to this conclusion that the OC has not only failed to prove the due debt, but the present application is also hit by Section 10(A) of the IBC.