Sri Durga Department Store vs Argus Cosmetics Limited

Heard, both sides.

The Appellant / Petitioner / Operational Creditor has preferred the instant `Company Appeal (AT) (CH) (Ins) No.317/2022’, before this ‘Tribunal’, being aggrieved against the ‘Impugned Order’ dated 24.12.2021 in CP/IB/90(CHE)/2021, passed by the ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench – II, Chennai).

Earlier, the ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench – II, Chennai), while passing the ‘Impugned Order’ in CP/IB/90(CHE)/2021 dated 24.12.2021, at Paragraphs 10 to 12, had observed the following:-

and ultimately dismissed the Application, of course, without Costs.

The Learned Counsel for the Appellant / Petitioner / Operational Creditor contends that the ‘Impugned Order’ of dismissal of the Section ‘9’ Application filed by the Petitioner / Operational Creditor in CP/IB/90(CHE)/2021 is an incorrect and illegal one, because of the fact that the ‘Adjudicating Authority’ (National Company Law Tribunal, Division Bench – II, Chennai) had not taken into account that the Appellant had deposited Rs.1,25,00,000/- (on 01.12.2016 by RTGS) with Argus Cosmetics Limited, Chennai for the business of `Mega Stockists’ (for the whole area of Andhra Pradesh to supply their `Super Stockists’ in replacement of M/s. Ramkamal Enterprises), which was offered to the Appellant by their ‘Sales Force’, during middle of the year 2016.

Advancing his argument, the Learned Counsel for the Appellant / Petitioner / Operational Creditor, proceeds to point out that Marketing and Sales responsibility entirely rests upon the Respondent and its `Sales Personnel’, in reality assured margin / discount was 3% per month, as per the agreement, irrespective of the sales, shown by the Respondent.

It is represented on behalf of the Appellant / Petitioner / Operational Creditor that the Respondent / Company had stopped giving monthly margin ‘Credit Note’ from March 2017 onwards and therefore, the Appellant is raising monthly ‘Debit Note’ and sending them to the Respondent / Company through ‘E-mails’ regularly, etc.

Furthermore, the Respondent aggrieving to the Appellant in August 2020, had stopped supplies and also when the Appellant had addressed through an ‘E-Mail’ on 10.08.2020 requesting to restore supply or to return its deposit and account dues altogether a sum of Rs.1.64 Crore,there was no ‘Reply’ from the Respondent and also there was ‘no restoration of supplies’ nor there was ‘repayment’ of the amount.

Expatiating the above, the Learned Counsel for the Appellant brings to the ‘Notice’ of this ‘Tribunal’, that during August 2020, the Respondent had stopped supplies and when a mail was sent on 10.08.2020, requesting to restore the supply or return the Appellant’s deposit and Account Dues amounting to Rs.1.64 Crores, there was no reply and also the supplies were not restored. Hence, it is represented that the Appellant / Petitioner / Operational Creditor had lodged a complaint before the local `Commissioner of Police’, through ‘E-mail’ on 12.08.2020, the same was forwarded to the `Suryaraopet Police Station’, the Appellant’s complaint was filed.

It is the version of the Appellant that later, the Respondent / Company sent an ‘E-mail’ on 29.08.2020 stating that they were restoring supplies with a clear assurance to review the system within three months, by then, and supplies were restored up to December 2020 only. Further, the Appellant / Petitioner / Operational Creditor, had demanded Rs.1 Crore, as a damage / compensation, in addition, to the deposit of Rs.1.25 Crore and ‘Running Account’ dues through an ‘E-Mail’ dated 10.08.2020 to the Respondent / Company and this was not denied by the Respondent / Company, as projected by the `Appellant’.

On behalf of the Appellant, it is brought to the fore, that in Form of Demand Notice, demanding payment under the I & B Code, 2016, (Form – 3, under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, under Particulars of Operational Debt at Serial No.2, the amount claimed to be in `Default’ was mentioned as Rs.2,63,47,302 and further it was mentioned that `continuous since July 2017 and on 03.03.2021’).

According to the Appellant, in Part IV `Particulars of Operational Debt’ (vide Form-5, Application by Operational Creditor to initiate `Corporate Insolvency Resolution Process’, under Chapter II of Part II of the Code (under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules, 2016), dated 13.04.2021, at Serial No. 1, the total amount of `Debt’ was mentioned as Rs.2,63,47,302/- (`Deposit Account’ Rs.1,25,00,000/- plus Running Trading Account Rs.38,47,302/-plus Damages & Compensation Rs.1,00,00,000/-) on 03.03.2021 as claimed in Demand Notice, under Form-3.

Moreover, under `Part V of the Application, Particulars of Operational Debt (Documents, Records and Evidence of Default at Serial No.6, it was mentioned that as per Section 73 of the Indian Contract Act, 1872 and Agreement dated 01.12.2016, the `Operational Debt’ fell due.

It is represented that the `Appellant’/`Petitioner’/`Operational Creditor’ had issued a `Demand Notice’ under Form 3 on 06.03.2021, through email and also sent a hard copy through `Registered Post’ to the Respondent and a `Reply’ through email dated 12.03.2021 was given by the Respondent and that the Respondent had not made any payment. Therefore, `Appellant’/`Petitioner’/`Operational Creditor’, had prayed before the `Adjudicating Authority’ for initiation of `Corporate Insolvency Resolution Process’ or by directing the Respondent to pay the due amounts as per Appellant’s accounts and monthly margins as per Agreement terms till the date of full and final payment (Rs.38,47,302/- as on 03.03.2021, as per Demand Notice under Form 3); by ordering the Respondent to return Appellant’s Deposit of Rs.1.25 Crores and by ordering the Respondent to pay a compensation of Rs.1 Crore to the Appellant for violation of agreements terms and discontinuation of business, as mentioned in the `Application’.

Per contra, it is the submission of the Learned Counsel for the Respondent that an Application under Section ‘9’ of the Insolvency & Bankruptcy Code, 2016 can be filed by the ‘Operational Creditor’ only, resting upon the existence of an ‘Operational Debt’. Further, the existence of an ‘Operational Debt’ is a ‘Condition Precedent’ for commencing the `Corporate Insolvency Resolution Process’ (`CIRP’) under `Section 9 of the Insolvency & Bankruptcy Code, 2016’.

The Learned Counsel for the Respondent by adverting to the ingredients of Section 5(20)under the caption ‘Operational Creditor’ and Section 5(21) under the heading ‘Operational Debt’ of the Insolvency & Bankruptcy Code, 2016 contends that ‘without any iota of doubt’,‘Operational Creditor’ means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Furthermore, the ‘Operational Debt’ is one such, which arises out of claim, in regard to the provision of any goods or services.

The Respondent in its `Reply’/`Counter’ to the main Company Petition, filed by the `Appellant’ (before the `Adjudicating Authority) had taken a plea that, the `Appellant/Operational Creditor’ to press into service the ingredients of Section 9 of the Code and to file an `Application’ in this regard, there must be an `Existence’ of an `Operational Debt’ at the first instance and when there is no `Existence’ of an `Operational Debt’, the `Petition’ in CP(IB)/90(CHE)/2021, filed by the `Appellant’/`Petitioner’/`Operational Creditor’, per se, is not maintainable in the `eye of Law’.

The Learned Counsel for the Respondent points out that total outstanding was only Rs.78,72,143/- (Rupees Seventy Eight Lakh Seventy Two Thousand and One Hundred and Forty Three Only) and the same is mentioned hereunder in a ‘tabulator format’.

The Learned Counsel for the Respondent brings to the ‘Notice’ of this ‘Tribunal’, that ‘Total Amount’ due from the Respondent to the Appellant is less than Rs.1 Crore (below the threshold limit) and hence, the ‘Application’, filed before the `Adjudicating Authority’ by the `Appellant’/`Petitioner’/`Operational Creditor is `not maintainable’ in `Law’.

The Learned Counsel for the Respondent projects the arguments that because of the ‘Police Complaint’ given before the Suryaraopet Police Station and the same is under ‘Investigation’, it is a clear case of `pre-existing dispute’, raised by the `Appellant’ / `Petitioner’ / `Operational Creditor’. Moreover, the `awarding of compensation’, as per Section 73 of the Indian Contract Act, 1872, is outside the ambit of the proceedings, under the I & B Code, 2016.

Indeed, the Respondent in its `Counter’, before the `Adjudicating Authority’ (to the main `Company Petition’), at paragraph 16, had averred among others things, that the `Appellant’/`Petitioner’ had omitted to consider credits to the tune of Rs.4,43,735/- given by the Respondent to the `Appellant’. Furthermore, the `Appellant’/`Petitioner’ had also not accounted for a sum of Rs.10,470/- deducted by the Respondent as `TDS’. Apart from that, a sum of Rs.73,05,531/- remitted, was omitted to be accounted by the `Appellant’/`Petitioner’.

This ‘Tribunal’ has heard the Learned Counsels appearing for the respective parties (at the stage of ‘Admission’ of the instant `Appeal’) and noticed their contentions.

It is not out of place for this Tribunal to make a pertinent mention that the `Mega Stockists Agreement’, entered into between the `Respondent’/`Argus Cosmetics Limited’, Chennai – 600018 (`Company’) and the `Appellant’/`M/s. Sri Durga Department Store, Vijayawada – 520002 (`Mega Stockists’), the covenants of Clause Nos. 1 to 8, reads as under:

It is pertinently pointed out, that the definition of the ‘Operational Creditor’, as per Section 5 (20) of the Insolvency & Bankruptcy Code, 2016, in a crystalline manner means `a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred’.

In terms of the ingredients of Section 9 of the I & B Code, 2016, an `Adjudicating Authority’, is to see (1) whether there is an `Operational Debt’ satisfying the requirement of threshold limit of Rs.1 Crore (2) whether there is an `Existence’ of a `Dispute’ between the `Parties’ / `the Record of Pending Suit or Arbitration Proceedings’.

As per Section 9 of the Code, an `Adjudicating Authority’ is to consider, whether the `Dispute’ raises a `Plausible Contention’, which requires a `deeper investigation’. In this Connection, it is pointed out that the term `Dispute’ is not to mean a `mere denial’ and it has to be a `Dispute’, as per Section 5 (6) of the Code.

Section 73 of The Indian Contract Act, 1872, encompasses, the principle pertaining to the `Assessment of Damages’. If there is a `Breach’ of the terms and conditions of the `Contract’ and when there are `Acts of Mal-feasance, Mis-feasance and Non-feasance’, as per decision of the Hon’ble Supreme Court in the matter of Punjab State Civil Supplies Corporation Ltd. v. Sikander Singh, reported AIR (2006) SC at Page 1438.

To be noted that, in `Law’, the `Plaintiff’ in a `Suit’, is to prove that pre-mature annulment of the `Agreement’ was a `wrongful’ and an `illegal’ one. In reality, one `Party’ may `Claim’ a liquidated or un-liquidated damages from the other, in respect of a `Contract’ being violated by the concern.

No wonder, the compensation is payable for violation of contract, as per Section 74 of the Indian Contract Act, 1872, where `damage’ or `loss’ is caused by such `breach’, as per the decision of the Hon’ble Supreme Court in Kalash Nath Associates v. Delhi Development Authority (2015) 4 SCC at Page 136.

It is to be remembered that in the instant case, that the Respondent had disputed the `Claim Sum’, due and payable to the `Appellant’/`Petitioner’, with reference to `Form – 3’ and `Form – 5’ of the `Application’, filed before the `Adjudicating Authority’, There exists, certainly a `pre-existing dispute’ in the present case and the same is not an `illusory’ or `moon-shine one’, as opined by this `Tribunal’.

It must be borne in mind that as per `Mega Stockist’ Agreement dated 01.12.2016, the Appellant / Mega Stockist will pass on the orders of the `Super Stockists’ and the amount immediately to the Respondent / ARGUS by RTGS, etc. Further, the Respondent / ARGUS will supply stocks to the Appellant/Mega Stockist on the basis of orders and payments received. Therefore, it is quite evident from the tenor and spirit of the `Mega Stockist’ Agreement dated 01.12.2016, that the Respondent / ARGUS is required to supply the `Goods’ to the `Appellant’ / `Petitioner’, purported to be the `Operational Creditor’. It cannot be forgotten that the `Default’, in the instant case took place because of the fact that the Respondent had not repaid the `Deposit Sum’, which will not fit within the parameters of definition of Section 5 (21) of the Code relating to `Operational Debt’, in the earnest opinion of this `Tribunal’. Viewed in that perspective, as a logical corollary, the `Appellant’/`Petitioner’ is not an `Operational Creditor’, as per the definition of Section 5 (20) of the I & B Code, 2016.

In the light of the foregoing discussions and reasons and this `Tribunal’ looking into the entire gamut of facts and circumstances of the present case, comes to an inescapable conclusion that the view arrived at by the `Adjudicating Authority’ (`National Company Law Tribunal’, Division Bench – II, Chennai), in dismissing the Section 9 `Application’ in CP(IB)/90(CHE)/2021, does not suffer from any material irregularity or patent illegality in the `eye of Law’. Resultantly, the `Appeal’ fails.

In fine, the instant Comp. App (AT) (CH) (Ins) No.317/2022 is dismissed. No costs. The connected I.A. No.675/2022 is Closed.

Before parting with this case, it is abundantly made, quite clear, by this ‘Tribunal’, that the dismissal of the instant Comp. App (AT) (CH) (Ins) No.317/2022, will not preclude the `Appellant’ / `Petitioner’ / `Operational Creditor’ to approach the ‘Competent Civil Forum’, for redressal of its grievances, ofcourse, in the manner known to ‘Law’ and in accordance with ‘Law’, if it so desires / advised.