Avon Capital vs M/S. Tattva & Mittal Lifespaces Pvt. Ltd

[arising out of Orders dated 11th July, 2017 by NCLT, Mumbai Bench, Mumbai in Case Nos. CP No. 37/I&BP NCLT/MB/MAH/2017]

IN THE MATTER OF:

AVON Capital, through Proprietor of Ravindra Gopal, 801, Gemini Spaces, Malhotra Chambers, Deonar, Mumbai - 400 088. ...Appellant

Versus

M/s. Tattva & Mittal Lifespaces Pvt. Ltd. B-48, TODI Estate, Sunmill Compound, Lower Parel (W), Mumbai - 400 013. ...Respondent

Present:

For Appellant : Mrs. Avnish Ahlawat, Advocate

For Respondent : Shri Aditya Thakkar and Shri Ranjit Shetty, Advocates

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

The appellant preferred an application under Section 9 of the Insolvency

and Bankruptcy Code, 2016 (hereinafter referred to as the 'I&B Code') for 2

initiation of 'corporate insolvency resolution process' against M/s. Tattva &

Mittal Lifespaces Pvt. Ltd. (Corporate Debtor); the Adjudicating Authority

(National Company law Tribunal), Mumbai Bench by the impugned order dated

11th July, 2017 rejected the same on two grounds namely:

(i) That the appellant do not come within the meaning of 'Operational

Creditor'; and

(ii) There is an 'existence of dispute'.

2. The question arises for consideration in this appeal is whether the

appellant comes within the meaning of 'Operational Creditor' as defined in

Section 5(20) r/w (21) of the I&B Code and whether there is an 'existence of

dispute' between the 'appellant' and the 'Corporate Debtor'.

3. The appellant has brought on record the application under Section 9 of

the I&B Code which is in Form 5 of Insolvency & Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 to suggest that the appellant comes within

the meaning of 'Operational Creditor'. The relevant evidence in support of the

claim is enclosed with Form 5. The claim of appellant, in fact, is based on the

letter dated 7th January, 2016 issued by the 'Corporate Debtor'. According to

learned counsel for the appellant, by the letter aforesaid, the 'Corporate Debtor'

engaged the appellant to provide services in lieu of which retainer fee was

chargeable; for advisory and ancillary services separate fees were chargeable on

receipt of the term-sheet from the investor. The appellant was also entitled for

success fee once the funds were remitted into the accounts of the appellant by

the parties.

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4. The case of the respondent is that no debt is due to the appellant and there

is no default; the debt has been disputed by the appellant.

5. Learned counsel appearing on behalf of the respondent submitted that

merely production of invoices will not suggest that the appellant has provided

services to the respondent. The burden of proof to show that the appellant

rendered services is squarely on the appellant, which he failed to prove.

6. Further, according to the learned counsel for the respondent no new facts

have been brought to the notice of this Appellate Tribunal by the appellant.

Reliance has also been placed on the decision of the Hon'ble Supreme Court in

"Modern Insulators Ltd. vs. Oriental Insurance Co. Ltd. - (2000)2 SCC 734".

7. However, such submission cannot be accepted as the appeal under

Section 61 cannot be treated to be continued suit or proceeding pending before

the Court of law, as no decision on merit is required to be passed by the

Adjudicating Authority for admitting or rejecting an application under Section 7

or 9 or 10 of the I&B Code. It is also settled law that initiation of a 'corporate

insolvency resolution process' is not an adversary litigation nor is a money claim.

If the application is complete and the Adjudicating Authority is satisfied that

there is a 'debt' and 'default' on the part of the 'Corporate Debtor', the application

is to be admitted. On the other hand, if the application is incomplete, the

applicant should be asked to remove the defects failing which the application

under Section 7 or 9 or 10 can be rejected.

8. In an application under Section 9, it is open to the 'Corporate Debtor' to

point out that the applicant is not an 'Operational Creditor' or there is an

Company Appeal (AT) (Insolvency) No. 256 of 2017 4

'existence of dispute' or there is no 'debt' or there is no 'default'. No other issues

can be raised required for determination by the Adjudicating Authority, having

no such jurisdiction.

9. To determine the question as to whether the appellant comes within the

meaning of 'Operational Creditor' it is relevant to refer Section 5(20) and Section

5(21), which reads as follows:

"5. In this Part, unless the context otherwise requires,--

(20) "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;

(21) "operational debt" means a claim in respect of the

provision of goods or services including

employment or a debt in respect of the repayment

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;"

10. It is not the case of the appellant that he has supplied any goods.

According to the appellant, it has rendered services for which 'operational debt'

is owed to him by the 'Corporate Debtor' and therefore, the appellant come within

the meaning of 'Operational Creditor'.

Company Appeal (AT) (Insolvency) No. 256 of 2017 5

11. The argument is based on letter dated 7th January, 2016 by the 'Corporate

Debtor', relevant of which reads as follows:

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Company Appeal (AT) (Insolvency) No. 256 of 2017 7

Company Appeal (AT) (Insolvency) No. 256 of 2017 8

12. The terms of 'engagement' and 'payments' enclose with the said letter,

which is as follows :

Company Appeal (AT) (Insolvency) No. 256 of 2017 9

13. Further, the term of 'agreement' relates to 'termination' of engagement. In

Clause 9 'miscellaneous' shown that the appellant is engaged as an independent

contractor not as an agent or representative, which is as follows :

14. There is a 'dispute resolution' prescribed under Clause 11 therein. The

aforesaid letter dated 7th January, 2016 is part of Form 5. The invoices dated

1st August, 2016 and 27th September, 2016 have also been enclosed with the

application filed under Section 9 in Form 5. Plain reading of the letter dated 7th

January, 2016 including the 'terms of engagement' enclosed therein shows that

the appellant - 'Avon Capital' was engaged as an independent contractor and not

as an agent or representative or employee of the company. The appellant was

so engaged to study company's current business operations including visiting of

their sites under development, carry out a SWOT analysis, conduct a preliminary

Company Appeal (AT) (Insolvency) No. 256 of 2017 10

due diligence and identify areas of concern. It was also engaged to discuss risk

mitigation, brainstorm the draft business plan with the company management

and prepare information memorandum. Clause 2 of the letter dated 7th January,

2016 further shows that the appellant was also to assist in the introduction of

one or more potential financial/strategic partners of the company which was

exploring all options for raising the necessary resources including private equity

etc.

15. In terms of Clause 3, the appellant was entitled for following remuneration:

(i) Towards the 'Appointment Fee' : Rs. 3 Lakhs plus service tax @ 14%

payable on introductions & interest letter/term sheet from

investors/lenders/funds institutions

(ii) Towards the 'Retainer Fee' : Rs. 5 Lakhs plus service tax @ 14%

payable in advance on the 1st of every quarter for a period of one

year or may be extended period if mutually agreed.

(iii) Towards the 'Fixed Success Fee' : 3.0% of amount raised by 'AVON'

from those parties to be determined. 25% for signing a

memorandum of understanding and 'Success Fee' for business

introduction/marketing alliance, as per mutual agreement.

This apart, 'reimbursements': all out-of-pocket expenses was

provided therein excess of USD 1,000 with the prior oral and written

approval. The appellant was also entitled for 'specific assignment

fee' other than the fees aforesaid.

Company Appeal (AT) (Insolvency) No. 256 of 2017 11

16. From the aforesaid Clause 3, it is clear that certain amount is payable on

performance of specific job like introductions of parties and interest letter from

investors/lenders/funds/institutions etc. Apart for the same there are

independent fee such as retainer fee @ Rs. 5 Lakhs plus service tax @ 14% in

advance on the 1st of every quarter for a period of one year.

17. The appellant while raised 'professional fee' in the invoice of 1st May, 2016

had raised 'retainer fee' for quarter beginning 1st May, 2016 plus @14.5% service

tax apart from 'retainer fee' for the quarter beginning 1st August, 2016 along with

15% service tax. By another invoice dated 1st August, 2016 'appointment fee'

has been raised on issue of term sheet by 'Milestone Advisors' which was

accepted by TM Group on 30th July, 2016. By another invoice dated 27th

September, 2016 'break fees' or 'break drop dead fees' in US$ 1 lakh plus @

service tax @ 15% as per clause 4 of para 2 of Engagement Agreement has been

raised. All those invoices are independent to 'appointment fee' or 'fixed fee' or

'successors fee'. The Adjudicating Authority has noticed the 'engagement letter'

dated 7th January, 2016 including the invoices receipt. However, without

appreciating the relevant facts, the Adjudicating Authority like a Trial Court

observed as under:

"The evidences such as the work done by the professional

or any due diligence report submitted to the Respondent

Company are missing in this case. The Petitioner has not

filed a single evidence to demonstrate that by his effort a

Corporate Financer has factually invested in the

Company Appeal (AT) (Insolvency) No. 256 of 2017 12

Respondent Company" are missing in this case. The

petitioner has not file the evidence to demonstrate that by

his effort a corporate financer had factually invested in the

respondent company.

18. Then the Adjudicating Authority went on presumption that the appellant

is a 'financial creditor' and thereby discuss the evidence of investment made by

the appellant with the respondent 'Corporate Debtor' which was not the claim.

Thereby, the Adjudicating Authority failed to appreciate that the appellant has

claimed himself to be an 'operational creditor' having rendered services on the

basis of said letter dated 7th January, 2016 and not as a 'Financial Creditor'.

The subsequent letter of cancellation of retainer-ship by company has been

treated to be as notice of dispute on the ground that the 'Corporate Debtor' has

categorically raised the objection by disputed claim.

19. In 'Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd.' (2018)

1 SCC 353, the Hon'ble Supreme Court while discussing the provisions of Section

9 observed as follows:

"34. Therefore, the adjudicating authority, when examining

an application under Section 9 of the Act will have to

determine:

(i) Whether there is an "operational debt" as defined

exceeding Rs 1 lakh? (See Section 4 of the Act)

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(ii) Whether the documentary evidence furnished with the

application shows that the aforesaid debt is due and

payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between the

parties or the record of the pendency of a suit or

arbitration proceeding filed before the receipt of the

demand notice of the unpaid operational debt in

relation to such dispute?

If any one of the aforesaid conditions is lacking, the

application would have to be rejected. Apart from the

above, the adjudicating authority must follow the

mandate of Section 9, as outlined above, and in

particular the mandate of Section 9(5) of the Act, and

admit or reject the application, as the case may be,

depending upon the factors mentioned in Section 9(5) of

the Act.

xxx xxx xxx

37. It is now important to construe Section 8 of the Code.

The operational creditors are those creditors to whom

an operational debt is owed, and an operational debt,

in turn, means a claim in respect of the provision of

goods or services, including employment, or a debt in

Company Appeal (AT) (Insolvency) No. 256 of 2017 14

respect of repayment of dues arising under any law for

the time being in force and payable to the Government

or to a local authority. This has to be contrasted with

financial debts that may be owed to financial creditors,

which was the subject-matter of the judgment delivered

by this Court on 31-8-2017 in Innoventive Industries

Ltd. v. ICICI Bank [ Innoventive Industries Ltd. v. ICICI

Bank, (2018) 1 SCC 407] (Civil Appeals Nos. 8337-38

of 2017). In this judgment, we had held that the

adjudicating authority under Section 7 of the Code has

to ascertain the existence of a default from the records

of the information utility or on the basis of evidence

furnished by the financial creditor within 14 days. The

corporate debtor is entitled to point out to the

adjudicating authority that a default has not occurred;

in the sense that a debt, which may also include a

disputed claim, is not due i.e. it is not payable in law or

in fact. This Court then went on to state: (SCC p. 440,

paras 29-30)

"29. The scheme of Section 7 stands in

contrast with the scheme under Section

8 where an operational creditor is, on

the occurrence of a default, to first

Company Appeal (AT) (Insolvency) No. 256 of 2017 15

deliver a demand notice of the unpaid

debt to the operational debtor in the

manner provided in Section 8(1) of the

Code. Under Section 8(2), the corporate

debtor can, within a period of 10 days of

receipt of the demand notice or copy of

the invoice mentioned in sub-section (1),

bring to the notice of the operational

creditor the existence of a dispute or the

record of the pendency of a suit or

arbitration proceedings, which is pre-

existing -- i.e. before such notice or

invoice was received by the corporate

debtor. The moment there is existence of

such a dispute, the operational creditor

gets out of the clutches of the Code."

xxx xxx xxx

38. It is, thus, clear that so far as an operational creditor is

concerned, a demand notice of an unpaid operational

debt or copy of an invoice demanding payment of the

amount involved must be delivered in the prescribed

form. The corporate debtor is then given a period of 10

Company Appeal (AT) (Insolvency) No. 256 of 2017 16

days from the receipt of the demand notice or copy of

the invoice to bring to the notice of the operational

creditor the existence of a dispute, if any. We have also

seen the notes on clauses annexed to the Insolvency

and Bankruptcy Bill of 2015, in which "the existence of

a dispute" alone is mentioned. Even otherwise, the

word "and" occurring in Section 8(2)(a) must be read as

"or" keeping in mind the legislative intent and the fact

that an anomalous situation would arise if it is not read

as "or". If read as "and", disputes would only stave off

the bankruptcy process if they are already pending in

a suit or arbitration proceedings and not otherwise.

This would lead to great hardship; in that a dispute

may arise a few days before triggering of the insolvency

process, in which case, though a dispute may exist,

there is no time to approach either an Arbitral Tribunal

or a court. Further, given the fact that long limitation

periods are allowed, where disputes may arise and do

not reach an Arbitral Tribunal or a court for up to three

years, such persons would be outside the purview of

Section 8(2) leading to bankruptcy proceedings

commencing against them. Such an anomaly cannot

possibly have been intended by the legislature nor has

Company Appeal (AT) (Insolvency) No. 256 of 2017 17

it so been intended. We have also seen that one of the

objects of the Code qua operational debts is to ensure

that the amount of such debts, which is usually smaller

than that of financial debts, does not enable operational

creditors to put the corporate debtor into the insolvency

resolution process prematurely or initiate the process

for extraneous considerations. It is for this reason that

it is enough that a dispute exists between the parties."

20. The reply letter dated 25th January, 2017 written by the 'Corporate Debtor'

cannot be taken into consideration having issued in reply to demand notice

dated 14th January, 2017 given by the appellant under Section 8(1) of the I&B

Code. The dispute raised on imaginary facts and circumstances while replying

to the demand notice cannot be treated to be an 'existence of dispute' for rejecting

the application under Section 9. In absence of any evidence relating to pre-

existence dispute i.e. prior to issuance of notice dated 14th January, 2017 under

Section 8(1) of the I&B Code we hold that there was no dispute in existence.

Further, in view of letter of engagement and terms and condition of engagement

as discussed above we hold that the appellant comes within the meaning of

'Operational Creditor' as defined under Section 5(7) r/w Section 5(8). There

being a 'debt' due to the appellant and in absence of any evidence of payment, it

is to be accepted that there was a 'default'. In such background it was the duty

of the Adjudicating Authority to admit the application.

Company Appeal (AT) (Insolvency) No. 256 of 2017 18

21. For the reasons aforesaid, we set aside the impugned order dated 11th

July, 2017 passed in C.P. No. 37/I&BP/NCLT/MB/MAH/2017 and remit the

case to the Adjudicating Authority, Mumbai Bench to admit the application

and pass appropriate order in presence of the parties. All the plea taken by

the parties, having discussed no further opportunity of hearing is required to

be given to any of the parties for admission the application under Section 9 of

the I&B Code.

18. However, it will be open to the respondent to settle the claim before

admission of the application under Section 9. In such case, the appellant

may withdraw the application before its admission. The appeal is allowed

with the aforesaid observations. However, there shall be no order as to costs.

[Justice S.J. Mukhopadhaya] Chairperson

[ Justice Bansi Lal Bhat ] Member (Judicial)

New Delhi

9th August, 2018

/ns/

Company Appeal (AT) (Insolvency) No. 256 of 2017