Concept Group vs Cns Fashion Retail Pvt. Ltd

25, Kazanskaya Str Lit. A., office 304, 190031, Saint Petersburg, Russian Federation. Ph. No.-+ 7 812 322 11 22 (ext. 7152) Email Id- georgiy.karaoglanov@conceptgroup.ru ...Appellant

Versus

CNS FASHION RETAIL PVT. LTD.

252E, 2nd Floor, Front Portion, Sant Nagar, New Delhi-110065, Ph. No.: 01206831111 Email ID- SAAMAGROC@YAHOO.COM Also at: JA 0911, Plot No. 10, DDA District Centre, Jasola, Delhi- 110020, India Also at: 39C, Pocket- A1, DDA Flats, Mayur Vihar-3, Delhi, East Delhi, Delhi-110096, India ...Respondent

Present: For Appellant : Mr. Gyanendra Kumar, Mr. Robin Grover, Advocates For Respondents : Mr. Nitish Kr. Sharma, Adv.

JUDGMENT

Per: Justice Rakesh Kumar Jain:

This appeal is directed against the order dated 06.06.2022, passed by the

Adjudicating Authority (National Company Law Tribunal, New Delhi (Court No. 2

II) by which an application bearing (IB)-1024(ND)2020, filed by the Appellant

under Section 9 of the Insolvency and Bankruptcy Code, 2016 (in short 'Code'),

has been dismissed, inter alia, on the ground that the Appellant is a related party

in terms of Section 5(24)(j) of the Code and there was a pre-existing dispute.

2. In brief, the Appellant entered into a Goods Supply Contract on

23.08.2017 with the Respondent (Corporate Debtor). There was an addendum to

the said contract dated 27.08.2018. It is an admitted case that the Appellant

served a pre-trial notice (Annexure A-5) in terms of the provision of Russian Laws

to the Respondent on 03.09.2019 to which reply was filed by the Respondent on

23.09.2019. Thereafter, the Appellant served a demand notice dated 23.01.2020

(Annexure A-7) claiming an amount of Rs. 20,143,443.87/- on account of non-

payment of the goods supplied by the Respondent. The Respondent sent a reply

dated 15.02.2020 to this demand notice in which it was averred that "fact that

you have supplied substandard goods to our client not capable of fetching a

market in India". Thereafter, the Appellant filed an application under Section 9

of the Code before the Adjudicating Authority and in part-iv of the application,

claimed an amount of USD 281,203.41 INR 20,143,443.87/- approx. alleging

that the default has occurred on 01.09.2019 which is the date agreed between

the parties vide addendum contract. It is also averred that subsequently the

default had occurred on 04.10.2019 (14 days from the date of receipt of the said

notice/pre-trial notice), on 15.02.2020 (10 days from the demand notice) and it

continued. The Respondent took the stand to non-suit the Appellant that the it

Company Appeal (AT) (Ins) No. 909 of 2022 3

has 49 % share in the Respondent (CD) and thus it is a related party in terms of

the definition provided in Section 5(24)(j) of the Code. The Respondent also relied

upon a decision of the NCLT in the case of Zoom Communications Pvt. Ltd. Vs.

M/s Par Excellence Real Estate Pvt .Ltd. in IB No. 616/ND/2020 decided on

17.05.2022 which was later on approved by this Appellate Tribunal in CA (AT)

(Ins) No. 619 of 2022 and also took the stand that since the goods were

substandard, therefore, there was a pre-existing dispute between the parties and

that there is a provision for arbitration in the contract which was the genesis of

their relationship. The Adjudicating Authority decided both the issues against

the Appellant and dismissed the application filed under Section 9 of the Code.

3. Aggrieved against the impugned order, the present appeal has been

preferred in which, while challenging the first issue decided by the Adjudicating

Authority qua the related party, while relying upon the judgment delivered by

the Tribunal, approved later on by this Appellate Tribunal in the case of Zoom

Communication Pvt. Ltd. (Supra), it is submitted that the facts in the case of

Zoom Communication Pvt. Ltd. (Supra) are altogether different from the present

case. It is submitted that in the case of Zoom Communication Pvt. Ltd. (Supra)

the court has come to the conclusion that it was a sham transaction between

the parties which cannot be followed for initiation of CIRP whereas in the present

case no such finding has been recorded. It is further submitted that even if the

appellant is a related party then there would be two hurdles before it that in case

of initiation of CIRP it cannot be a part of the CoC and cannot be a resolution

Company Appeal (AT) (Ins) No. 909 of 2022 4

applicant being barred under Section 29A of the Code. Besides that there is no

such bar that a related party cannot file an application under Section 9 of the

Code. In support of his submissions, he has relied upon a decision rendered by

this Tribunal in the case of Periasamy Palani Gounder (Promoter & Erstwhile

Director) Appu Hotels Limited Vs. Radhakrishnan Dharmarajan RP Appu Hotels

Limited & Anr. 2022 SCC Online NCLAT 86. He further submitted that as per

his instructions and information the judgment which is being cited has been

challenged before the Hon'ble Supreme Court but there is no stay.

4. As regards the other issue about the pre-existing dispute, it is submitted

that to the pre-trial notice served by the Appellant, the Respondent while replying

the same did not raise any issue regarding the goods being substandard which

has been raised only when the demand notice was issued before filing the

application under Section 9 of the Code and therefore, it was only an

afterthought objection which is not made out from the record. It is also submitted

that the Adjudicating Authority has relied upon the emails dated 31.08.2018,

27.10.2018 and 29.10.2018 to somehow reach to a conclusion that there was a

pre-existing dispute. In this regard, while referring to the email dated

31.08.2018, it is submitted that the said email was only to improve 'Acoola'

operation and sales and not regarding anything to say that the goods supplied

were substandard. As regards the clause of arbitration is concerned, which is

stated to have been mentioned in the contract itself, it is argued that the

presence of the arbitration clause in the argument will not disentitle the

Company Appeal (AT) (Ins) No. 909 of 2022 5

Appellant from preferring the application under Section 9 of the Code, in this

regard, he has relied upon a decision of this Tribunal rendered in the case of

Hasan Shafiq Vs. CT-Technologies Aps, CA (AT) (Ins) No. 802 of 2020 decided on

14.02.2022.

5. In reply, Counsel appearing on behalf of the Respondent has submitted

that in so far as the first issue of the related party is concerned, he would rely

upon the findings recorded by the Adjudicating Authority and shall refer to the

decision rendered by this Tribunal in the case of Zoom Communication Pvt. Ltd.

(Supra). Regarding the pre-existing dispute, it is not denied that in the reply filed

to the pre-trial notice there was no such averment about the goods supplied

being substandard but it is argued that in the reply to the demand notice which

was served prior to the filing of the application under Section 9 of the Code the

issue of goods being substandard has been raised. It is also argued that the

Adjudicating Authority has rightly taken into consideration various emails which

have been referred to by the Appellant which shows that there was some dispute

between the parties about the manner in which the goods were supplied after

delay and also that goods were not up to the mark. Counsel for the Respondent

has also half-heartedly argued about the presence of the arbitration clause to

contend that once the arbitration clause is there and the Appellant has raised

the issue of arbitration then it is initiation of the arbitration proceedings.

6. In rebuttal, Counsel for the Appellant has submitted that Section 21 of the

Arbitration and Conciliation Act, 1996 (Act) is in part -1 which pertains to the

Company Appeal (AT) (Ins) No. 909 of 2022 6

domestic arbitration and shall not apply to any arbitration, which take place

beyond India and in this regard, he refers to a decision of the Delhi High court

in the case of Raffles Design International India Pvt. Ltd. & Anr. Vs. Educomp

Professional Education Limited & Ors. 2016 SCC Online Del 5521, in which it

has been observed that "Section 21 is in Part I of the Act and, indisputably,

applies only to arbitral proceedings in India". He has further submitted that pre-

trial notice was sent in consonance with the laws of Russia and the Respondent

was informed that if the claim is not satisfied then matter goes to the Arbitration

Court of the St. Petersburg and Leningrad Region. He has further explained with

the help of the report of one Baker McKenzie that the Arbitrazh Court are the

commercial Court in Russia has nothing to do with Arbitral Tribunal. It

originates from an old soviet tradition, whereby the disputes between state

enterprises were heard before the so-called 'State Arbitrazh' and the procedural

principles of the arbitrazh courts are based on those of continental European

Civil Law Jurisdictions, regulated by the Code of Arbitrazh procedure approved

in 2002. He has thus submitted that the objection raised by the Respondent

about the arbitration, though not raised before the Adjudicating Authority is just

for a sake of it and is not made out.

7. We have heard Counsel for the parties and perused the record with their

able assistance.

8. In so far as the first issue, decided by the Adjudicating Authority for the

related party is concerned, the judgment relied upon by the Respondent in the

Company Appeal (AT) (Ins) No. 909 of 2022 7

Zoom Communications Pvt. Ltd. (Supra) is not at all applicable because it deals

with the sham transaction between the parties which was not allowed for the

initiation of CIRP whereas no findings have been recorded in the present case.

9. As regard the pre-existing dispute, the Adjudicating Authority has further

erred in not looking to the fact that in the reply to the pre-trial notice, the

Respondent did not raise any issue regarding the goods being substandard

which issue came to be raised only when the demand notice was issued before

filing the application and was an afterthought objection, not made out from the

record. The emails relied upon the Adjudicating Authority are not directed to

raise a pre-existing dispute rather the said emails are exchanged by the parties

regarding the improvement in the operation and sales and has nothing to do with

the goods which are now alleged to be substandard or defective. Argument of the

Respondent that the Appellant has invoked the arbitration in the pre-trial notice

is also neither here nor there in view of the fact that firstly, Section 21 of the Act

would apply only to the Arbitral proceedings in India as has been held by the

Delhi High Court in the case of Raffles Design International India Pvt. Ltd.

(Supra) and secondly, it was the arbitration court in the St. Petersburg which is

akin to Civil/Commercial Court having three tiers.

10. Thus, looking from any angle, there is an error of appreciation of facts and

evidence on the part of the Adjudicating Authority in dismissing the application

filed by the Appellant. The appeal is allowed and the impugned order is hereby

set aside. Though in the given facts and circumstances without any order as to

Company Appeal (AT) (Ins) No. 909 of 2022 8

costs. We direct the Adjudicating Authority to admit the application in

accordance with law.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Kanthi Narahari] Member (Technical)

New Delhi

28th November, 2022

Sheetal

Company Appeal (AT) (Ins) No. 909 of 2022