Continental Piling & Excavation Pvt. ... vs Capacite Infraprojects Limited

(14.07.2022) (Virtual Mode) Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 1 of 17 [Per.: Dr. Alok Srivastava, Member (Technical)]

This appeal has been filed under Section 61 of the Insolvency

and Bankruptcy Code, 2016 (hereafter called 'IBC') by the Appellant,

who is aggrieved by the order dated 14.12.2018 (hereafter called

Impugned Order) passed by the National Company Law Tribunal,

Mumbai (Adjudicating Authority) in CP 435/I&BP/NCLT/MAH/

2018, by which the application filed by the Operational Creditor

Continental Piling & Excavation Pvt. Ltd. under section 9 of the IBC

was dismissed by the Adjudicating Authority on the ground of a

dispute which was existing between the Operational Creditor and

Corporate Debtor prior to the serving of demand notice under

section 8 to the Corporate Debtor.

2. In brief, the facts of the case are that the Corporate Debtor

had given two work orders dated 17.8.2013 and 22.10.2013 to the

Operational Creditor (attached at pp.57-61 of the appeal paperbook)

relating to piling and foundation work in a project undertaken by

the corporate debtor. The Appellant has stated that after completion

of the work, certain invoices were raised by the

Appellant/Operational Creditor for payment of the said invoices for

work done (invoices attached at pp.62-72 of the appeal paperbook)

and some payments were made by the corporate debtor against Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 2 of 17 these invoices. He has further stated that he had submitted all the

necessary documents such as Provident Fund challans, ESI

challans, wage register copy etc. to the corporate debtor vide letter

dated 13.8.2016 (attached at pg. 89 of the appeal paperbook). The

Appellant has claimed that despite submission of the detailed

documents, he was sent e-mail communication(s) dated 26.9.2016,

3.10.2016 and 12.10.2016 (attached at pp. 85, 86 and 88 of the

appeal paperbook) asking him to submit account statement

alongwith relevant documents in respect of labour and other

statutory compliances required under law for release of pending

payment after due verification. He has, further, stated that vide e-

mail dated 12.11.2016, he informed the corporate debtor that all

labour compliances have been made and the operational creditor

was willing to hand over a indemnity letter in the event any legal

consequences/damages were faced by the corporate debtor in

respect of the works carried out by the operational creditor.

3. As certain payments amounting to Rs.38,34,843.53 were due

against invoices issued during the period 26.10.2013 to 6.9.2014,

the operational creditor sent a section 8 demand notice dated

16.8.2017 to the corporate debtor (attached at pp.92-97 of the

appeal paperbook), which was replied to vide letter dated 25.8.2017

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 3 of 17 by the corporate debtor wherein he pointed out that the operational

creditor was required to fulfil all the labour law related and other

statutory compliances, which were part of the 'Other Terms and

Conditions' of the work order and these documents were not

submitted to the corporate debtor.

4. We heard the arguments advanced by the learned counsels

for both the parties. The Learned Counsel for Appellant has argued

that the Respondent has made vital admissions with regard to the

existence of debt in various documents, as well as in reply to section

8 notice and in reply to the section 9 application, and a total amount

of Rs. 39,14,843.53 is due and payable by the corporate debtor to

the operational creditor. He has further submitted that the work

order required the Appellant to comply with the labour rules,

regulations and laws and other statutory compliances, but there is

not a single clause in the work order which entitles the Respondent

to withhold payments which are due to the Appellant on account of

any non-compliance of labour laws and related statutory

compliances. He has also submitted that Respondent has deposited

TDS due on the amounts given to the Respondent/Operational

Creditor and has placed Form 26AS (attached at pp. 76-78 of the

appeal paperbook) before us in proof of the same. He has argued

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 4 of 17 that Form 26AS amounts to a clear and unambiguous admission by

the Respondent regarding the existence of debt which is payable to

the Appellant. He has also submitted that the fact about depositing

the TDS has also been admitted by the Respondent in reply to the

section 8 demand notice (attached at pp.100-103 in paragraph 7).

In addition, the Learned Counsel for Appellant has stated that the

Respondent has also placed on record a ledger/statement of account

(attached at pg. 151 of the appeal paperbook) as admission of the

operational debt and, therefore, looking at all these admissions and

evidences the existence of operational debt, that is due and payable

to the appellant is clearly established.

5. Additionally, the Learned Counsel for Appellant has argued

that while the Appellant was required to comply with labour laws

under the work order payments that are due should have been made

to the Appellant as the 'Terms and Conditions' in the work order

makes it incumbent on the respondent/corporate debtor to make

payment within 10 days of submission of invoice. He has stated

that the Appellant has complied with labour regulations and

subjected itself to regular audit from time to time, and in such a

situation the due and payable amount cannot be withheld. Finally,

the Learned Counsel for Appellant has claimed that the Impugned

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 5 of 17 Order is not fully reasoned and does not deal with the points raised

by the Appellant. In support of his contention, the Learned Counsel

for Appellant has claimed that in the present case the dispute being

raised by the corporate debtor is a hypothetical and illusory one

which cannot be a ground for denial of debt payment by the

corporate debtor. He has referred to the judgment of the Hon'ble

Supreme Court in the matter of Mobilox Innovations Private

Limited vs. Kirusa Software Private Limited (2018) 1 SCC 353,

wherein it is held that the defence put up by the Respondent which

is hypothetical and moonshine, cannot help him evade his

responsibility to pay the operational debt which is otherwise

established as due and payable.

6. In reply, the Learned Counsel for Respondent has pointed out

to the various communications made between the Appellant and the

Respondent regarding non-submission of documents showing

compliance of labour laws and other statutory compliances very

clearly and unambiguously establish the existence of dispute

between them. In proof, he has cited letters dated 31.8.2016

(attached at page 89 of the appeal paperbook), undated letter

(attached at page 86 of the appeal paperbook), dated 26.9.2016

(attached at page 87 of the appeal paperbook), dated 3.10.2016

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 6 of 17 (attached at page 85 of the appeal paperbook) and dated 12.10.2016

and e-mail dated 12.10.2016 (attached at pages 88 and 90 of the

appeal paperbook) and e-mail dated 12.11.2016 (attached at page

91 of the appeal paperbook) to argue that the respondent had been

continuously requesting the appellant to submit various documents

to show compliance with requirements of labour laws and other

statutory compliances as detailed in the respondent's letter dated

3.10.2016 but no such documents/statements were submitted by

the appellant. He has also pointed out that in the e-mail dated

12.11.2016 (attached at page 91 of the appeal paperbook), the

appellant has stated that the requirements of labour compliances

are not relevant for the purpose of clearing the outstanding dues

payable to him .

7. The Learned Counsel for Respondent has brought to our

attention the clauses (i) and (j) in the section 'Other Terms and

Conditions' of the work order (attached at pp.57-60 of the appeal

paperbook) to claim that the contractor (the appellant in this case)

has to abide by all the laws/provisions of the Central/State/Local

authorities that may be related (whether directly or indirectly) to the

construction activity at site and to also strictly follow the provisions

of law related to labour e.g. minimum wages, working hours and

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 7 of 17 conditions, ESIS and PF provisions etc. He has argued that the

respondent received enquiries from labour/PF authorities regarding

compliance of labour laws, and in support of his contention he has

pointed out to the letter from EPFO dated 30.11.2018 (attached at

pg. 23 of Respondent's reply, diary. No. 15053 dated 11.10.2019).

8. In rejoinder, the Learned Counsel for Appellant has stated

that the appellant had submitted the documents relating to ESI/PF

payments and other compliances for the period September, 2013 to

February, 2014 with his letter dated 31.8.2016, and furthermore,

the letter from the EPFO dated 30.11.2018 (attached at pg. 23 of

Respondent's reply, diary. No. 15053 dated 11.10.2019) is a general

letter addressed to the corporate debtor and is not specific to the

work carried out by the operational creditor. He has also referred

to the Appellant's e-mail dated 12.11.2016 wherein the Appellant

has expressed willingness to hand over indemnity letter that no legal

consequences/damages will be faced by the Respondent in respect

of the work carried out by the operational creditor in respect of the

project, and the letter from EPFO dated 30.11.2018 was not placed

before the Adjudicating Authority for consideration by the

respondent.

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 8 of 17

9. The Appellant has submitted IA No. 1975/2021, an

application under rules 11 and 14 of the NCLT Rules, 2016, for filing

additional documents before this tribunal. With this interlocutory

application, the Appellant has placed Annexure A-16 (attached at

pps. 249-314 of the appeal paperbook) in support of his claim that

the work was completed in accordance with the terms and

conditions of the work order and TDS was paid by the corporate

debtor and labour laws' compliances were also made by the

appellant. He has placed documents regarding payments to the

EPFO with copies of challans (attached at pp.283/296 of appeal

paperbook) and reports of visits by EPFO officers (attached at

pp.297-310 of the appeal paperbook). It is noted by us that these

documents were not placed before the Adjudicating Authority, and

the list of documents attached to section 9 application (attached at

pp.121-126 of appeal paperbook) also shows that these documents

were not part of the section 9 application.

10. Hon'ble Supreme Court in the matter of Dena Bank vs C.

Shivakumar Reddy, (2021) 10 SCC 330 has held as follows

regarding filing of additional documents in a section 7 application:-

"142. There is no bar in law to the amendment of pleadings in an application under Section 7 IBC, or to the filing of Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 9 of 17 additional documents, apart from those initially filed along with application under Section 7 IBC in Form 1. In the absence of any express provision which either prohibits or sets a time-limit for filing of additional documents, it cannot be said that the adjudicating authority committed any illegality or error in permitting the appellant Bank to file additional documents. Needless however, to mention that depending on the facts and circumstances of the case, when there is inordinate delay, the adjudicating authority might, at its discretion, decline the request of an applicant to file additional pleadings and/or documents, and proceed to pass a final order. In our considered view, the decision of the adjudicating authority to entertain and/or to allow the request of the appellant Bank for the filing of additional documents with supporting pleadings, and to consider such documents and pleadings did not call for interference in appeal.

11. It is noted that the appellant did not seek the permission of

the Adjudicating Authority to place any additional documents in

support of his section 9 application. As is evident from the judgment

in Dena Bank (supra), the Adjudicating Authority can accept

additional documents at the stage of adjudication of section 7

application. It stands to reason that a similar condition will apply

in the matter of section 9 application.We find that in this case the

applicant/appellant did not make any request to the Adjudicating

Authority for accepting additional documents. We also note that the

Adjudicating Authority, in accordance with the requirement of

section 9, decided the application keeping in view the information

and documents presented in the section 9 application. We, Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 10 of 17 therefore, are of the view that it would not be appropriate that the

additional documents placed before us through I.A. 1975/2021 be

accepted at the stage of appeal. I.A. 1975/2021 is therefore rejected.

12. The Terms and Conditions of the work order provide for

compliance of labour laws. The relevant clauses in the work order

regarding labour law and statutory compliances which are included

in the section "Terms and Conditions" and "Other Terms and

Conditions" of the work order" are reproduced below for ready

reference:-

Terms and Conditions:

xx xx xx xx

13. On receipt of monthly bill payment will be released in 10 days.

Other Terms and Conditions:

xx xx xx xx

(i) Contractor has to abide all the laws/Provisions of

Central/State/Local authorities that may be related (whether directly or indirectly) to construction activity at the site.

(j) Contractor will strictly follow the provisions of law related to labour, e.g. minimum wages, working hours and conditions, ESIS & P.F provisions etc.

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 11 of 17

13. Clauses (i) and (j) contained in the 'Other Terms and

Conditions' are quite clear that the operational creditor has to

comply with all the laws/provisions of Central/State/Local

authorities that may be related to the construction activities at site

and also to strictly follow the provisions of law related to the labour

etc. It is also not denied by the parties that this work order relates

to a labour contract where the material is being supplied by the

corporate debtor and the labour is being arranged by the operational

creditor. Therefore, the compliance of all the statutory requirements

of Central/State/Local authorities regarding construction and

following of provisions of labour laws squarely falls on the

operational creditor, and in our view, are not just relevant but a pre-

condition for payment to the operational creditor. Therefore, we are

not persuaded by the argument of the Appellant that on receipt of

monthly bill, payment has to be released in 10 days irrespective of

whether due compliances regarding statutory requirements and

labour laws have been made.

14. We note that in the undated letter from the Corporate Debtor

to the Operational Creditor (attached at page 86 of the appeal

paperbook) the operational creditor is reminded to submit final bill

with documents for reconciliation. Another letter dated 12.10.2016 Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 12 of 17 of the corporate debtor, while referring to his earlier letter dated

26.9.2016 asks the operational creditor to submit necessary

documents regarding labour law compliances. Aanother e-mail

dated 12.10.2016 from the corporate debtor to operational creditor

(attached at page 90 of the appeal paperbook) wherein it is stated as

follows:-

"Xx xx xx

May we invite your kind attention to our communications dated 26/09/2016 and 30/10/2016, whereby we have had stressed upon you to kindly visit our office along with relevant documents in respect of labour compliances done by you under law and statement of accounts so that payment if any due after verification of the same, could be released?

It is regretted that you have not so far complied with the requirements of documents and given undertaking as detailed in our letter of 3rd October, 2016 also.

Hope you will do the needful at an early date to enable us to settle this issue, we therefore in write this to inform you that we shall await for period of thirty days (30 days) to enable you to comply the requirements as intimated failing which, we will be taking it for granted that the issue should be treated as closed from your side."

Thereafter, an e-mail dated 12.11.2016 is sent by the operational

creditor to the corporate debtor (attached at page 91 of the appeal

paperbook) which states the following:-

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 13 of 17 'Xx xx xx xx

With regard to your requirements of labour compliances as contained in your previous communications as well as meetings, it is stated that the same is not relevant for the purposes of clearing the outstanding dues payable to us. The purchase order and relevant documents executed between us does not in any manner empower you to withhold payments on account of any such requirement.

Be that as it may, we have already informed you that all labour compliances have been made and are even willing to hand over an indemnity letter from our end that no legal consequences/damages would be faced by you in respect of the works carried out by us in respect of the project.

It is further stated that 3C has independent and distinct transactions with us and is no way related to our transaction.'

15. We thus find that while the operational creditor claims to have

submitted all the relevant documents regarding labour compliances,

the corporate debtor has been repeatedly asking the operational

creditor to submit the relevant documents. We also note that the

operational creditor, in his e-mail dated 12.11.2016 states that the

requirement of labour compliances as contained in (corporate

debtor) previous communication as well as meetings are not relevant

for the purposes of clearing outstanding dues payable to the

operational creditor, but he is still willing to hand over an indemnity

letter regarding no legal consequences/damages to be faced by the

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 14 of 17 corporate debtor. No indemnity letter is also found to be handed

over to the corporate debtor.

16. Hon'ble Supreme Court, in its judgment delivered in the

Mobilox Innovations case (supra), has decided as follows:-

"It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

17. We note from the reply sent by the corporate debtor to the

section 9 application that the corporate debtor had been repeatedly

pointing out the deficiency/insufficiency of documents relating to

labour law compliances submitted by the operational creditor. At

one point in his e-mail dated 12.11.2016, the operational creditor

claims that the requirements of labour compliances are not relevant Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 15 of 17 for the purpose of clearing the outstanding dues. The sections on

'Terms and Conditions' and 'Other Terms and Conditions' of the

work order dated 17.8.2013 very clearly show that the work order

relates to a labour contract and therefore the conditions regarding

compliance of all labour laws and Central/State/Local authorities'

statutory requirements are necessary and have to be done. We are,

therefore, not convinced by the claim of the Appellant that

compliance of labour laws and other statutory requirements

including PF/ESIS compliances are not relevant to the contract.

Suffice to say that there is a dispute between the parties that existed

prior to the sending of the section 8 notice which is not merely a

hypothetical dispute or a dispute raised in moonshine defence.

18. On the basis of aforementioned discussion, we are of the view

that the Adjudicating Authority, who has relied on the facts and

documents presented before it alongwith the section 9 application,

has not erred in holding that a 'pre-existing dispute' was present in

the case, and has, therefore, correctly rejected the section 9

application. We, thus, find that the appeal is devoid of any merit and

accordingly dismiss it.

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 16 of 17

19. There is no order as to costs.

(Justice Rakesh Kumar Jain) Member (Judicial)

(Dr. Alok Srivastava) Member (Technical)

(Barun Mitra) Member (Technical)

New Delhi 14th July, 2022

/aks/

Company Appeal (AT) (Ins.) No. 726 of 2019 & I.A. No.1975 of 2021 Page 17 of 17