Continuous Dyeing & Printing Mills vs Bhavika Apparels Pvt Ltd

Company Appeal (AT)(Insolvency) No. 301 of 2022

[Arising out of order dated 21.12.2021 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi Bench-IV, in C.P. (IB) No.2844(ND)/2019]

IN THE MATTER OF:

Continuous Dyeing & Printing Mills Through its Partner Mr. Anubhav Agarwal 7A/3A, Rajpur Road Civil Lines, Delhi - 110 054 ...Appellant

Versus

Bhavika Apparels Pvt. Ltd. 414, Sitaram Apartments, IP Extension, Patparganj, New Delhi - 110092 ...Respondent

Present:

For Appellant: Mr. Ritesh Agrawal, Mr. Mani Bhushan Sinha, Ms. Priyanshi Sharma, Advocates.

For Respondent: Mr. Vaibhav Verma, Mr. Abhishek Panday, Mr. Charag Garg, Advocates.

JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of the Insolvency and Bankruptcy

Code, 2016 ('IBC' in short) by the Appellant arises out of the order dated

21.12.2021 (hereinafter referred as 'Impugned Order') passed by the Adjudicating

Authority (National Company Law Tribunal, Bench-IV, New Delhi in CP(IB) Company Appeal (AT)(Insolvency) No. 301 of 2022

1 No.2844(ND)/2019). By the impugned order, the Adjudicating Authority

dismissed the application filed by Operational Creditor (the present Appellant)

under Section 9 of the IBC seeking initiation of Corporate Insolvency Resolution

Process ('CIRP' in short) against Corporate Debtor-Bhavika Apparels Private

Limited (the present Respondent). Aggrieved by the impugned order, the present

appeal has been preferred by the Operational Creditor.

2. Making his submissions on the factual background of the case, the Learned

Counsel for the Appellant pointed out that the Appellant was approached by the

Respondent/Corporate Debtor for job work printing and finishing of woven

fabrics. The Corporate Debtor had issued a work order dated 13.12.2018 for

which the Operational Creditor had raised invoices from 04.01.2019 to

05.02.2019 and raised GST bills for the same. It has been further submitted that

the Corporate Debtor on receipt of the printed fabrics used to check the goods and

clear the bills for the invoices submitted after making TDS deductions and that

payments were cleared on running account basis instead of bill wise payments.

Moreover, Form 26A shows acknowledgment of invoices by the Corporate Debtor.

3. It was stated that only when the Operational Creditor took up the matter in

January 2019 with the Corporate Debtor for release of payment that the Corporate

Debtor for the first time sent debit notes dated 31.01.2019 by email on 05.02.2019

to the Operational Creditor. However, the Appellant/Operational Creditor sent a

reply email on 06.02.2019 to the Corporate Debtor conveying the non-acceptance

of the debit notes as baseless. The Corporate Debtor later released a payment of

Rs.10 lakh on 18.06.2019. Thereafter, due to delay in receipt of further payments,

the Appellant sent details of invoices and balance payments to the Corporate

Company Appeal (AT)(Insolvency) No. 301 of 2022

2 Debtor on 19.08.2019. In the said communication, it was mentioned that if the

Corporate Debtor did not clear the payments, the Operational Creditor would be

approaching the National Company Law Tribunal ('NCLT' in short) for due

redressal.

4. It has been further submitted that the Corporate Debtor instead of releasing

the payments sent a detailed notice on 23.08.2019 to the Operational Creditor

disputing 11 invoices and asking the Operational Creditor to come for

negotiations. This notice was replied back on 30.08.2019 by the Appellant.

Further the very fact that that they had been called for negotiations showed that

the Respondent had admitted that payments were due qua the invoices raised

during the period 04.01.2019 to 05.02.2019. It is further contended by the

Learned Counsel for the Appellant that these invoices were disputed purely in

reaction to the communication dated 19.08.2019 sent by the Appellant wherein it

had been stated that they would take up the issue of non-payment of operational

debt before the NCLT by invoking the provisions of IBC. Further, the very fact

that the Corporate Debtor had called the Appellant for negotiations indicated that

it was not a case of genuine pre-existing dispute. That these disputes were raised

six months after the invoices were raised, it was not a genuine dispute but

fabricated to frustrate the provisions of the IBC. It was also contended that the

alleged pre-existing disputes were not genuine and therefore deserve to be

ignored.

5. Advancing his arguments further, it was stated by Learned Counsel for the

Appellant that since no payment was forthcoming from the Corporate Debtor, the

Operational Creditor sent a demand notice under Section 8 of IBC on 16.09.2019.

Company Appeal (AT)(Insolvency) No. 301 of 2022

3 The Learned Counsel for the Appellant admitted that the Corporate Debtor replied

to the Section 8 Notice on 27.09.2019 in which reply it was stated that the Section

8 Notice was not maintainable because a suit had been filed in the District Court

vide suit No. 517/2019 which shows pre-existence of dispute. The Learned

Counsel for the Appellant submitted that the civil suit being not filed by the

Corporate Debtor but by one of the Directors of the Corporate Debtor in his

personal capacity was, therefore, not competent. Moreover, the very fact that this

suit was filed after the letter of 19.08.2019 shows that it was an afterthought.

Moreover, the Corporate Debtor had never disputed quality issues of printing job

prior to the intimation notice of 19.08.2019 and this bogey has been raised to

avoid liability to pay outstanding dues. Furthermore, had the goods not been of

acceptable quality, the same should logically have been returned by the Corporate

Debtor, but the goods were never returned which shows that the dispute raised

is moonshine and an afterthought.

6. Submitting further that several reminder emails were sent for release of

outstanding payment from 30.12.2018 onwards and the total outstanding

amount as on 04.01.2019 stood at Rs.35,33,737/- and the payment not having

been cleared even after the receipt of the demand notice, the Appellant had filed

Section 9 application on 15.10.2019.

7. The Learned Counsel for the Respondent refuting the submissions of the

Appellant contended that there was pre-existing dispute with respect to quality of

goods supplied by the Operational Creditor which had been raised on 23.08.2019

which was prior to the issue of demand notice under Section 8. It had been

brought to the notice of the Appellant that the fabric supplied by the Operational

Company Appeal (AT)(Insolvency) No. 301 of 2022

4 Creditor was inferior quality as it had 10% contraction as against the order placed

for 18% contraction, due to which the Corporate Debtor faced deduction of

payment from their client. Further a civil suit had also been filed on 06.09.2019

which also predated the issue of demand notice. It has also been submitted that

the Operational Creditor had raised different demands for the same alleged

operational debt, thereby, rendering the Section 9 application defective.

8. We have duly considered the arguments and submissions advanced by the

Learned Counsel for the parties and perused the records carefully.

9. Before dwelling on the facts of the present case, a quick glance at the

relevant statutory construct of IBC would be useful. Section 8 of the IBC requires

the Operational Creditor, on occurrence of a default by the Corporate Debtor, to

deliver a Demand Notice in respect of the outstanding Operational Debt. Section

8(2) lays down that the Corporate Debtor within a period of 10 days of the receipt

of the Demand Notice would have to bring to the notice of the Operational

Creditor, the existence of dispute, if any. Section 8 of the IBC is as follows:

"8. Insolvency resolution by operational creditor- (1) An

operational creditor may, on the occurrence of a default, deliver a

demand notice of unpaid operational debt or copy of an invoice

demanding payment of the amount involved in the default to the

corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt

of the demand notice or copy of the invoice mentioned in sub-section

(1) bring to the notice of the operational creditor--

Company Appeal (AT)(Insolvency) No. 301 of 2022

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(a) existence of a dispute, if any, or record of the pendency of the

suit or arbitration proceedings filed before the receipt of such

notice or invoice in relation to such dispute;

(b) the payment of unpaid operational debt--

(i) by sending an attested copy of the record of electronic

transfer of the unpaid amount from the bank account of the

corporate debtor; or

(ii) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate

debtor.

Explanation.--For the purposes of this section, a "demand notice"

means a notice served by an operational creditor to the corporate

debtor demanding payment of the operational debt in respect of which

the default has occurred."

10. This now brings us to the statutory construct of IBC post issue of demand

notice by the Operational Creditor as laid down in Section 9 of IBC. Under Section

9(1), if the Operational Creditor does not receive payment from the Corporate

Debtor or notice of the dispute under Sub-section (2) of Section 8, he may file an

Application under Section 9(1) of the Code. It is also an undisputed fact in the

present matter that the Operational Creditor did not receive any payment from

the Corporate Debtor and therefore proceeded to file an application under Section

9 of IBC.

Company Appeal (AT)(Insolvency) No. 301 of 2022

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11. For convenience, we reproduce Section 9(1) of IBC which is to the following

effect:

"9. Application for initiation of corporate insolvency resolution

process by operational creditor.- (1) After the expiry of the period

of ten days from the date of delivery of the notice or invoice demanding

payment under sub-section (1) of section 8, if the operational creditor

does not receive payment from the corporate debtor or notice of the

dispute under sub-section (2) of section 8, the operational creditor may

file an application before the Adjudicating Authority for initiating a

corporate insolvency resolution process."

Section 9(5)(ii) is as follows:

"(5) The Adjudicating Authority shall, within fourteen days of the

receipt of the application under subsection (2), by an order--

(i).....

(ii) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if--

(a) the application made under sub-section (2) is incomplete;

(b) there has been payment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for

payment to the corporate debtor;

(d) notice of dispute has been received by the operational

creditor or there is a record of dispute in the information utility;

or

Company Appeal (AT)(Insolvency) No. 301 of 2022

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(e) any disciplinary proceeding is pending against any

proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an

application under sub-clause (a) of clause (ii) give a notice to the

applicant to rectify the defect in his application within seven days of

the date of receipt of such notice from the adjudicating Authority."

12. From a plain reading of the above provisions, it is clear that with regard to

an Operational Creditor, the existence of dispute and its communication to the

Operational Creditor is therefore statutorily provided for in Section 8. In the

present case, it is an undisputed fact that the demand notice was issued by the

Operational Creditor on 16.09.2019 and notice of dispute raised by the Corporate

Debtor on 27.09.2019.

13. It is the case of the Appellant that the Corporate Debtor had been receiving

the printed fabric goods from the Operational Creditor for which invoices were

raised by the Operational Creditor. Moreover, it was contended that Form 26A

clearly evidences the acknowledgement of invoices by the Corporate Debtor.

Further, since goods were received by the Corporate Debtor after due quality

check, the question of defective goods having been supplied was denied. It was

pointed out by the Learned Counsel for the Appellant that for six months after

raising of invoices, no grounds were ever raised with regard to supply of defective

and substandard goods and therefore the debit notes issued by the Corporate

Debtor were not accepted. However, since payments were not forthcoming,

Section 8 demand notice issued on 16.09.2019 was followed by Section 9

application before the Adjudicating Authority. While admitting that the Corporate Company Appeal (AT)(Insolvency) No. 301 of 2022

8 Debtor had raised disputes in their communication dated 23.08.2019, it was

pointed out that the Adjudicating Authority failed to appreciate the fact that this

communication had been triggered by the fact that the Corporate Debtor had been

informed on 19.08.2019 that action would be initiated against them before the

NCLT in case of non-payment. It is also the Appellant's contention that the very

fact that they were called for negotiations by the Corporate Debtor in their

communication dated 23.08.2019, this was an implied admission on the part of

the Corporate Debtor that they had acknowledged their liability.

14. When the matter came up before the Adjudicating Authority, it was

observed by the Adjudicating Authority that even prior to issue of demand notice

by the Operational Creditor, a communication was issued by the Corporate Debtor

on 23.08.2019 raising questions about defective goods supplied by the

Operational Creditor. The Adjudicating Authority took notice of the fact that the

above notice of 23.08.2019 to the Operational Creditor for supply of defective

goods predated the Section 8 Demand Notice which was issued on 16.09.2019.

The Adjudicating Authority while observing that the notice of the Corporate

Debtor raising defects in the goods supplied dated 23.08.2019 was six months

after the issue of last invoice on 05.02.2019, it also took cognizance of the fact

that this notice nevertheless preceded the demand notice thereby establishing

evidence of dispute between the two parties.

15. A perusal of the notice of dispute sent by the Corporate Debtor on

23.08.2019 to the Operational Creditor as at page 115-116 of the Appeal Paper

Book ('APB' in short) clearly articulates the allegations that the Operational

Creditor had supplied inferior quality fabric of Machine Drying Variant with 10%

Company Appeal (AT)(Insolvency) No. 301 of 2022

9 contraction as against the requirement of Line Drying Variant having 18%

contraction. Since extra expenditure had to be incurred to render the defective

goods marketable it has also been alleged that debit notes were raised as well. It

was also indicated in the notice that there has been 8% extra printing charges

levied by the Operational Creditor besides also complaining that the Corporate

Debtor's shipment to its suppliers were rejected on quality grounds thereby

causing losses. In the said notice, the Corporate Debtor had intimated the

Operational Creditor to negotiate in the matter failing which they had threatened

to initiate legal proceedings.

16. The Learned Counsel for the Respondent has also submitted in the reply

affidavit that the Operational Creditor had demanded different amounts on

different occasions and therefore the legal debt cannot be ascertained. The legal

debt claimed has been varying from time to time being Rs.35,33,737/-; Rs.

40,24,320/- on another occasion and Rs.50,24,320/- and Rs.50,26,260/- on two

other occasions. We note that the Adjudicating Authority has looked into this

issue and correctly held that the lack of consistency of legal debt claimed was

occasioned by calculation of interest component and therefore not sufficient

ground to hold that the Section 9 petition was not maintainable.

17. It has also been contended by the Learned Counsel for the Respondent that

the Corporate Debtor in their reply to the demand notice dated 16.09.2019, as

placed at page 132-134 of the APB, had sent a reply on 27.09.2019 stating that

the notice of demand was unwarranted, untenable and frivolous. It has been

clearly mentioned that there is a pre-existing dispute and that inspite of having

pointed out these discrepancies, the operational creditor had continued to ignore

Company Appeal (AT)(Insolvency) No. 301 of 2022

10 the same and rejected the debit notes which has led to filing of a civil suit

No.517/2019. It has been pressed in the said reply that the Civil Suit was filed

before the receipt of the demand notice of the Operational Creditor and hence the

demand notice is illusory and unwarranted having no legs to stand. Paras 8 and

9 of the Reply Notice is relevant and is to the following effect: -

"8. That the dispute as regards the amount claimed by you from our

client is a pre-existing dispute, that is, this dispute is prior to the

receipt of the demand notice under reply if and therefore on this

ground alone the demand notice under reply must fail in light of the

provisions of the Insolvency and Bankruptcy Code, 2016.

9. In view of the above stated facts and legal precedents, we request

you, to withdraw your unwarranted, untenable and frivolous notice

of demand by issuing forged invoices preferred under the Insolvency

and Bankruptcy Code, 2016."

18. The contention raised by the Appellant that the Civil Suit filed by the

Corporate Debtor was not filed by the Corporate Debtor but by one of the Directors

in his individual capacity has also been looked into by the Adjudicating Authority

and it was observed that the contention of the Appellant lacked substance as the

company was also impleaded in the said civil suit subsequently. Hence the civil

suit has been treated as a ground for pre-existing dispute by the Adjudicating

Authority. It is also the contention of the Operational Creditor that the civil suit

had been dismissed for non-appearance of the Corporate Debtor on 24.03.2022

and was restored on 08.07.2022 purely with the intent to create a pre-existing

dispute to frustrate the provisions of the IBC. On a pointed question asked by this Company Appeal (AT)(Insolvency) No. 301 of 2022

11 Tribunal, it has been admitted by both the parties that the civil suit is still pending

which therefore validates existence of dispute between the two parties.

19. At this stage, it may be useful to reproduce para 23 of the Impugned Order

wherein the Adjudicating Authority has held as follows: -

"23. Thus, there also exists dispute prior to demand notice with respect

to the quality of the goods supplied by the Operational Creditor to the

Corporate Debtor and litigation is also pending, qua the said dispute. The

said question was also raised in the reply to the demand notice sent by

the petitioner. Therefore, there was a clear 'existence of dispute', which

was genuine in nature and it could not be said that the same was raised

falsely just to defend the present matter. Hence, the petitioner is not

entitled to the relief claimed.

24. As per Section 9(5)(ii)(d) of the Code provides that adjudicating

authority shall reject the application if notice of dispute has been received

by the operational creditor or there is record of dispute in the information

utility.'

(Emphasis supplied)

20. In the present factual matrix, the defence raised by the Corporate Debtor

therefore cannot be held to be moonshine, spurious, hypothetical or illusory. The

tone and tenor of the letter dated 23.08.2019 clearly manifested existence of

dispute prior to the date of Section 8 demand notice on 16.09.2019. It is well

settled that in Section 9 proceeding, there is no need to enter into final

adjudication with regard to existence of dispute between the parties regarding Company Appeal (AT)(Insolvency) No. 301 of 2022

12 operational debt. For such disputed operational debt, Section 9 proceeding under

IBC cannot be initiated at the instance of the Operational Creditor. The

Adjudicating Authority has therefore correctly noted that the application filed by

the Operational Creditor under Section 9 has been hit by Section 9(5)(ii)(d) and

accordingly rejected.

21. Given this backdrop, we have no reasons to disagree with the findings of

the Adjudicating Authority. Considering the overall facts and circumstance of the

present case, and in view of the foregoing discussion, we are satisfied that the

Adjudicating Authority did not commit any error in rejecting the Section 9

Application filed by the Appellant. There is no merit in the Appeal. Appeal is

dismissed. We however make it clear that it will remain open to the Appellant to

resort to other remedies that may be available to it under any other law. No order

as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 18.04.2023

PKM

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