Dhruv Harjai vs Ppg Asian Paints Private Limited & Anr

Company Appeal (AT) (Ins.) No. 60 of 2023 & I.A. No. 224, 225, 476, 3871 of 2023 & 5221 of 2024

IN THE MATTER OF:

Dhruv Harjai ...Appellant

Versus

PPG Asian Paints Pvt. Ltd. & Ors. ...Respondents

Present: For Appellant : Mr. Adhitya Srinivisan, Mr. Rishabh Kanojiya, Mr. Srajan Tyagi, Mr. Ankur Das, Advocates. For Respondents : Mr. Yashvardhan, Mr. Piyush Singh, Mr. Shubham Raj, Mr. Ayush Kumar, Advocates for R-1. Mr. Shailendra Singh, Mr. Abhyuday Dhasmana, Advocates for HDFC Bank.

JUDGMENT

Per: Justice Rakesh Kumar Jain:

This appeal is against the order dated 08.12.2022 by which an

application filed under Section 7 of the Insolvency and Bankruptcy Code,

2016 (in short 'Code') by PPG Asian Paints Pvt. Ltd. (Financial Creditor)

against Sidhi Vinayak Vehicles Pvt. Ltd. (Corporate Debtor) for the resolution

of an amount of Rs. 42,35,000/- has been admitted and Rajan Sharma was

appointed as the IRP.

2. The Suspended Director of the CD has challenged the impugned order

by the present appeal in which at the time of issuance of notice on 18.01.2023

it was directed that no further steps shall be taken in pursuance of the

impugned order and the said order was clarified in I.A No. 476 of 2023 by the

Company Appeal (AT) (Ins.) No. 60 of 2023 2

order dated 06.02.2023 to the effect that the order dated 08.12.2022 has not

been stayed but stay was qua the further steps to be taken. It was also made

clear that there was no stay in regard to moratorium which ensued by order

dated 08.12.2022.

3. The Appellant has alleged that the CD was engaged in the business of

automotive sales, servicing and repair works and as a part of its business

activities, it was utilizing substantial quantities of automotive paints and

refinish coating products.

4. The CD entered into a Bodyshop Agreement dated 21.03.2018 (in short

'Agreement') with the Financial Creditor in terms of which the FC contributed

a sum of Rs. 35,00,000/- as an upfront contribution for the purchase of paint

equipment and promotional activities. The CD agreed to procure the material

worth Rs. 1 Cr. during the four-year tenure of the agreement from the deals

of the appellant and also executed a promissory note of Rs. 35 lakh alongwith

12% interest p.a. as collateral security. As per the article 3 of the agreement,

the CD was under obligation to procure material of Rs. 20 Lakh within a

period of one year i.e on or before 31.03.2019 but since it failed to procure

the material as stipulated, it caused breach of the agreement which amounted

to default.

5. The Financial Creditor filed an application under Section 7 of the Code

on Form 1 and claimed a sum of Rs. 42,35,000/- as the amount in default in

part IV and mentioned the date of default as 01.04.2019.

6. The agreement between the parties dated 21.03.2018 which is the basis

of their relationship and promissory note dated 21.03.2018 executed by the

Company Appeal (AT) (Ins.) No. 60 of 2023 3

CD in favour of the Financial Creditor for return of Rs. 35 Lakh alongwith

interest @ 12% p.a were attached.

7. The Tribunal issued notice in the petition to the CD on 04.03.2020

which was duly served but nobody appeared on behalf of the CD nor any reply

was filed. Consequently, the CD was proceeded against ex-parte on

17.03.2022.

8. The Tribunal heard the case of the Financial Creditor ex-parte and

decided the issue of limitation in its favour and in so far as the issue of debt

and default is concerned, it was held that the Financial Creditor sent the legal

notice to the CD and in reply to the notice, the CD had undertaken to clear

all the legitimate dues but still dues were not clear and thus it was found that

there was a debt of Rs. 42,32,000 and the default. Thus, the Tribunal

admitted the application filed by the Financial Creditor and appointed Rajan

Sharma as the IRP.

9. Counsel for the Appellant has submitted that the application under

Section 7 was not maintainable because the debt in question was in respect

of the provision of goods or services which clearly falls within the definition of

operational debt and has referred to some clauses of the agreement.

10. According to the Appellant, the amount of Rs. 35 Lakh was even without

any interest for the purpose of purchasing the material. In this regard,

reliance has been placed by the Appellant in the case of Consolidated

Construction Consortium Limited Vs. Hitro Energy Solutions Pvt. Ltd., (2022)

7 SCC 164 in which it has been held that if the debt arises from the provision

of goods or services then it would be an operational debt.

Company Appeal (AT) (Ins.) No. 60 of 2023 4

11. On the other hand, Counsel for the Respondent has submitted that the

amount of Rs. 35 Lakh was not given to the CD towards the purchase of goods

or obtaining its services but enabling the CD to support the purchase

commitment of refinish products. It is further submitted that the CD had

issued a promissory note dated 21.03.2018 by which it had agreed to pay Rs.

35 lakh alongwith interest @ 12% p.a. in case of default which is sufficient to

establish that the amount of Rs. 35 Lakh was a financial debt and not an

operational debt. It is further submitted that in terms of the agreement, the

CD had agreed to procure material of Rs. 1 Cr. during the four year tenure of

the agreement and upon failure of the CD in non-compliance of the

agreement, particularly clauses 4 and 5, the Financial Creditor issued a legal

notice in terms of clause 7(d)(i) calling upon the CD to pay Rs. 35 Lakh @

12% interest p.a as agreed upon. It is further submitted that CD, in response

to the legal notice, gave and undertaken regarding purchasing the goods as

acknowledged by it under the agreement but the amount of Rs. 35 Lakh

advanced by the Financial Creditor was not for purchasing the goods from the

CD.

12. Counsel for the Respondent has referred to a decision of the Hon'ble

Supreme Court in the case of Global Credit Capital Limited & Anr. Vs. Sach

Marketting Pvt. Ltd., (2024) SCC OnLine SC 649 in which it has been observed

that it is necessary to determine the real nature of the transaction on a plain

reading of the agreement. It is further submitted that in the said case, it has

been held that clause (f) of Section 5(8) of the Code covers all other

transactions which are not covered under clause (a) to (e) of Section 5(8) which

Company Appeal (AT) (Ins.) No. 60 of 2023 5

means any other transaction covered under any other transaction and in the

present case, the agreement was executed for transfer of funds to the CD to

fulfil its purchase commitments to refinish the products. It is further

contended that the transactions between the parties emanating from the

agreement also had a commercial effect of borrowing.

13. In this case, an application was also filed by HDFC as a financial

creditor of the CD for its impleadment and vacation of the order of stay

alleging that it had filed form C to the IRP for a claim of Rs. 50,59,56,161/-

against the CD as on 08.12.2022.

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

able assistance.

15. The issue involved in this case is as to whether the amount advanced

by Respondent No. 1 is a financial debt or an operational debt?

16. It is pertinent to mention that the CD, despite service of notice of the

application filed under Section 7, did not choose to appear before the Tribunal

nor filed the reply to the said petition. However, the relationship between the

CD and the Financial Creditor is based upon the agreement.

17. The agreement was executed between the parties in which it was clearly

mentioned that "the body shop proposes to substantially expand its business

and being completely satisfied with the quality of refinish products supplied

by PPGAP, the body shop is desirous of entering into an agreement with

PPGAP to secure timely delivery of the PPGAP refinish products at the body

shop services canters. 4. The body shop has approaching PPGAP for financial

Company Appeal (AT) (Ins.) No. 60 of 2023 6

contribution for the purpose of sales promotions and procurement of

specialized painting equipment's for the development and upgradation of

automotive painting facilities".

18. It is pertinent mention that the body shop is engaged in the business of

automotive sales, servicing and repair work and in the course of its business

utilizes substantial quantities of automotive parts and refinish coating

products whereas PPGAP is a major supplier of automotive refinish coating

products, deltron global refinish system and 2k refinish system, amongst

others, which are extensively used by bodyshop's for painting cars and other

vehicles.

19. Since, the body shop/CD required financial assistance for specialized

painting equipment for the development and upgradation of automotive

paining facilities for the purpose of its sales promotions, Respondent made an

upfront contribution of Rs. 35 Lakh and secured it by a demand promissory

note on the same date, a continuing security throughout the agreement,

imposing liability upon the CD to repay the said amount with interest @ 12%

p.a. in case of breach of contractual obligation to procure material wroth Rs.

1 Cr. during the four year tenure of the agreement.

20. This understanding between the parties is a commercial effect of

borrowing which is covered by Section 5(8)(f) of the Code.

21. It is not the case of the CD that the Respondent had advanced the

amount in question for purchase of goods or for availing the services of the

CD. The contention of the Appellant that the subject matter of the debt has

some connection with the subject matter of the goods in the transaction which

Company Appeal (AT) (Ins.) No. 60 of 2023 7

would attract the provision of Section 5(21) cannot be accepted because it

has been held in the case of Global Credit Capital Ltd. (Supra) by the Hon'ble

Supreme Court while deciding the financial debt or operational debt it is

necessary to determine the real nature of the transaction reflected in the

writing.

22. Therefore, In view of the aforesaid discussion, we find no reason to

interfere with the impugned order and the same is hereby dismissed, however,

without any order as to costs.

I.As, if any, are hereby closed.

[Justice Rakesh Kumar Jain] Member (Judicial)

[Mr. Naresh Salecha] Member (Technical)

[Mr. Indevar Pandey] Member (Technical)

New Delhi 15th July, 2025 Sheetal

Company Appeal (AT) (Ins.) No. 60 of 2023