Digvijay Kathiwada vs Haren Sanghvi And Associates And Ors

[Arising out of order dated 12.05.2023 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench - V in CP(IB) No. 4427/IB/MB/2019].

IN THE MATTER OF:

Digvijay Kathiwada 3A, Pratap Plaza, Near Bank of Baroda, Sunmil Compound, Lower Parel(W), Mumbai - 400 013 ...Appellant

Versus Haren Sanghvi & Associates 512, A/B, Swastik Disa Corporate Park, 5th Floor, Kohinoor Mills Compound, Opp. Shreyas Cinema, L.B.S. Marg, Ghatkopar (W), Mumbai - 400 086 ...Respondent No.1

CDigital Arts and Crafts Private Limited Ground Floor, 69/72, West More Building, Sir Pochkanwala Road, Worli Colony, Mumbai - 400 030 ...Respondent No.2

Lalit Zaverchand Shah Office No.421, Grohitam Building, 4th Floor, Sector - 19, Vashi, Opp. APMC Grain Market, Next to Mathadi Bhavan, Navi Mumbai, Maharashtra - 400 703 ...Respondent No.3

Present:

Appellant: Mr. Raghenth Basant, Ms. Anne Mathew, Ms. Kaushitaki Sharma, Advocates

For Respondents: Advocate D. Bhattacharyya, Advocate Deeti Ojha, Advocate Subhoday Banerjee

Company Appeal (AT) (Ins.) No. 703 of 2023 1 JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code, 2016 ("IBC" in short) by the Appellant arises out of the Order dated

12.05.2023 (hereinafter referred to as "Impugned Order") passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-V)

in CP(IB) No.4427/IB/MB/2019. By the impugned order, the Adjudicating

Authority has admitted the Section 9 application filed by the Respondents

seeking initiation of Corporate Insolvency Resolution Process ("CIRP" in short)

of the Corporate Debtor. Aggrieved by the impugned order, the present appeal

has been filed by erstwhile Director of the Corporate Debtor.

2. The Learned Counsel for the Appellant making his submissions stated

that the Adjudicating Authority had erroneously allowed the Section 9

application filed by Operational Creditor-Haren Sanghvi &

Associates/Respondent No.1 on the ground that existence of debt and default

committed thereto by the Corporate Debtor stood established. The

Adjudicating Authority had seriously erred in passing the impugned order

without examining the fact that demand notice required to be issued by the

Operational Creditor as mandated by Section 8 of the IBC had not been

complied to by the Operational Creditor. It was also asserted that the

requirement of serving Section 8 demand notice being a statutory pre-

requisite, non-service thereof cannot be viewed as a curable defect.

Company Appeal (AT) (Ins.) No. 703 of 2023 2

3. It was further contended that the Appellant had never received any

demand notice from the Operational Creditor and the latter has also failed to

provide any proof of delivery of the same on the Corporate Debtor. It has been

pointed out that the postal receipt and tracking report of the said demand

notice which has been placed on record by the Operational Creditor in support

of their claim that demand notice was served lacks credence since it only

depicts that the said demand notice had been served by the Advocate of the

Operational Creditor on the Operational Creditor and not on the Corporate

Debtor. On this ground alone that no Section 8 demand notice had been

served on the Corporate Debtor, the maintainability of Section 9 application

becomes questionable and the Adjudicating Authority should have verified

this aspect before considering the Section 9 application. In support of their

contention, the Learned Counsel of the Appellant has referred to the judgment

of this Tribunal in the matter of Shailendra Sharma, Director of R&M

International Pvt. Ltd. v. Ercon Composites 2021 SCC OnLine NCLAT 3

which held that an application filed under Section 9 of the IBC without serving

notice under Section 8 is not maintainable and failure to serve the demand

notice is not a curable defect.

4. It has also been submitted that the address of the Corporate Debtor at

which the said demand notice was allegedly sent was also not the registered

address of the Corporate Debtor but had been wrongly sent to the corporate

office of the Corporate Debtor. Contending that this service of statutory notice

on the Corporate Debtor at its registered office renders the process of service

to be contrary to the scheme of IBC and therefore legally unsustainable. It is

Company Appeal (AT) (Ins.) No. 703 of 2023 3 the case of the Appellant that the Operational Creditor has failed to provide

proof of correct service of notice on the Corporate Debtor. Even the grounds

cited by the Advocate for the Operational Creditor on failure to give proof of

service of Section 8 notice on the Corporate Debtor per se are flimsy grounds

and lack credulity.

5. Refuting the submissions made by the Appellant, the Learned Counsel

for the Respondent No.1 denied the contention of the Corporate Debtor that

the statutory demand notice had not been served on the Corporate Debtor.

The Operational Creditor had followed the due process of law in serving the

demand notice in terms of Section 8 of the IBC. It was forcefully argued that

this plea of non-service of demand notice should have been raised during the

proceedings before the Adjudicating Authority and that not having been done

then cannot be agitated now at this belated stage before the Appellate

Tribunal.

6. Advancing their arguments further it was asserted that the Section 8

demand notice dated 04.11.2019 was addressed to the Corporate Debtor with

a copy of the same also endorsed to the Operational Creditor by the legal

counsel of the Operational Creditor. The wrong proof of delivery submitted by

the Advocate of the Operational Creditor was on account of clerical error.

Moreover, since the office premises of the Advocate of the Operational Creditor

had to be shifted due to Covid pandemic and there has been a lapse of more

than three and a half years since then, the proof of service of the demand

notice could not be traced as the proof seems to have been misplaced. As

regards the contention of the Corporate Debtor that the demand notice had

Company Appeal (AT) (Ins.) No. 703 of 2023 4 been wrongly served upon the Corporate Office and not the registered office,

it was pointed out that there have been numerous communications

exchanged between the corporate office of the Corporate Debtor and the

Operational Creditor. Moreover, even if the Section 8 demand notice was

served at the corporate office, the same cannot be held against the Operational

Creditor since the Section 9 application had been addressed to the registered

office and this fact has not been controverted by the Corporate Debtor.

7. It has also been contended that the impugned order has duly

considered all the other objections too which had been raised by the Corporate

Debtor and recorded its findings. It has correctly come to the conclusion that

there is no requirement that a firm has to be registered in case it wants to file

a Section 9 application. The contention raised by the Appellant that the

Section 9 application is barred by limitation was also found to have been

devoid of substance by the Adjudicating Authority at paragraphs 16-18.

8. We have duly considered the arguments advanced by the Learned

Counsel for the parties and perused the records carefully.

9. To appreciate the facts of the case, at the outset, it would be useful to

refer to Sections 8 and 9 of the IBC read with Rule 5 of the Insolvency and

Bankruptcy, (Application to Adjudicating Authority) Rules, 2016:

"8. Insolvency resolution by operational creditor-

(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

Company Appeal (AT) (Ins.) No. 703 of 2023 5 (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 -

(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 the 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."

"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 subsection (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.

(2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shall, along with the application furnish-

Company Appeal (AT) (Ins.) No. 703 of 2023 6

(a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order--

(i) admit the application and communicate such decision to the operational creditor and the corporate debtor i,--

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

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.

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.

Company Appeal (AT) (Ins.) No. 703 of 2023 7 (6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section"

"Rule 5 Insolvency and Bankruptcy, (Application to Adjudicating Authority) Rules, 2016

5. Demand notice by operational creditor.-(1) An operational creditor shall deliver to the corporate debtor, the following documents, namely.-

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4. (2) The demand notice or the copy of the invoice demanding payment referred to in sub-section (2) of section 8 of the Code, may be delivered to the corporate debtor,

(a) at the registered office by hand, registered post or speed post with acknowledgement due; or

(b) by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility, if any."

10. A plain reading of Section 8 of IBC indicates that the prerequisites

necessary to trigger CIRP under Section 9 of the IBC is the existence of a debt

due and its default by the corporate debtor and a corresponding delivery of

demand notice of the said unpaid and undisputed debt and further that there

has been no payment of the unpaid and undisputed debt within the period of

10 days of receipt of demand notice and that no real pre-existing dispute is

discernible.

Company Appeal (AT) (Ins.) No. 703 of 2023 8

11. The Learned Counsel for the Appellant/Corporate Debtor has

contended that the Adjudicating Authority in this case has erroneously

commenced the insolvency process under Section 9 of IBC though the

Appellant/Corporate Debtor was not served any notice upon them under

Section 8 of IBC. It has also been asserted that the Operational Creditor has

failed to adduce valid proof of delivery of demand notice. There appears to be

force in the contention of the Appellant since material placed on record at

page 163 of the Appeal Paper Book to substantiate that demand notice had

been served clearly shows that the demand notice had been served by the

Advocate of the Operational Creditor on the Operational Creditor and not on

the Corporate Debtor. The explanation offered by the Operational Creditor is

that Section 8 demand notice dated 04.11.2019 was addressed to the

Corporate Debtor but on account of clerical error the proof that was attached

was the notice copy which had been endorsed to the Operational Creditor by

the legal counsel of the Operational Creditor. Admittedly the Operational

Creditor has not been able to produce the notice copy addressed to the

Corporate Debtor since their Advocate has misplaced the same and the said

letter dated 26.06.2023 has been placed at page 11 of reply affidavit of the

Operational Creditor. The Appellant has vehemently contended that these

grounds cited by the Advocate for the Operational Creditor on failure to give

proof of service of Section 8 notice on the Corporate Debtor are flimsy and

lack credulity. Moreover, we also notice that admittedly the Section 8 notice

was sent to the corporate office and not to the registered office of the Corporate

Debtor.

Company Appeal (AT) (Ins.) No. 703 of 2023 9

12. There is no doubt in our minds that in terms of the statutory construct

of the IBC, an application for initiation of corporate insolvency resolution

process can be filed by Operational Creditor only after expiry of period of 10

days from the date of delivery of the Section 8 demand notice on the Corporate

Debtor. If we look at the impugned order, it has held at paragraph 19 that the

Corporate Debtor was served with a notice dated 04.11.2019 which notice

was not responded to by the Corporate Debtor. However, there is no specific

finding recorded on whether the notice was actually served on the Corporate

Debtor, a factum which has been seriously contested by the Corporate Debtor.

Further it is the case of the Appellant that the proof of service claimed by the

Operational Creditor was wrong proof of service.

13. In the facts of the present case, where the delivery of the Section 8

notice has itself been questioned by the Corporate Debtor there arises a need

to verify as to whether the statutory provisions of IBC code have been duly

complied with. In view of the mandatory provision under Section 8 of IBC read

with Rule 5 of Insolvency and Bankruptcy, (Application to Adjudicating

Authority) Rules, 2016 which entails that for initiation of insolvency

resolution by an Operational Creditor a demand notice has to be served by

the unpaid Operational Debtor on the Corporate Debtor, we feel that the

contention of the Appellant deserves due consideration.

14. Having given thoughtful consideration to the submissions made on

behalf of the Appellant and having examined the material available on record

with reference to the applicable mandatory statutory provisions of the IBC,

we are clearly of the view that the order of the Adjudicating Authority is silent

Company Appeal (AT) (Ins.) No. 703 of 2023 10 on the actual delivery of the Section 8 notice which is a bone of contention

between the two parties. We are of the considered opinion that this aspect

needs to be appropriately examined and hence remand the matter back to the

Adjudicating Authority to consider the Section 9 application afresh with

particular reference to actual and proper delivery of the demand notice on the

Corporate Debtor. In result, the appeal is allowed. The impugned order dated

13.05.2023 is set aside. The orders passed by the Adjudicating Authority

initiating CIRP against the Corporate Debtor and appointing interim

Resolution Professional and all other orders pursuant to the impugned order

are declared illegal and set aside. The interim Resolution Professional shall be

paid the actual expenses incurred and nominal fees by the Operational

Creditor on production of invoices. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 06.12.2023

PKM

Company Appeal (AT) (Ins.) No. 703 of 2023 11