Explo Media Private Limited vs T & D Hospitality India Llp

[Arising out of order dated 08.02.2022 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi Bench-II in Company Petition (IB) No. 689/ND/2020]

M/s Shalini Sharma Ex-Director Explo Media Pvt. Ltd. W/o Mr. Shri Sunjjoy Daadhicch R/o 4th Floor - 5116 DLF Phase 4 Gurugram - 122009 Haryana ....Appellant

Versus

1. T & D Hospitality India LLP Plot No. 1, 3rd Floor, Balaji House, Ram Kumar Marg, Motia Khan, Delhi - 110055. ....Respondent No.1

2. Rakesh Takyar Resolution Professional Explo Media Pvt. Ltd. (Under Insolvency Resolution Process) UGF-1/15, Near PNB Tilak Nagar, Delhi - 110018. .....Respondent No. 2

Present: For Appellant: Mr. Avadh Kaushik & Mr. Prateek Goyal, Mr. Lakshay Gangawat, Advocates

For Respondent: Mr. Bharat Arora, Mr. Bharat Arora, Advocates for R-1.

JUDGMENT

Company Appeal (AT) (Ins.) No. 416 of 2022 1 [Per: Barun Mitra, Member (Technical)]

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

Code, 2016 ('IBC' in short) by the Appellant arises out of order dated 08.02.2022

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

Authority, National Company Law Tribunal, New Delhi, Bench - II in CP(IB) No.

689/ND/2020. By the impugned order, the Adjudicating Authority admitted the

Section 9 application under IBC filed by the Operational Creditor and initiated

Corporate Insolvency Resolution Process ('CIRP' in short) against the Corporate

Debtor with immediate effect. Aggrieved by this impugned order, the present

appeal has been preferred by the Ex-Director of the Corporate Debtor.

2. The brief facts of the case as brought forth by the Learned Counsel for the

Appellant is that Explo Media Pvt Ltd., the Corporate Debtor/Appellant had

entered into an understanding on 08.04.2019 with T&D Hospitality, India LLP,

the Operational Creditor/Respondent No.1 for creative outdoor advertisements

where the design and logo was to be given by the Corporate Debtor as per the

approvals/instructions given to them by clients and the said advertisement was

to be printed by the Operational Creditor/Respondent No.1 using quality fabric,

ink and colours. The Corporate Debtor had received an order from Air India Ltd.

for printing and supply of disposable Head Rest Covers ("HRC" in short) for two

years. The HRC were to carry third party advertisement. Pursuant to this

contract, the Corporate Debtor had received an order from a client, Cashur Drive,

for supply of HRC with display of "Ease my Trip".

Company Appeal (AT) (Ins.) No. 416 of 2022 2

3. The Learned Counsel for the Appellant has submitted that following the

Cashur Drive purchase order received by the Corporate Debtor, on the latter's

instructions, the Operational Creditor started supplying the HRC directly to Air

India Cargo from August-November, 2019. The Corporate Debtor made

substantial payment for this purpose to the Operational Creditor in advance and

a total sum of Rs.50,72,800/- was paid by the Corporate Debtor to the

Operational Creditor/Respondent No.1 till 18.11.2019. It was therefore argued

that the Corporate Debtor never made any default in making the payments to

the Operational Creditor/ Respondent No.1 and therefore the Section 9

application on the part of the Operational Creditor is premature.

4. It has been further claimed that the Operational Creditor failed to supply

goods of the promised quality and in fit state. During inspections carried out by

Cashur Drive, the HRC supplied by the Operational Creditor was found to be

defective and the Operational Creditor was accordingly informed regarding

supply of damaged, inferior and sub-standard quality of goods by Corporate

Debtor. It has also been claimed that the Operational Creditor ignored

obligations to supply quality goods. Not only did the Operational Creditor refuse

to acknowledge deficiency in services but also refused to join mandatory

inspection and in fact after a while discontinued supply. The Operational

Creditor had also deliberately not placed on record the letter dated 08.04.2019

until directed by the Adjudicating Authority as they wanted to conceal the fact Company Appeal (AT) (Ins.) No. 416 of 2022 3 that this letter provided for mandatory inspection which was actually not

complied by the Respondent No.1. It was strenuously contended that the

Operational Creditor served Demand Notice on the Corporate Debtor

immediately after they were informed about defective supplies and sub-standard

supply of goods. It was also emphatically asserted that the demand notices were

not effectively served upon the Corporate Debtor.

5. On the claim amount raised in the demand notice of 15.02.2020 it has

been submitted by the Learned Counsel for the Appellant that the amount raised

by the Operational Creditor is false and frivolous. Apart from one letter dated

08.04.2019 for supply of these materials, there exists no other legal agreement

which was entered into by the two parties for supply of goods. The Adjudicating

Authority has failed to appreciate the fact that there was a need to verify and

substantiate the claim made by the Operational Creditor as other consignments

were based on verbal assurances and arising out of verbal contracts. No bills or

invoice for any delivery was ever sent by the Operational Creditor to the

Corporate Debtor. The genuineness of the "Airway Bill" which has been relied

upon by the Operational Creditor is questionable because the source and origin

of such documents are not disclosed. Moreover, the ledger Account furnished by

the Operational Creditor is unaudited and, therefore, lacks legal validity.

6. Refuting the above submissions, the Learned Counsel for the Respondent

No. 1 contended that the Corporate Debtor with the sole intent of not making Company Appeal (AT) (Ins.) No. 416 of 2022 4 payment of their admitted debt, which had become due for some time, has made

these misleading assertions. In terms of the letter dated 08.04.2019, the

Corporate Debtor was to make 50% advance payment to the Operational Creditor

at the time of placing the order and 50% against the inspection of goods. It was

submitted that the Corporate Debtor initially did make the advance payments

but after a short while informed the Operational Creditor that they were not in a

position to make further advance payments because of shortage of funds. Yet

they continued to supply goods without advance payment on good faith.

Eventually after lapse of some time, the issue of outstanding payment was raised

by the Operational Creditor by sending e-mails and exchanging chat

communications. Since no payment was still forthcoming from the Corporate

Debtor, the Operational Creditor was constrained to issue notice on 15.02.2020

under Section 8 of IBC. It has been further submitted that the Corporate Debtor

did not reply to the Demand Notice nor made any payments which compelled the

Operational Creditor/ Respondent No.1 to file the Section 9 petition before the

Adjudicating Authority in March 2020.

7. The Learned Counsel for the Respondent No.1 rebutted the charge of

deficiency in services vehemently. It was pointed out that HRC were supplied on

the demand raised by the Corporate Debtor and that they were checked and

inspected by the Corporate Debtor through their representatives before receiving

the supplies. It has also been argued that the Corporate Debtor had not raised

any objection or grievance with respect to the HRC supplied and that the Company Appeal (AT) (Ins.) No. 416 of 2022 5 Appellant has failed to produce any document or any communication in support

of their contention in this regard. That there were no complaints with regard to

the quality of goods supplied by them is proven by the fact that the Corporate

Debtor had in fact requested the Operational Creditor for supply of HRC for a

new project. It has also been pointed out that no complaint was either received

from the Air India regarding the supply of HRCs even though the Air India terms

and conditions clearly provided that "Air India reserves the right to inspect the

goods/items at its discretion before accepting the material. In case of any deviation

in quality, is found at the time of supply, then the same will be rejected and should

be replaced free of cost." (page-69 of the Appeal Paper Book)

8. On the plea raised by the Appellant regarding ineffective delivery of notice

under Section 8 of IBC, the Learned Counsel for the Respondent No.1 stated that

the notice had been sent to the Gurgaon Corporate Office, on the e-mail ID of

the Corporate Debtor as reflected in the Master Index Data of the Corporate

Debtor maintained by the Registrar of Companies as also on the e-mail ID of the

Director of the Corporate Debtor.

9. We have duly considered the detailed arguments and submissions

advanced by the Learned Counsel for both the parties and perused the records

carefully.

Company Appeal (AT) (Ins.) No. 416 of 2022 6

10. The issue for our consideration is whether payment to the Operational

Creditor/Respondent No.1 was due from the Corporate Debtor giving rise to an

operational debt, and if so, whether a default has been committed by the

Corporate Debtor/Appellant in respect of payment of such operational debt

having already become due and payable and whether the said operational debt

exceeds an amount of Rs. 1 lakh and is an undisputed debt. This examination

would be in line with the test which has been laid down by the Hon'ble Supreme

Court in Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Private Limited

(2018) in C.A. No.9405 of 2017 (MANU/SC/1196/2017) (hereinafter referred

to as 'Mobilox') for the Adjudicating Authority while examining an application

under Section 9, the relevant excerpts of which are as follows:-

"25. Therefore, the adjudicating authority, when

examining an application under Section 9 of the Act

will have to determine:

(i) Whether there is an "operational debt" as defined

exceeding Rs. 1 lakh? (See Section 4 of the Act)

(ii) Whether the documentary evidence furnished

with the application shows that the aforesaid debt

is due and payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between

the parties or the record of the pendency of a suit or

arbitration proceeding filed before the receipt of the

Company Appeal (AT) (Ins.) No. 416 of 2022 7 demand notice of the unpaid operational debt in

relation to such dispute?

If any of the aforesaid conditions is lacking, the

application would have to be rejected. Apart from the

above, the adjudicating authority must follow the

mandate of Section 9, as outlined above, and in

particular the mandate of Section 9(5) of the Act, and

admit or reject the application, as the case may be,

depending upon the factors mentioned in Section 9(5)

of the Act."

11. We have perused the "Technical-Commercial Letter for Non-woven Head

Rest Cover" exchanged between the Corporate Debtor and the Respondent No.1

on 08.04.2019 which mentions of a supply order for HRC with clear payment

terms of 50% as advance against Purchase order and 50% against inspection of

goods. There is specific mention of GST certificate as one of the documentary

requirements. It is therefore clear that the relationship between the two was that

of Corporate Debtor and Operational Creditor with the latter being a supplier of

goods. Given that this agreement of 08.04.2019, has been admitted by both

parties as the core of their relationship, it is a specious plea taken by the

Corporate Debtor that it is a legally inadmissible document and that

consignments supplied were based on oral statements. We cannot attach much

credibility to the contention of the Corporate Debtor that no bills or invoice for

any delivery was ever sent by the Operational Creditor to the Corporate Debtor Company Appeal (AT) (Ins.) No. 416 of 2022 8 in the light of the fact that the Operational Creditor issued invoices from time to

time claiming the outstanding amount against the supply of HRC as can be seen

at pages 46, 47, 50 of the rejoinder reply of Respondent No. 1.

12. This brings us to the question that if invoices were raised then whether

there was an outstanding amount above Rs. one lakh and whether it had become

due and payable. We find that the Adjudicating Authority has minutely examined

and recorded the reply filed before it by the Corporate Debtor before coming to

the conclusion "that the Corporate Debtor has admitted that out of the total sum

of Rs. 65,30,168/- only an amount of Rs. 50,72,800/- was paid by the Corporate

Debtor and the remaining balance has not been paid as yet." Since the Corporate

Debtor on his own has admitted that there was an operational debt due and

payable, it is a clinching factor and therefore there arises no ground to disagree

with the Adjudicating Authority. There is also ample evidence that the

Operational Creditor/Respondent No. 1 has from time to time sent reminders to

the Corporate Debtor to clear the outstanding dues by sending e-mails on

04.12.2019, 14.12.2019, 06.01.2020 and 17.01.2020 besides exchanging chat

communications in this regard over WhatsApp as placed at pages 46-56 in the

written reply filed by the Respondent No. 1. On the other hand, there are no

documents which have been put forth by the Corporate Debtor which show that

they had denied these dues or that they had indicated any error in the due

statement. Rather, the contents of chat messages as exchanged indicate that the

Company Appeal (AT) (Ins.) No. 416 of 2022 9 Corporate Debtor sought time to make the payments which is again an implied

admission of the debt.

13. Having failed to make the requisite payments, it is noticed that the

Operational Creditor sent a notice under Section 8 of IBC to the Corporate

Debtor. It has been contested by the Corporate Debtor that the notices were not

received as they were not delivered as per prescribed procedure. On this aspect

we find that the Adjudicating Authority has dwelled upon the issue of service of

Demand Notice in details. Having perused the speed post tracking report, the

Adjudicating Authority found that the notice which was sent to the Corporate

Office of the Corporate Debtor at Gurgaon was duly delivered. We also find the

delivery confirmation report at page-131 of the Appeal Paper Book. The

Adjudicating Authority also took note of the fact that the Operational Creditor

had sent the Demand Notice on the e-mail ID mentioned in the Master Data of

the Corporate Debtor as well as on the e-mail ID of the Director of the Corporate

Debtor. After taking note of rules relating to service of Demand Notice, the

Adjudicating Authority has rightly found no force in the contention raised by the

Corporate Debtor that the Demand Notice was not delivered. Affirming the

reasoned findings of the Adjudicating authority, it would be better to reproduce

the relevant paragraph of the impugned order hereunder: -

"14. A bare perusal of the Rule 5 of IBBI (Application

to Adjudicating Authority Rules, 2016 shows that in terms of

Rule 5 sub-Rule-2 Clause (b), the demand notice served to a Company Appeal (AT) (Ins.) No. 416 of 2022 10 whole-time director or designated partner or key managerial

personnel will be treated as a valid service. Here, admittedly,

Mr. Sunjoy Daadhicch is the Director of the Corporate Debtor,

on whose email id the demand notice was delivered, hence

the demand notice was served in terms of Rule 5 of IBBI

(Application to Adjudicating Authority) Rules, 2016. Apart

from that, at this juncture, we would also like to refer to the

decision of the Hon'ble NCLAT in CA (AT)(Insolvency)

684/2018 decided on 21st January, 2019. The relevant

paragraph of the said judgement is reproduced below:-

"6. In view of aforesaid facts we hold that

the Adjudicating Authority erred in rejecting the

application under Section 9 on wrong

presumption that demand notice is to be served

on the Registered Office of the Corporate Debtor

and not on Corporate Office (Industrial Area

Office herein). It the demand notice under

Section 8(1) is served on Corporate Debtor

either on its Registered Office or its Corporate

Office, it should be treated to be valid service of

notice under Section 8 and application under

Section 9 on failure of payment, if filed after 10

days, is maintainable."

Company Appeal (AT) (Ins.) No. 416 of 2022 11

15.In terms of the decision referred to Supra, we are of the

considered view that since the demand notice was

delivered at the corporate office of the Corporate Debtor as

well as on the email id of the director, therefore, in terms of

Section 8 sub-section (1) of the IBC, 2016, the demand

notice was duly delivered. Hence, we find, no force in the

contention raised on behalf of the Learned Counsel

appearing for the Corporate Debtor that the demand notice

was not delivered".

14. We now come down to examine whether there was any pre-existing

dispute raised during the stage of notice or whether there was any dispute

on the date of filing the application under Section 9 of the IBC. The guiding

principles have been laid down by the Mobilox judgment supra and it is

relevant to refer to para 24 and 40 of the said Judgment which is detailed

as hereunder:

"24............What is important is that the existence of the

dispute and/or the suit or arbitration proceeding must be pre-

existing i.e. it must exist before the receipt of the demand

notice or invoice, as the case maybe. In case the unpaid

operational debt has been repaid, the corporate debtor shall

within a period of the self-same 10 days sent and attested

Company Appeal (AT) (Ins.) No. 416 of 2022 12 copy of the record of the electronic transfer of the unpaid

amount from the bank account of the corporate debtor or send

an attested copy of the record that an operational creditor has

encashed a cheque or otherwise received payment from the

corporate debt [Section 8(2) (b)]. It is only if, after the expiry of

the period of the said 10 days, the operational creditor does

not either receive payment from the corporate debtor or notice

of dispute, that the operational creditor may trigger the

insolvency process by filing an application before the

adjudicating authority under Sections 9(1) and 9(2)........."

****** ***** *****

40. 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 that the "dispute" is not a Company Appeal (AT) (Ins.) No. 416 of 2022 13 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."

15. From material on record it is clear that notice under section 8(1) was

sent to the Corporate Debtor by the Operational Creditor. We have not been

persuaded by the argument of the Corporate Debtor that the notice was not

effectively served upon him for reasons elaborated at paragraph 13 above.

It is also an admitted fact that the Corporate Debtor did not reply to the

Section 8(1) notice and it follows therefore that the 'existence of dispute' was

not raised by the Corporate Debtor at the stage which it was obligated to do

under section 8(2) of IBC on receipt of notice under Section 8(1) of the IBC.

When no mention of existence of dispute was made by the Corporate Debtor,

the statutory scheme of IBC entitled the Operational Creditor to file an

application under Section 9 and this is exactly the course of action followed

by the Operational Creditor.

Company Appeal (AT) (Ins.) No. 416 of 2022 14

16. At the stage when the Operational Creditor moved an application before

the Adjudicating Authority under Section 9, we notice that the Corporate Debtor

has tried to protect his interests by raising the issue that the Operational

Creditor had supplied sub-standard and defective goods and deliberately did not

join mandatory inspection of goods supplied to evade admission of deficiency in

services. From the papers on record and submissions made, we find no reasons

to disagree with the Adjudicating Authority that the Corporate Debtor has failed

to show any correspondence to establish that the Corporate Debtor had ever

raised any dispute regarding defective goods prior to the issuance of Demand

Notice. Even when the goods were supplied to Air India on the instructions of the

Corporate Debtor, Air India before accepting delivery at their site inspected the

complete consignment of HRC and noted that they were accepted in apparent

good order and condition as clearly indicated in Airways Bill, illustrative

examples of which are at pages 172-173 and onwards in the Appeal Paper Book.

No evidence to the contrary has been submitted by the Appellant. We also note

that the alleged complaint on quality of goods which the Corporate Debtor had

received from its client, Cashur Drive, was a correspondence which remained

confined between the Corporate Debtor and the client and not shared with the

Operational Creditor and, therefore, cannot be viewed as pre-existing dispute

raised with the Operational Creditor.

17. It is also noted that there was no standard protocol/arrangement laid

down for quality-check inspections. Moreover, the Learned Counsel for the Company Appeal (AT) (Ins.) No. 416 of 2022 15 Appellant while making his submissions on a pointed query, admitted that no

written communication was ever sent to the Operational Creditor with regard to

joint inspection of the goods supplied. That being so, the issue raised before the

Adjudicating Authority against the Operational Creditor that they did not comply

to mandatory inspections is more of an after-thought. We also find substance in

the argument proffered by the Learned Counsel for the Respondent No.1 that the

Corporate Debtor had sought further supply of goods from them vide e-mails

dated 02.12.2019 and 22.12.2019, nearly 45 days after supply of last

consignment of goods which shows that there were no complaints with respect

to the quality of goods supplied. It defies logic that if the complaints raised

regarding quality were genuine, why the Corporate Debtor requested the

Operational Creditor for supply of HRC for yet another new client/project as can

be noted at pages 45 and 52 in the written reply filed by the Respondent No. 1.

We find that the Adjudicating Authority in the present case has carefully

considered the reply and submissions made by the Corporate Debtor and has

correctly come to the conclusion that there is no ground to establish any real

and substantial pre-existing dispute which can thwart the admission of section

9 application against the Corporate Debtor.

17. Based on the foregoing discussion, we are of the considered view that all

the requisite conditions necessary to trigger the Corporate Insolvency Resolution

Process under Section 9 of the IBC stand fulfilled in the present case:

a) Existence of a debt due and its default by the corporate debtor.

Company Appeal (AT) (Ins.) No. 416 of 2022 16

b) Delivery of demand notice of an unpaid and undisputed debt.

c) There is no payment of the unpaid and undisputed debt within the period of

10 days of receipt of demand notice.

d) No real pre-existing dispute is discernible.

17. We find that no error has been committed by the Adjudicating Authority

in admitting the application under Section 9 of the IBC and initiating CIRP. We

find no merit in this appeal. Appeal is dismissed. No costs.

[Justice Ashok Bhushan] Chairperson

[Mr. Barun Mitra] Member [Technical]

Place: New Delhi Date: 02.11.2022 Shashi

Company Appeal (AT) (Ins.) No. 416 of 2022 17