In the matter of Kajaria Bathwaee Private Limited

PRESENT: For the Applicant : Adv. Jojo Jose & Adv. Sunitha John, Adv. Anitta & Adona LLP For the Respondent : Adv. D. Bhattacharya, Adv. Deeti Ojha (IB)-322/(ND)/2023 SVS Marketing Sanitaryware Pvt. Ltd. Vs. Kajaria Bathware Pvt. Ltd.

ORDER

PER: SH. L. N. GUPTA, MEMBER (T)

M/s SVS Marketing Sanitaryware Private Limited (for brevity, hereinafter referred to as the ‘Applicant’/ ‘Operational Creditor’) has filed the present petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016’) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a prayer to initiate the Corporate Insolvency Resolution Process against M/s. Kajaria Bathware Private Limited (for brevity, hereinafter referred to as the ‘Respondent’).

2. The Respondent namely, M/s. Kajaria Bathware Private Limited is a Company incorporated on 22.05.2013 with CIN U26943DL2013PTC252495 under the provisions of the Companies Act, 1956 having its registered office at J-1/B-1 (Extn.), Mohan Co-Operative, Industrial Area, Mathura Road, New Delhi – 110044, which is within the jurisdiction of this Tribunal. The Authorized Share Capital of the Respondent is Rs.35,00,00,000/- and the Paid-up Share Capital is Rs.29,41,17,640/- as per the Master Data annexed.

3. It is stated by the Applicant that it was appointed as the sole distributor of the Corporate Debtor for an exclusive area as reflected in the Distributorship Agreement which was renewed from time to time. Pursuant to discontinuance/prevention of the supply of goods to the dealers, unsold stock of Rs. 3.00 crores, which was fully paid, got accumulated in the godown of the Applicant. As of 28.02.2023, there is an operational debt of Rs.7,33,64,097.88/- in the form of unsold stock, stock interest, warehouse (IB)-322/(ND)/2023 charges, bad debt, and compensation/damages for the loss incurred due to the breach of the Distributorship Agreement by the Corporate Debtor by misusing their dominant position. The Respondent refused to make the payment even after receiving the statutory demand notice.

4. The particulars of the Operational Debt in terms of the total amount of default, and the date of default are mentioned in Part IV of the application, the relevant extracts of which are reproduced below for the sake of convenience:

As per the above, the Applicant has claimed the unpaid Operational Debt of Rs.7,33,64,097.88/- excluding interest and relied upon 05.03.2020 as the date of default.

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5. It is stated by the Applicant that since the Respondent did not make the due payment of its operational debt, it issued a Demand Notice dated 13.12.2022 under Section 8 of IBC 2016 that was served to the Respondent at its registered office vide speed post. The said Demand Notice was replied to by the Respondent vide letter dated 23.12.2022.

6. On issuance of the notice, the Respondent filed its reply and opposed the application on the following grounds that - i) No Section 9(3)(b) Affidavit has been annexed with the Application by the Applicant, ii) A Distributorship Agreement dated 15.07.2016 was executed between the Respondent and Mr. Shibu M (proprietorship concern trading as “SVS Marketing”). The said Distributorship Agreement clearly prohibited Mr. Shibu M (SVS Marketing) from transferring or assigning the same or any part thereof without the prior written consent in terms of Clause 8(iii) of the Agreement (ref: page no. 99 of the application), iii) The claim of the Applicant is arising out of damages and therefore, is not an operational debt.

7. The Applicant filed its rejoinder and stated that the Distributorship Agreement never prohibited the transfer of business or assigning of actionable claims. It only prohibited the transfer of “obligation”. It is submitted by the Applicant that there was no obligation towards the company and no obligation was never ever transferred. Further, the proprietorship was transferred into a (IB)-322/(ND)/2023

Private Limited Company and the promoter of both of them is one and the same i.e., SVS marketing which transferred only the “actionable claims” as defined under the term “property” as per section 3(27) of the Code.

8. We heard the parties and perused the pleadings on record. The Applicant has claimed the alleged debt on account of the accumulated stock due to discontinuance/prevention of the supply of goods to the dealers of the Applicant, which it had been doing pursuant to the Distributorship Agreement dated 15.07.2016 executed between the Respondent and SVS Marketing (through its proprietor Mr. Shibu M). As per the Respondent, the said Distributorship Agreement clearly prohibited Mr. Shibu M (SVS Marketing) from transferring or assigning the same or any part thereof without the prior written consent in terms of Clause 8(III) of the Agreement. The Applicant in its rejoinder has admitted that the proprietorship was transferred into a Private Limited Company by virtue of an “Amalgamation Agreement” entered between M/s SVS Marketing (Proprietorship Concern) and M/s SVS Marketing Sanitaryware Pvt. Ltd. and the aforesaid Distributorship Agreement never prohibited the transfer of business or assigning of actionable claims.

9. It is in this backdrop of events, what transpires is that the Petitioner being a ‘Company’ is pursuing debt on behalf of the ‘Proprietorship firm’. There are two different ways of looking at this proposition. The first view could be that the debt is “assigned” by a Proprietorship firm to a Company. In this context, when we refer to Section 5(20) of IBC 2016, the definition of ‘Operational Creditor’ means a person to whom an operational debt is owed (IB)-322/(ND)/2023 and includes any person to whom such debt has been legally assigned or transferred. Thus, the ‘assignee of debt’ is included in the definition of an Operational Creditor. When we look at this way, we find no hurdle in proceeding with the matter.

10. Another view that emerges - when we observe the way the assignment of debt in the instant case has been done by a ‘Proprietorship firm’ to a ‘Company’. It is observed that the ‘assignment of debt’ has been done on the strength of an “Amalgamation Agreement”. Against this backdrop, we would like to examine Whether the amalgamation between a Sole Proprietorship Firm (i.e., M/s SVS Marketing) and a Company (i.e., M/s SVS Marketing Sanitaryware Pvt. Ltd is valid in the eyes of the law or not.

11. Accordingly, we refer to the Amalgamation Agreement dated 25.05.2018 executed between M/s SVS Marketing (Proprietorship Concern) and M/s SVS Marketing Sanitaryware Pvt. Ltd., which read thus - (IB)-322/(ND)/2023 (IB)-322/(ND)/2023 (IB)-322/(ND)/2023

12. We are conscious of the fact that the provisions relating to Compromise/Arrangement/Amalgamation/De-Merger are provided under Sections 230-232 of the Companies Act 2013, which read thus:

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13. On perusal of the abovementioned provisions of law, we find that the Compromise and Arrangement under Section 230-232 of the Companies Act 2013 entered into by and between a company and its members or any class of them.

14. In the instant case, Mr. M. Shibu Proprietor of M/s SVS Marketing (A Proprietorship Concern) is a member/shareholder in M/s SVS Marketing Sanitaryware Pvt. Ltd. as is evident from the following extracts of the Balance Sheet of the Applicant Company annexed by the Respondent at page no. 165 of the Reply:

15. Since the Sole Proprietorship Firm has no separate legal entity of its own, and it is known only through its Proprietor Mr. Shibu M, who (as we have seen in the table given in Para 12 above) is a member/shareholder in the Applicant Company, the provision of Section 230 of the Companies Act 2013 can be resorted to by Mr. Shibu M and the Applicant Company namely, M/s SVS Marketing Sanitaryware Pvt. Ltd. for the purpose of “Compromise and Arrangement” by filing an appropriate Petition before NCLT by following the due procedure prescribed by law.

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16. However, as regards “Merger or Amalgamation” under Section 232 of the Companies Act 2013, the parties that are eligible to seek Merger or Amalgamation can file an application before NCLT, but this does not mean that the Amalgamation can take place between “a Proprietorship Firm” and “a Company” as the Section 232 (a) of the Companies Act 2013 specifically deals with the Merger and Amalgamation of two or more companies only. In this context, at the cost of repetition, we refer to Section 232(a) of the Companies Act 2013, which reads thus:

17. The term ‘Company’ is defined under Section 2(20) of the Companies Act 2013, wherein “Company means a Company incorporated under this Act or any previous company law”. Thus, neither the “Sole Proprietorship Firm” nor “its individual Proprietor” is a “Company” in terms of Section 2(20) of the Companies Act 2013. Hence, the Merger and Amalgamation of a “Sole Proprietorship Firm” and “a Company” is not possible under Section 232 of the Companies Act 2013. Hence, we find that an amalgamation of “a Sole Proprietorship Firm” with “a Company” is not permissible under the law.

18. Further, this issue had also cropped up before this Adjudicating Authority in the matter of Amalgamation of “Central Railside Warehouse Company Ltd. with Central Warehousing Corporation”, (CA)-(CAA) 128/(ND)/2021, where the merger of “a Company” with “a Corporation” was (IB)-322/(ND)/2023 sought to be made under Section 230-232 of Companies Act, 2013 and this Adjudicating Authority sought an opinion of RD (North) Delhi on the issue. The RD opined that those entities namely, a “Company” and a “Corporation” cannot be merged, as one of them did not fall under the definition of a “Company” as defined under Section 2(20) of the Companies Act 2013. Accordingly, the Applicants withdrew the Scheme. However, it is worthwhile to peruse the Affidavit filed by RD in the matter, which is reproduced below:

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19. Hence, in our considered view, both/or all the entities involved in the Amalgamation Scheme under Section 230-232 of the Companies Act 2013 have to be necessarily “Companies” as defined under Section 2(20) of the Companies Act 2013. In the instant case, the applicant has merged its “proprietorship firm” with a “company” in disregard to and without resorting to the provisions of Section 230-232 of the Companies Act 2013.

20. However, keeping all this analysis aside, when we re-visit the Amalgamation Agreement placed on record, we find that though the heading of the Agreement starts with the word Amalgamation, but no characteristics of Amalgamation are found present/followed in executing said document. Merely what ought to have been an “assignment deed” is executed and named as an “Amalgamation Agreement”. Therefore, in the interest of justice, we would not like to reject the Application and still examine the “debt” of the Applicant on its merits.

21. On careful perusal of the Application, it is observed that the Applicant has given the following breakup of the amount claimed as debt:

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22. In terms of the breakup of the amount claimed (ibid), we would first like to examine whether the “unsold stock valuing Rs. 2,18,74,109/- as of 17.03.2023” can be considered as an Operational Debt. The Applicant has relied upon the Judgement in “M/s Consolidated Construction Consortium Limited Vs. M/s Hitro Energy Solutions Private Limited”, wherein the Hon'ble Supreme Court while defining the term "operational debt" held that a claim "in respect of provision of" goods of services would include not only those who supply goods or service to the Corporate Debtor but also those who receive the goods or services from the Corporate Debtor. Whereas the Respondent in its Written Submissions has stated that under the Distributorship Agreement with the Applicant, the Respondent had no obligation to purchase the unsold inventory, which is reflected in every invoice and the relationship with the Applicant was solely that of the seller and a purchaser on principal-to-principal basis. The claims of the Applicant are at best the claims for damages and specific performance. It is the settled law that no pecuniary liability in regard to a claim for damages arises till a competent court adjudicates upon the claim for damages and holds that the defaulting party has committed a breach and incurred a liability to compensate the non-defaulting party for the loss. An alleged default or breach gives rise only to a right to sue for damages and not to claim any debt.

23. In order to examine the aforesaid contentions of the parties, we consider it appropriate to refer to one of the invoices, which is reproduced overleaf:

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On perusal of the above, it is evident that the invoice contained a clause as per which “Goods once supplied would not be exchanged or taken back”.

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24. However, it is still contended by the Applicant that the Respondent had acknowledged that it will make a payment towards the bill of Rs. 2.48 Crore, which is pleaded to be an admission towards the liability of Rs. 2.48 Crore towards the Unsold stock amount. In this regard, the Applicant has referred to the following communication received from the Respondent:

25. Per Contra, the Respondent has denied the issuance of such a letter by stating that it is a forged document since it is not only undated but also is not an attachment/part of any e-mail communication.

26. In our view, the Respondent had supplied the Goods and the Applicant had made payments towards the Goods as Distributor of the Respondent. The chain of transaction ends here itself. Moreover, the invoice itself stipulates (IB)-322/(ND)/2023 that “Goods once supplied would not be exchanged or taken back.” Further, the letter on which Applicant has relied is an un-dated one and no particulars are available as to when, and how the letter was sent. Even otherwise, once agreeing to purchase the goods and subsequently, denying the purchase will not constitute an “Operational Debt” since there is neither any flow of goods/services nor any payment of consideration from one party to another in this chain. Hence, we find that there is no existence of any operational debt or default committed by the Respondent towards the so-called unpaid stock.

27. Since no operational debt and default have been proved with respect to unsold stock, the question of going into the “stock interest” component does not arise.

28. The Applicant has further claimed “Bad Debts amounting to Rs. 1,57,65,634.48/-”. The applicant has contended that due to the discontinuance of supply without informing the Distributor (Applicant), the Applicant could not supply products to their dealers on time, for which they started to block payments of the Applicant. Thus, the Applicant has sought to recover an amount of Rs. 1,57,65,634.58/- as bad debts in the market.

29. In our considered view, if the goods have been supplied by the Applicant to its dealers, and if they had not paid the Applicant in time, the Applicant cannot shift the burden of the alleged default by dealers to the Respondent and claim the same as an Operational Debt. At the most, the claim of the Applicant against the Respondent in respect of causing bad debts could be of compensatory in nature, subject to such a Clause existing in the Distributorship Agreement, but it cannot be claimed as an Operational Debt.

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30. Other than the aforesaid three components of the amount claimed, the Applicant has claimed an amount of Rs.84,41,968/- as “Warehouse Charges”. Though this amount itself is less than the minimum threshold limit of Rs 1 Crore, however, since we have heard the matter on merits, we would like to examine whether the same could be claimed by the Applicant under the IBC proceedings. The Applicant has stated that it had paid Rs.1,59,282.42/- per month altogether as warehouse charges to four individual landlords in order to store the unsold stock. Accordingly, the Applicant has claimed an amount of Rs. 84,41,968.35/- as warehouse charges from the Respondent.

31. In the instant case, from the record it is observed that the Applicant has neither rendered any warehousing services nor is the beneficiary of those services from the Respondent. Since in the context of the alleged transaction of warehousing services, there is no relation with regard to the transaction of any goods or services by and between the parties herein, the same cannot be claimed as an Operational Debt.

32. We have examined the various components of the claim of the Applicant and find that there is no operational debt subsisting for which CIRP be initiated against the Respondent. Hence, the Application is misconceived and is accordingly, dismissed.

33. However, nothing expressed herein shall be construed as an opinion before any other forum in respect of the rights of both parties to agitate before any other forum.

Sd/- Sd/- (L. N. GUPTA) (ASHOK KUMAR BHARDWAJ) MEMBER (T) MEMBER (J)

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