Irk Raju vs Immaneni Eswara Rao & Ors

Shri IRK Raju ...Appellant

Vs.

Immaneni Eswara Rao & Ors. ...Respondents

Present: For Appellant: - Mr. Rajiv Ranjan, Senior Advocate with Mr. K. Datta, Mr. Rahul Gupta and Mr. Tulsi Raj Gokul, Advocates.

For Respondents: - Mr. Ajit K. Sinha, Senior Advocate with Mr. Praveen Kumar Singh, Mr. Rajiv Shankar Divedi, Mr. Karan Bhardwaz and Mr. Ziauddin Ahmad, Advocates.

J U D G M E N T

SUDHANSU JYOTI MUKHOPADHAYA, J.

'M/s. Ice TV Private Limited'- ('Operational Creditor') moved an

application under Section 9 of the Insolvency and Bankruptcy Code, 2016

("I&B Code" for short) for initiation of 'Corporate Insolvency Resolution

Process' against 'M/s. Sreedevi Digital Systems Private Limited'-

('Corporate Debtor'). The Adjudicating Authority (National Company Law

Tribunal), Amaravati Bench at Hyderabad by impugned order dated 4th

October, 2019 admitted the application.

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2. The Appellant has challenged the said order on the ground that the

application under Section 9 was filed fraudulently with malicious intent

for any purpose other than for the resolution of insolvency or liquidation

and attracts penal amount in terms of Section 65(1) of the 'I&B Code'.

3. Learned counsel for the Appellant submitted that the Adjudicating

Authority has failed to consider that the debt claimed was not payable in

fact and the application under Section 9 was filed fraudulently with

malicious intent for extracting money and not for resolution or

liquidation.

4. The case of the Appellant is that the 'operational debt' claimed by

the 2nd Respondent can be bifurcated into two; (i) Rs.1,06,38,500/- on

account of the 1st Memorandum of Understanding dated 22nd November,

2015 and (ii) Rs.1,29,80,018/- on account of 2nd Memorandum of

Understanding dated 22nd November, 2015.

5. Further, the case of the Appellant is that despite the Appellant

offered 100% of the amount actually payable in terms of the original

Memorandum of Understanding dated 22nd November, 2015 i.e.

Rs.1,06,38,500/- which was raised on account of the invoices raised by

the 2nd Respondent, but the 2nd Respondent declined to settle the amount

and asked for more.

6. It was submitted that the 2nd MoU dated 22nd November, 2015 is

as per the version of the 2nd Respondent was executed between the

Company Appeal (AT) (Insolvency) No. 1058 of 2019 3

parties in order for the 3rd Respondent to reimburse the 2nd Respondent

for customs duty paid to the relevant authorities. However, no such

arrangement has been made.

7. Further, according to counsel for the Appellant, even if it is

assumed and not admitted that custom duty is payable, it cannot come

within the meaning of 'operational debt' payable to the 2nd Respondent,

the supplier of goods.

8. When the matter was taken up before this Appellate Tribunal on

16th October, 2019, learned counsel for the Appellant reiterated its stand

and submitted that the Appellant agreed to pay the total outstanding

amount to the 'Operational Creditor' based on the original MoU dated

22nd November, 2015 (1st MoU) and not on the forged MoU enclosed with

the Demand Notice under Section 8(1) of the 'I&B Code', but the said

Respondent refused to accept the same.

9. On 17th December, 2019, we asked the Appellant to pay entire

amount of Rs.1,06,38,500/- and also ordered to pay additional amount

of Rs.10,00,000/-. However, the 2nd Respondent refused to accept the

same and asked for more interest.

10. It is in this background, we heard the case on merit.

11. According to counsel for the 2nd Respondent, both the

Memorandum of Understanding(s) dated 22nd November, 2015 are

Company Appeal (AT) (Insolvency) No. 1058 of 2019 4

genuine. The 1st Memorandum of Understanding dated 22nd November,

2015 was reached with regard to the claim against the invoices and the

2nd Memorandum of Understanding dated 22nd November, 2015 was

reached towards excise duty which is to be paid by the 2nd Respondent.

12. For determining the issue, it is relevant to refer the Memorandum

of Understanding dated 22nd November, 2015, as under:

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13. The other Memorandum of Understanding of the same date i.e.

22nd November, 2015 though signed on the same date, but it is not in the

same format, as extracted below:

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14. The 2nd Memorandum of Understanding dated 22nd November,

2015 though stated to have been executed on the same date, but is not

in the letter head of 'M/s. Sreedevi Digital Systems Private Limited'. It

does not mean to say that the 1st MoU of the same date i.e. 22nd

November, 2015 is read by all the parties and signed on the date as

mentioned. The signature of the 1st Party and 2nd Party and Witnesses

are in different boxes of the 1st Memorandum of Understanding, but there

is no such separate signature box and as such it is difficult to find out

whether the same witnesses etc. have signed.

15. The 2nd Memorandum of Understanding dated 22nd November,

2015 which the Appellant alleged to have been forged not only varies from

the 1st Memorandum of Understanding, but also varies in the details of

supply of Set Top Boxes and dates in respect of invoices as detailed in

the 1st Memorandum of Understanding. It does not say that the claim is

against the custom duty or any other statutory dues.

16. On the other hand, in the 1st Memorandum of Understanding dated

22nd November, 2015 'Schedule of the Goods Supplied and Invoice

Details' have been shown, including each Set Top Box and Value Added

Tax.

17. For the first time in Demand Notice issued under Section 8(1) dated

24th January, 2018, it was mentioned that the parties agreed that

whatever amount towards Custom Duty will be paid by 'ICE TV', the same

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will be reimbursed by the 'Corporate Debtor'. Therein the details of the

Custom Duty have been explained for the first time which is not

mentioned in the 2nd Memorandum of Understanding dated 22nd

November, 2015, as quoted above. Thereafter, application filed under

Section 9 in Form-5 wherein at Paragraph 9, the total amount of debt

payable is shown as "Rs.2,36,18,518/-" and it was mentioned that after

due negotiations, it was mutually agreed between the 'Operational

Creditor' and the 'Corporate Debtor'. It was further agreed that the

Custom Duty amount incurred in respect 45,000 DSTBs would be

initially borne by 'Operational Creditor' and the same was to be

subsequently reimbursed by 'Corporate Debtor'. Relevant portion of

Form-5 reads as under:

"Part-IV

PARTICULARS OF OPERATIONAL DEBT

1. Total amount of Rs.2,36,18,518 (rupees Two debt, details of Crore Thirty Six Lakh Eighteen transactions on Thousand Five Hundred account of which Eighteen Only) and interest debt fell due, and thereon @24% p.a. from 21.12.2016.

a. Corporate Debtor through a mutual friend one Mr. D. Nitin Reddy approached the Operational Creditor to purchase 45,000 units of Digital Set-Top Box (DSTB) for its business needs viz. Digital Cable TV Network in Vishakapatnam.

b. After due negotiations, it was mutually agreed between Operational Creditor and Corporate Debtor that the price for one DSTB would be Rs.1,020

Company Appeal (AT) (Insolvency) No. 1058 of 2019 11

(One Thousand Twenty Only) plus applicable taxes. It was further agreed that the Custom Duty amount incurred in respect 45,000 DSTBs would be initially borne by Operational Creditor. However, the same was to be subsequently reimbursed by Corporate Debtor.

c. It was mutually agreed between Operational Creditor and Corporate Debtor that the aforesaid amounts viz. cost and custom duty in respect of the 45,000 DSTBs were to be paid by Corporate Debtor within a period of one year from date of delivery of DSTBs. It was also agreed that in the event Corporate Debtor defaulted in paying the aforesaid amounts within the agreed period of one year from the date of supply, the Corporate Debtor would be liable to pay interest @ 24% p.a. on the outstanding due amounts. The same is even evident from the invoices raised by Operational Creditor.

d. Operational Creditor has supplied 45,000 number of DSTBs to the Corporate Debtor between the period 10.06.2014 to 22.08.2014

e. In respect of the 45,000 DSTB supplied by the Operational Creditor to Corporate Debtor, Operational Creditor raised 9 invoices on the Corporate Debtor aggregating to a sum of Rs.4,81,95,000/- (inclusive of 5% CST).

f. Operational Creditor incurred a sum of Rs.1,28,81,798/-

towards customs duty in respect of the 45,000 DSTBs supplied to the Corporate Debtor. Thus, a

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total amount of Rs.6,10,76,798/- was due and payable by the Corporate Debtor to the Operational Creditor in respect of the cost and custom duty for the 45,000 DSTB supplied to the Corporate Debtor...................."

18. The Demand Notice is also not in terms of Section 8(1), as it allows

15 days' time which will be evident from paragraph 21 of the said Notice,

as under:

"21....................In the premises, we once again

request Your Company to release our justified

outstanding payments amounting to

Rs.2,36,18,518/- (Two Crore Thirty Six Lakhs

Eighteen Thousand Five Hundred and Eighteen

Only) along with interest @ 24% due to us within 15

days of receiving this notice, failing which we will be

constrained to take legal action against Your

Company at your risk & cost."

19. It is a legal notice as distinguished from Demand Notice under

Section 8(1). It has allowed 15 days' time to pay the amount with interest

and mentioned that on failure the 2nd Respondent will take legal action

against the Company. On the contrary, in terms of Section 8(1), in the

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Demand Notice 10 days' time was to be granted on occurrence of default

and in terms of Form-3 of the 'Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016', it is mandatory to state that on

failure to pay the amount within 10 days', the 'Operational Creditor' 'shall

initiate a corporate insolvency resolution process in respect of the

Corporate Debtor', as evident from Clause 6 of Form 3, as quoted below:

"6. The undersigned request you to

unconditionally repay the unpaid operational debt

(in default) in full within ten days from the receipt

of this letter failing which we shall initiate a

corporate insolvency resolution process in respect

of [name of corporate debtor]."

20. It is clear from Part-IV (Form-5) that the 'Operational Creditor' has

supplied 45,000 number of Digital Set-Top Box to the 'Corporate Debtor'

between the period 10th June, 2014 to 22nd August, 2014. The

'Operational Creditor' reached 1st Memorandum of Understanding on

22nd November, 2015, much thereafter.

21. Section 5(20) defines 'Operational Creditor' whereas Section 5(21)

defines 'Operational Debt' which includes goods or services including

employment or a debt in respect of the payment of dues arising under

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any law for the time being in force and payable to the Central

Government, any State Government or any local authority.

22. The statutory dues are payable under law to the Central

Government for which the Central Government can claim to be the

'Operational Creditor'. The 2nd Respondent does not come within the

meaning of 'Operational Creditor' for the purpose of Custom Duty.

23. Section 5(21) makes a provision of payment of statutory dues as

'operational debt'. however, what is pertinent to mention is "payment" of

statutory dues. This by itself indicates that a statutory due is only

operational in nature when it is paid to the relevant authority, and not

when it is repaid to a party that has paid such statutory authority. In

fact, the amendment of Section 5(21), where the word "repayment" in the

context of statutory dues was replaced with the word "payment" makes

clear the intent of the legislature that a statutory due becomes

operational debt only when the same is to be paid to the relevant

authority and not otherwise. Consequently, a statutory due de hors of the

invoice of the good or service cannot be claimed as an 'operational debt'

from a party, where the party is not a statutory authority.

24. In the circumstances, even if it is accepted that the 2nd

Memorandum of Understanding dated 22nd November, 2015 was

executed by the parties on the same date though we have doubt in looking

to the 2nd Memorandum of Understanding on the same date and it should

Company Appeal (AT) (Insolvency) No. 1058 of 2019 15

have been reflected in the 1st Memorandum of Understanding, in such

case also, the 2nd Respondent is not entitled to claim the same by filing

petition under Section 9.

25. So far as the dues payable to the 2nd Respondent for supply of

goods, pursuant to the Memorandum of Understanding dated 22nd

November, 2015, the amount claimed is Rs.1,66,38,500/-. This Appellate

Tribunal on the request of the Appellant allowed the Appellant to pay the

amount to the 2nd Respondent with additional amount of Rs.10,00,000/.

However, the 2nd Respondent refused to accept the same.

26. It is a glaring example that the 2nd Respondent moved an

application under Section 9 fraudulently with malicious intent for

extracting more amount, not for the liquidation or resolution as covered

by Section 65 and as such calls for penal action. The Adjudicating

Authority has failed to notice the aforesaid fact.

27. For the reasons aforesaid, while we are not passing any penal order

under Section 65 on 2nd Respondent, set aside the impugned order dated

4th October, 2019. In the result, the 'Corporate Debtor' (company) is

released from all the rigours of 'Corporate Insolvency Resolution Process'

and is allowed to function through its Board of Directors from immediate

effect. The 'Interim Resolution Professional' will hand over the assets and

records to the Board of Directors. The case is remitted to the Adjudicating

Authority to determine the fees and costs incurred by the 'Interim

Company Appeal (AT) (Insolvency) No. 1058 of 2019 16

Resolution Professional' and whatever the amount payable, it will be paid

by the 2nd Respondent.

The appeal is allowed with aforesaid observations and directions.

No costs.

(Justice S.J. Mukhopadhaya) Chairperson

(Justice Bansi Lal Bhat) Member(Judicial)

NEW DELHI 30th January, 2020

AR

Company Appeal (AT) (Insolvency) No. 1058 of 2019