Karpara Project Engineering Pvt. Ltd vs Bgr Energy Systems Ltd

[Arising out of order dated 13th August, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, in CP(IB) No. 104/9/HDB/2018]

IN THE MATTER OF:

Karpara Project Engineering Private Limited, Room No. 405, SNS Platina, Near Reliance Mall, Behind J. H. Ambani School, Vesu Road, Surat - 395007. Gujarat.

....Appellant

Vs

BGR Energy Systems Ltd., Registered Office at: Plot 5, Pannamgadu Industrial Estate, Ramapuram Post, Sullurpet (T), Nellore District - 524401, Andhra Pradesh. ....Respondent

Present:

For Appellant: Mr. Suryanarayan Iyer, Ms. Garima Bajaj and Mr. Sanskar Agarwal, Advocates. For Respondent: Mr. Devansh Mohta, Mr. Ashwin Kumar D. S. and Ms. Aditi Dani, Advocates. -2-

BANSI LAL BHAT, J.

Appellant (Operational Creditor) - 'Karpara Project Engineering Private

Limited' filed application under Section 9 of the Insolvency and Bankruptcy

Code, 2016 (hereinafter referred to as 'I&B Code') for initiation of Corporate

Insolvency Resolution Process against the Corporate Debtor - 'M/s BGR

Energy Systems Ltd.'. In terms of its order dated 13th August, 2018 the

Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench,

Hyderabad rejected its application on the ground that there existed a

dispute even before the issuance of demand notice and the said dispute had

been brought to the notice of Operational Creditor by the Corporate Debtor

in the form of reply notice. Aggrieved thereof the Appellant has filed the

present appeal assailing the order dated 13th August, 2018 on the grounds

that the impugned order was passed by the Adjudicating Authority ignoring

the fact that the Corporate Debtor never raised the issue of delay and the

consequent claim of liquidated damages during the course of fifteen

revisions of the work orders extending the final completion date from time to

time finally to 31st May, 2015 and that the Corporate Debtor could not

agitate the claim of liquidated damages against the Operational Creditor

after the release of two bank guarantees towards the performance

Company Appeal (AT) (Insolvency) No. 622 of 2018 -3-

guarantee. According to Appellant, the disputes raised by the Corporate

Debtor are spurious, designed only to harass the Appellant.

2. Heard learned counsel for the parties and perused the record.

3. Initiation of Corporate Insolvency Resolution Process at the instance

of an Operational Creditor is provided for under the provision engrafted in

Section 9 of the I&B Code, whereunder an Operational Creditor may file an

application before the Adjudicating Authority for initiating a Corporate

Insolvency Resolution Process after complying with the statutory

requirements of Section 8. Dwelling on the scope of this provision in

"Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407", the

Hon'ble Apex Court observed as under:

"29. The scheme of Section 7 stands in contrast with the

scheme under Section 8 where an operational creditor is,

on the occurrence of a default, to first deliver a demand

notice of the unpaid debt to the operational debtor in the

manner provided in Section 8(1) of the Code. Under Section

8(2), the corporate debtor can, within a period of 10 days

of receipt of the demand notice or copy of the invoice

mentioned in sub-section (1), bring to the notice of the

operational creditor the existence of a dispute or the record

of the pendency of a suit or arbitration proceedings, which

Company Appeal (AT) (Insolvency) No. 622 of 2018 -4-

is pre-existing--i.e. before such notice or invoice was

received by the corporate debtor. The moment there is

existence of such a dispute, the operational creditor gets

out of the clutches of the Code."

In a later judgment titled "Mobilox Innovations (P) Ltd. v. Kirusa

Software (P) Ltd., (2018) 1 SCC 353", the Hon'ble Apex Court further

observed as under:-

"51. 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 patently feeble legal

argument or an assertion of fact unsupported by evidence.

It is important to separate the grain from the chaff and to

Company Appeal (AT) (Insolvency) No. 622 of 2018 -5-

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."

4. The undisputed facts leading to initiation of Corporate Insolvency

Resolution Process may briefly be noticed. The Operational Creditor was

awarded a contract for the collection of material from stores of the Corporate

Debtor, loading, transportation to work site, unloading of materials,

erection, testing, commissioning of steam generator comprising boiler with

all necessary wherewithal's, etc. The work was awarded under Work Order

dated 19th August, 2009 for execution of pre-assembly, erection, testing and

commissioning of boiler and other plants in respect of 'Kalisindh Thermal

Power Project, Rajasthan'. Delivery date was fixed for 31st October, 2009.

This was followed by another Work Order dated 10th January, 2013 relating

to erection, testing and commissioning of auxiliary steam piling and clear oil

painting of the same project with completion date fixed as 30th July, 2013.

According to the Operational Creditor, the Corporate Debtor failed to adhere

to the terms of Work Order as the erection materials, crane facilities as also

electricity were not provided at the work site at the relevant time. The total

tonnage of the project was increased in February, 2011 and February, 2014.

Company Appeal (AT) (Insolvency) No. 622 of 2018 -6-

This necessitated periodical revisions being issued by the Corporate Debtor

from time to time. Final revision made by Revision No. 15 dated 5th March,

2015 extended the completion time to 31st May, 2015. The Operational

Creditor claims to have completed the work awarded to it on 28th March,

2015 culminating in issuance of 'completion certificate' by the Corporate

Debtor. The Operational Creditor raised retention bill dated 11th August,

2014, final bill dated 27th February, 2016 and retention bill dated 10th

March, 2016 besides claiming overrun compensation (ORC) of

Rs.5,49,22,446/- vide its email dated 11th February, 2014. The Operational

Creditor had provided two bank guarantees for Rs.1,90,00,852/- and

Rs.41,80,585/- towards a performance guarantee/ security deposit to the

Corporate Debtor which were extended from time to time due to extension in

the contract period. While the Corporate Debtor sought extension of the two

bank guarantees, the Operational Creditor, vide its letter dated 18th March,

2017, explained the amounts due to the Corporate Debtor and sought

release of the bank guarantees as contractual conditions had been fulfilled.

Responding thereto, the Corporate Debtor vide its letter dated 20th March,

2017 to SBI Baroda withdrew its requests for extension of the two bank

guarantees. According to Corporate Debtor, the Corporate Debtor sent an

email dated 17th July, 2017 admitting dues of Rs.3,07,62,493/- to the

Operational Creditor subject to decision on liquidated damages for alleged

delay in execution of work by the Operational Creditor. The Operational

Creditor issued demand notice dated 3rd October, 2017 for amount of

Rs.8,56,84,939/-together with amount of Rs.3,07,62,493/- as interest

Company Appeal (AT) (Insolvency) No. 622 of 2018 -7-

besides ORC claim of Rs.5,49,22,446/-. The Corporate Debtor, in its reply

dated 17th October, 2017 disputed the dues and made counter claim of

Rs.1,81,78,699/-. This led to filing of application under Section 9 of I&B

Code by the Operational Creditor which came to be dismissed at the hands

of Adjudicating Authority for reasons assigned in the impugned order and

adverted to hereinabove.

5. Learned counsel for Appellant, while assailing the impugned order

submitted that the Adjudicating Authority erred in passing the impugned

order without considering whether the dispute regarding liquidated damages

raised by the Corporate Debtor was an afterthought, spurious, hypothetical

or illusory. It is further submitted that no liquidated damage for any

revision has been imposed or quantified by the Corporate Debtor even once

during fifteen revisions of the Work Order spanning 2009 to 2015. It is

further submitted that the mandatory provision in Clause 2.6(c) for levy of

liquidated damages has not been followed and the counter claim of the

Respondent does not survive as a defense against the Operational Creditor's

claim. It is further submitted that since completion certificate has been

issued unconditionally on 5th March, 2015, claim on account of liquidated

damages cannot lie. It is further submitted that the Corporate Debtor

cannot be allowed to raise a mutually destructive plea in view of the fact

that it has deposited TDS towards dues of Rs.2,33,74,173/- to the

Corporate Debtor. Thus, it is contended that the plea of pre-existing dispute

is nothing but a fraud designed to finish off the Operational Creditor.

Company Appeal (AT) (Insolvency) No. 622 of 2018 -8-

6. Per contra learned counsel for Corporate Debtor submitted that the

Corporate Debtor's claim for liquidated damages was raised and discussed

between the parties as is admitted in writing by the Operational Creditor in

its letter dated 1st February, 2017 i.e. well before the issuance of the

demand notice. Thus, the same constituted a pre-existing dispute. It is

submitted that completion certificate has nothing to do with settlement of

dues. It is further submitted that the parties are in dispute over the liability

of the delay and without resolution of the same provisions of I&B Code

cannot be invoked. It is further submitted that the release of bank

guarantee does not amount to acceptance of Operational Creditor's claim by

the Respondent. It is submitted that the Corporate Debtor in its email dated

17th July, 2017 has clearly stated that the pending payment is subject to

decision on liquidated damages imposition by the Corporate Debtor as per

agreement between the parties. Therefore, same could not be construed as

an admission. It manifested that the amounts were disputed and there was

no admission of any debt. It is further submitted that there existed some

dispute between the parties in regard to completion of work and

computation of liquidated damages. It is further submitted that the amount

claimed by the Operational Creditor is a disputed claim and the application

under Section 9 of I&B Code is not maintainable.

7. We have given our anxious consideration to the arguments advanced

at the Bar. It is the settled position of law that the existence of a pre-

existing dispute is a bar to initiation of Corporate Insolvency Resolution

Company Appeal (AT) (Insolvency) No. 622 of 2018 -9-

Process at the instance of an Operational Creditor. The Adjudicating

Authority is required to ascertain whether the Operational Creditor has

received the notice of dispute pursuant to service of notice of demand on the

Corporate Debtor within the specified time or a dispute emerges from the

record of information utility. A suit or arbitration proceeding relating to a

dispute may be pending between the parties or the dispute raised qua the

claim or the invoices may emerge from the record of information utility or

correspondence and communication between the parties. The Adjudicating

Authority is not required to conduct a roving enquiry or examine the merits

of dispute in a manner as if he were going to decide the issues on merit.

The Adjudicating Authority exercises a limited jurisdiction and cannot dwell

upon the pros and cons of the claim or merits of dispute. The limited

exercise required to be undertaken by the Adjudicating Authority extends

only to sift the material for separating the grain from the chaff with a view to

reject a palpably spurious defense. Likelihood of such defense succeeding or

failing is not the concern of Adjudicating Authority. If the dispute exists in

fact, is a pre-existing dispute and is not spurious, hypothetical or illusory,

the Adjudicating Authority must reject the application.

8. Clause 2.6 (c) of Annexure-I of Work Order dated 19th August, 2009 at

page 191 of the paper book provides that the time schedule shall not be

liable for extension without levy of liquidated damages unless under the

exceptional circumstances specified in the contract. It also provides that no

compensation shall be payable for any time overrun of two months beyond

Company Appeal (AT) (Insolvency) No. 622 of 2018 -10-

the time schedule, if same is caused due to reasons attributable to the

Corporate Debtor. Clause 2.7 provides for levy of liquidated damages in the

event of delay in handing over of the unit. It is gatherable from the Work

Order that time schedule of 24 months had been fixed for Boiler Package

Unit-1 w.e.f. October, 2009. On a plain reading of the covenants in the

Work Order it is manifestly clear that extension of the time schedule without

levy of liquidated damages was not contemplated unless same was covered

by the exceptional circumstances specified in the Contract. The

compensation for any time overrun of two months beyond the time schedule

was not admissible for delay caused due to reasons attributable to the

Corporate Debtor. It is the admitted case of the parties that the Work

Order had to be revised fifteen times and the time schedule got extended

beyond proportion. Letter dated 8th October, 2014 (at page no. 317 of the

paper book) from Operational Creditor to the Corporate Debtor is with

respect to overrun compensation worked out at Rs.5,49,22,446/- as on

14th June, 2014 but the same has not been included in the claim. In reply

thereto, the Corporate Debtor sent reply dated 11th December, 2014 (at

page no.319 of the paper book) saying that the issue was under

consideration and same would be settled alongwith final bills. Therefore,

there can be no quarrel with the proposition canvassed by learned counsel

for the Operational Creditor that there was no dispute as regards claim of

Operational Creditor for overrun compensation, as the issue was agreed to

be settled alongwith final bills. However, the matter does not end there as

the issue of liquidated damages raised by the Corporate Debtor is distinct

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from the issue of overrun compensation and operates in different

circumstances. From letter dated 1st February, 2017 (at page no. 310 of the

paper book) from the Operational Creditor to the Corporate Debtor, it is

clearly gatherable that the Corporate Debtor had staked its claim for

liquidated damages under the 'LD Clause' referred hereinabove and the

Operational Creditor resisted the same on the ground that the contract was

extended from date of its trial operation in October, 2011, periodically, not

due to any delay attributable to Operational Creditor. The only conclusion

deducible from this letter is that the Corporate Debtor had raised issue as

regards levy of liquidated damages much prior to service of demand notice

dated 3rd October, 2017, which was disputed by the Operational Creditor.

Viewed in the context of revision of Work Order umpteen times viz. fifteen, it

is manifestly clear that levy of liquidated damages in terms of the Work

Order is directly and proximately linked with delay in execution of the

project for which both parties squarely blame each other. Keeping in view

these considerations it cannot be said that the dispute raised by the

Corporate Debtor was spurious, hypothetical or illusory. Release of Bank

Guarantees towards Performance Guarantee/ security and issuance of

completion certificate have no bearing on such pre-existing dispute.

Arguments advanced on this score by learned counsel for Operational

Creditor are rejected.

9. For what has been discussed hereinabove, we are of the considered

opinion that the issue of pre-existing dispute raised by the Corporate Debtor

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much prior to service of demand notice under Section 8(1) of I&B Code

requiring adjudication by a competent judicial forum brings the case out of

the clutches of Corporate Insolvency Resolution Process. We are of the

considered view that in the given circumstances triggering of Corporate

Insolvency Resolution Process at the instance of Operational Creditor was

uncalled for and unwarranted. The impugned order does not suffer from

any legal infirmity or factual frailty. The appeal is accordingly dismissed.

There shall be no order as to costs.

[Justice A. I. S. Cheema] [Justice Bansi Lal Bhat] Member (Judicial) Member (Judicial)

NEW DELHI 14th May, 2019

AM

Company Appeal (AT) (Insolvency) No. 622 of 2018