Kellton Tech Solutions Limited vs Actas Technologies Private Limited

(Arising out of the Impugned Order dated 04.09.2023 passed by the 'Adjudicating Authority' (National Company Law Tribunal, Allahabad Bench in Company Petition (IB) No. 06/ALD/2022]

IN THE MATTER OF: M/s Kellton Tech Solutions Limited Plot No. 1367, Phagan Plaza, Road No. 45, Jubilee Hills, Hyderabad - 500033

Also at: 404-405, iLabs Centre, Udyog Vihar Phase III, Gurugram Haryana - 122016 ...Appellant Versus

M/s Actas Technologies Private Limited Registered office at: C-16, Sector-6, Noida - 201301, India

Also at: A-38, Jalvayu Vihar, Sector - 21, Gautam Budh Nagar, ...Respondent Uttar Pradesh - 201301 Present: For Appellant : Mr. Rakesh Kumar, Ms. Tanisha Kaushal, Advocates.

For Respondent : Mr. Parangat Pandey and Mr. Tuhin Batra, Advocates

JUDGMENT

(Hybrid Mode)

[Per: Arun Baroka, Member (Technical)]

This is an appeal under Section 61 of the Insolvency & Bankruptcy

Code, 2016 (hereinafter referred as "IBC") filed by M/s Kellton Tech Solutions

Limited against the order (Impugned Order) passed by the National Company

Company Appeal (AT) (Insolvency) No. 1569 of 2023 1 of 14 Law Tribunal, Allahabad Bench (Adjudicating Authority) dated 04.09.2023 in

Company Petition (IB) No. 06/ALD/2022, by which the Adjudicating

Authority has dismissed the Application filed by the Appellant under Section

9 of the IBC, 2016 on the ground that there is a pre-existing dispute between

the parties.

2. Heard the Counsels for both the parties and perused the documents

placed before us.

Case of the Appellant viz. M/s Kellton Tech Solutions Limited

3. The Appellant is an IT company providing IT services such as

development of software, technology consulting, outsourced product

development etc. The Appellant had entered into a "Software Development

and Service Agreement" (Agreement) dated 17.09.2020 with the Respondent

namely, M/s Actas Technologies Private Limited for the development of

customized e-wallet platform.

4. The Appellant submits that it provided the services as per the

agreement and after the completion of the work, up to the User Acceptance

Testing (UAT) stage, it duly raised the invoices for said services. Out of the

total invoices raised by the Appellant, the Respondent failed to make the

payment for the last two invoices of Rs 29,50,000 dated 11.12.2020 and Rs

1,46,32,000 dated 21.07.2021, even though it paid earlier three invoices

dated 24.09.2020, 28.09.2029 and 29.10.2020. Appellant issued Demand

Notice under section 8 the Code on 8.10.2021 which was replied to by the

Respondent on 19.10.2021, but failed to raise existence of dispute within the

statutory period.

Company Appeal (AT) (Insolvency) No. 1569 of 2023 2 of 14

5. On 12.11.2021 the Appellant filed an application under section 9 of the

IBC 2016 before the Adjudicating Authority. The Appellant submits that the

Adjudicating Authority has wrongly applied the e-mail exchanged between the

Appellant and Respondent to arrive at a conclusion that there is a pre-existing

dispute between the parties and therefore rejected the application filed by the

Appellant under Section 9 of the IBC on 4.9.2023.

6. Appellant further claims that when the Operational Creditor and the

Corporate Debtor had devised a mechanism by incorporating a clause in the

agreement to raise a dispute regarding debt and no dispute as per the agreed

procedure is ever raised by the Corporate Debtor, then whether it can be said

that there is a pre-existing dispute. The Appellant submits that Clause 3.4 of

the agreement provides for the mechanism for raising the dispute which reads

as follows:

"3.4 Disputes. In case of any issue in the Services provided or error in the amount raised in the invoice, PAYMONK shall bring the same to the notice of the Service Provider within 15 (Fifteen) Business Days of receipt of the invoice ("Disputed Service Fees"). Both the parties shall then provide the other with such necessary information to enable them to reconcile the issues and upon amicable settlement, PAYMONK shall make payment towards the said disputed invoice within 5 (Five) Business Days thereafter ("Agreed Due Date"). In the event that a dispute in relation to the Disputed Service Fees has not been settled within 21 (Twenty One) days of the Service Provider being notified about the Disputed Service Fees by PAYMONK, the parties shall refer such disputes to Arbitration in compliance with Clause 16 of this Agreement. Notwithstanding the above, PAYMONK shall however make payments to the undisputed portion of the invoices, if any, within the Agreed Due Date."

Company Appeal (AT) (Insolvency) No. 1569 of 2023 3 of 14

7. Appellant submits that in the light of the above, no pre-existing dispute

can be said to be in existence either about the quality of the product or in the

invoice raised unless the same has been raised in accordance with the second

clause of the agreement.

8. Appellant further submits that the pre-existing dispute was raised after

the issuance and receipt of Section 8 notice. Otherwise, also no mediation

proceedings in terms of Section 12A of Commercial Courts Act, 2015 has been

initiated or at least no proof of the same has been brought on record.

9. Appellant further submits that no suit could have been instituted as

Section 12A is applicable in respect of Commercial Suits whereas in the

present case "Agreement" contains Arbitration Clause and accordingly there

was no need for mediation between the parties as envisaged under Section

12A of the Commercial Courts Act, 2015.

10. Appellant further submits that the product has been duly delivered and

the no dispute about the quality of the product has ever been raised.

Otherwise, also in case of software development, no product is final at the

delivery itself, its working testing and commissioning always requires

technical support and working on the software and this a reason that the

entire amount was not claimed by the Appellant.

11. Appellant further submits that the issue regarding the quality of the

product was raised by the Respondent after raising of the invoices. The same

could have been raised when the product was delivered and not at the time

of making payment. Appellant further submits that Section 8 notice was

issued on 08.10.2021 and was delivered to the Corporate Debtor by Company Appeal (AT) (Insolvency) No. 1569 of 2023 4 of 14 11.10.2021 and the Corporate Debtor had also replied to the same on

21.10.2021 but the "indemnity notice" was issued by the Respondent only on

29.10.2021 and the Corporate Debtor had not mentioned anything relating

to that on 21.10.2021 in its reply.

12. Appellant further claims that the Respondent never raised any specific

dispute prior to the service of demand notice under Section 8 of the IBC. It

further claims that the product was delivered to the Respondent on

01.06.2021, receipt of the product is also duly acknowledged but there is no

proof that the Respondent ever raised any dispute about the product.

13. The Appellant claims that it has delivered the product and raised the

invoices as per the milestone, therefore, there is an existence of Operational

Debt and as the Respondent had admitted the factum of completion of the

work, therefore, there is an admission of debt by the respondent. Appellant

claims that the end customer accepted the product and agreed to release 50%

payment vide e-mail dated 02.06.2021.

14. It further claims that Respondent has initiated the mediation

proceedings between the parties, not only after the service of the notice under

Section 8 of the IBC, but also after the dismissal of the petition under Section

9 IBC filed by the Appellant. Appellant claims that the Corporate Debtor made

a false statement about pendency of civil suit during pendency of Section 9

application before the Adjudicating Authority.

Case of the Respondent M/s Actas Technologies Private Limited

15. Respondent has claimed that there is a genuine pre-existing dispute

regarding the failure of delivery of work as well as the quality of Non-usable

Company Appeal (AT) (Insolvency) No. 1569 of 2023 5 of 14 "Sample Programming Code", which was clearly evident from e-mail

exchanged between the parties. Furthermore, the Appellant was conscious of

the indemnity notice, which was issued on 29.10.2021 by the Respondent to

the Appellant, which is also part of the record of the Adjudicating Authority

and is also mentioned in the impugned order of the Adjudicating Authority.

The said indemnity notice has recorded that the dispute is ongoing and the

respondent has initiated the process for filing of claim before the Delhi High

Court Mediation Centre as per Section 12A of the Commercial Courts Act,

2015. This clearly shows that there is a pre-existing dispute between the

parties with respect to the claims and invoices of the Appellant.

16. Respondent submits that the Appellant has not made complete delivery

of the services as per the software development agreement, which included e-

wallet platform for the end client of the respondent i.e. THIMAR AL ARABIYA.

The Services were to be completed in three phases, which were further divided

into total of 15 (fifteen) milestones.

17. Respondent submits that on the one hand Appellant rejects pendency

of any pre-existing dispute, while on the other hand they have accepted their

participation in the pre-institution mediation proceedings under Section 12A

of the Act.

18. Respondent further submits that there was no provision in the

agreement to raise any invoices without approval and acceptance of

corresponding work by the Respondent or to raise any consolidated invoice of

all phases & their milestones as per Schedule III. In pursuance to Clause 3.2

of the Agreement, the Appellant followed the process of requesting the signing

Company Appeal (AT) (Insolvency) No. 1569 of 2023 6 of 14 of the acceptance form from the Respondent and the End Client, only until

Milestone 4. Thereafter, the Appellant tried to seek the approval for Phase 1

on which the Respondent and End Client clearly communicated the highly

bad quality of Phase I Sample Programming Code. This was also rejected by

the End Client and the Respondent. The Appellant had failed to proceed

beyond Milestone 4 as per Agreement.

19. Third party audit report of the programming code also showed that 95%

of the code had to be re-written. Also, the Appellant never responded on the

audit report which was shared with him on 05.07.2021.

20. Thereafter, Appellant raised a consolidated invoice on 21.07.2021 for

all the remaining 11 milestones under schedule III of the agreement. Since

there was no delivery of the services beyond milestone 4 there can be no

obligation or liability to pay for the incomplete or abandoned work.

21. Respondent further claims that the pre-existing dispute is evident from

various the e-mail exchanges, particularly dated 20.01.2021 and 11.12.2020.

Further, Respondent submits that on 15.06.2021, the CEO of the End Clint

raised a dispute, by conveying his concern for delay in the delivery of the

project/software code. This was also brought to the notice of the Appellant in

a WhatsApp communication which showed poor quality of the sample

software coding provided by the Appellant company. The End Client also had

conveyed its dissatisfaction on 04.07.2021 and 05.07.2021. Appellant has

been able to achieve the completion of milestone 4 and no further deliveries

as per the milestones have been done till date. The Respondent claims that

Company Appeal (AT) (Insolvency) No. 1569 of 2023 7 of 14 Section 9 proceedings under the Code before the AA are intended to cover up

substandard phase 1 sample programming code of the Appellant.

22. Respondent further claims that pursuant to the Appellant's breach of

obligations, representations and warranties under the agreement, the

Respondent not only raised its concern over the quality and non-delivery of

services on part of the Appellant, but also issued an indemnity notice on

29.10.2021.

23. Respondent further claims that the consolidated invoice dated

21.07.2021 raised by the Appellant for an amount of Rs 1,46,32,000 is invalid

and is a tactic to circumvent the bar of Section 10A of the IBC. As per Clause

3.2 of the Agreement the Appellant would have to raise separate invoices only

when they became due and accepted by the Respondent. In order to

circumvent this and to increase the size of the claims above Rs. 1 crore at one

go, the Appellant issued invalid consolidated invoice dated 21.07.2021, totally

inconsistent with provisions of Agreement. Apparently, sole intention of

Appellant was to harass and extort undue amounts from the Respondent

through filing of bogus insolvency petition against the Respondent. Records

clearly show that the monthly invoices were being raised between 24.09.2020

-11.12.2020 but thereafter the Appellant did not raise any invoice as the work

was left incomplete after the 4th Milestone. The said act of the Appellant

clearly establishes the fact that it did not raise any invoice until 21.07.2021

as there was no provision agreed under the Agreement for sending a

consolidated invoice.

Company Appeal (AT) (Insolvency) No. 1569 of 2023 8 of 14 Issue before us

24. The short issue before this Tribunal is whether in the facts of this case,

there is a pre-existing dispute or not and whether this Appeal can be allowed

or not.

Findings and Conclusions

25. Appellant has claimed total outstanding unpaid balance to be

Rs.1,82,36,619/- comprising of two invoices of Rs.29,50,000/- which was

raised on 11.12.2020 and next one of Rs.1,46,32,000/- raised on 21.12.2021.

Appellant, being the OC, had issued Demand Notice under Section 8 of the

Code, 2016 on 8.10.2021. The former is barred by Section 10A of the Code

and the Appellant is not entitled to initiate proceedings under Section 9 for

this amount. The other invoice is for Rs.1,46,32,000/- and Adjudicating

Authority has rightly decided to examine his claim to that extent only.

26. Prior to this Demand notice of 8.10.2021, many business events had

happened, which are worth noticing, as they have a bearing on the decision

of whether there is a pre-existing dispute or not. Some of them are noted as

below:

i. On 20.01.2021, much before sending of notice u/s 8 IBC, 2016, an e-mail was sent by the Corporate Debtor to Operational Creditor stating that "Little weird you are asking for the payment for which the delivery still pending. Can you please sync with your team before following up for payments? Also, there are enough escalations on the current project from the client regarding the quality of the project. Based on project delivery and quality will see the payment process accordingly."

ii. On 15.06.2021 the end client "THIMR AL ARABIYA" through an e-mail exchange raised a concern of delay in delivery of the

Company Appeal (AT) (Insolvency) No. 1569 of 2023 9 of 14 project works. This concern and dispute were raised directly to the Applicant company by the End Client.

iii. On 21.06.2021 "Code Review Report" for the "Phase I Sample Programming Code" shared through WhatsApp by the

Respondent herein with Mr. Gaurav Srivastava, an executive of the Appellant company regarding poor quality of the sample software coding provided by the Applicant company.

iv. On 04.07.2021 the end client "THIMR AL ARABIYA" raised a concern of the quality of the sample software codes supplied by the Applicant Company. This concern and dispute was raised directly with the Applicant company by the End Client through an e-mail exchange.

v. On 5.07.2021 the end client "THIMR AL ARABIYA" again raised a concern of the quality of the sample software codes supplied by the Applicant Company. This concern and dispute was raised directly with the Applicant company by the End Client through an e-mail exchange.

vi. On 21.07.2021 the Appellant raised a consolidated invoice for all other pending milestones for an amount of Rs.1,46,32,000/-. This was not paid by the Respondent as all other milestones as per the Agreement were not achieved by the Appellant and also the delivery of the product and service was not effected till that date.

vii. Applicant sent a demand notice under Section 8 of IBC Code on 11.10.2021.

viii. Respondent sent reply to the demand notice on 21.10.2021 in which it disputed the debt as extracted herein "..We hereby strongly deny the existence of any 'Operational Debt' and several 'Disputes' have been raised from our end to your Client, which your Client is fully aware of. The payment platform programming

Company Appeal (AT) (Insolvency) No. 1569 of 2023 10 of 14 code that was developed by your client was defective and highly risky to go live as a payment business platform, which can lead to withdrawal of a payment license of the payment platform programming code user. This was apparent from the code quality report that was shared with your client's employee's executive (Gaurav) through WhatsApp communication dated 21/06/21..."

ix. Indemnity notice dated 29.10.2021 from the Corporate Debtor/ Respondent was sent, seeking indemnity for failure to perform obligations as per the agreement. Before Delhi High Court Mediation Centre, mandatory pre-institution mediation proceedings under Section 12A of the Commercial Courts Act, 2015 are ongoing.

x. Appellant moved a Section 9(1) proceeding under the IBC Code

2016 on 12.11.2021 before the AA.

27. The Appellant and Respondent had entered into a "Software

Development Agreement" dated 17.09.2020, as per which the Appellant was

to provide its services of development of customised e-wallet platform for the

End client of the Respondent i.e. THIMR AL ARABIYA. As per the Schedule of

the Agreement, the services were to be completed by the Appellant and their

corresponding payments were to be made in different phases, which were

further divided into different milestones. But the above-mentioned events,

particularly the e-mail exchange dated 15.06.2021, 21.06.2021, 04.07.2021

and 05.07.2021 brings out clearly that the End Client is very concerned about

the delay and the delivery of the final product and services. The End Client

had conveyed its dissatisfaction on 04.07.2021 and also on 05.07.2021-

much before the issue of Demand Notice under section 8 IBC 2016 and the

Section 9(1) proceedings under the IBC, 2016 initiated on 12.11.2021 and all

Company Appeal (AT) (Insolvency) No. 1569 of 2023 11 of 14 this is clear evidence that there is a dispute on the delivery of the product and

services, in the form of e-wallet, which is part of the Software Development

Agreement.

28. In the meantime, the Appellant raised a consolidated invoice of Rs

1,46,32,000/- dated 21.07.2021 for all the remaining 11 milestones under

schedule III of the agreement. Since there was no delivery of the services

beyond milestone 4, it is difficult to comprehend the issuance of this invoice

and also adds to another dimension of the pre-existing dispute. It also gives

credence to the argument of the Respondent that this invoice was filed with

the sole intention to harass and extort undue amounts through filing of bogus

insolvency petition - though we are not dwelling into that track in deciding

this Appeal.

29. Later on, ignoring all the emails exchanged between the Appellant,

Respondent and the End Client, which was clear evidence of the poor quality

of the software programming and also the non-delivery of the product and

dis-satisfaction of the End Client, for which the product was being made,

which is much more than a feeble dispute, still the Appellant proceeded

against the provisions of Section 8(2)(a) of the IBC and sent a demand notice

to the Respondent on 08.10.2021.

30. It is worth noting that the Respondent had also sent an indemnity

notice dated 29.10.2021 to the Applicant, mentioning about the ongoing

dispute for faulty services, with payment platform programming code being

defective and highly risky to go live as a payment platform. Further,

Respondent had initiated the process for filing a claim petition before the

Company Appeal (AT) (Insolvency) No. 1569 of 2023 12 of 14 Delhi High Court Mediation Centre as per Section 12A of the Commercial

Courts Act, 2015. This fact is part of the record before the Adjudicating

Authority. Even the Appellant has accepted its participation in the mandatory

pre-institution mediation proceedings under Section 12A of the Commercial

Courts Act, 2015. This is also an evidence that the Appellant accepts the

indemnity claims and is willing to mutually settle the disputes and the claims.

And the indemnity notice is relying mainly on the same events which have

been noted in aforesaid paragraphs. And all this is emanating from the events

prior to the issue of Demand Notice u/s 8 of IBC, 2016. Therefore, on this

count also pre-existing dispute cannot be denied.

31. Adjudicating Authority in this case tested Appellant's case as per the

judgment of the Hon'ble Apex Court in Mobilox Innovations Private Limited

Vs. Kirusa Software Private Limited (2018) 1 SCC 356 and as per the

facts in the present case, it has come to the conclusion that there is sufficient

evidence of pre-existing which is prior to the issue of the demand notice under

Section 8 of the IBC, 2016. We do not find any error in these findings.

32. Appellant has further claimed that the disputes need to be handled as

per Clause 3.4 as per the Agreement and unless the same has been raised in

accordance with the clauses of the agreement, any reference of the

Adjudicating Authority to any e-mail is a wrong assumption of pre-existing

dispute. To us, this is not a tenable argument for identifying a pre-existing

dispute for the reasons that Adjudicating Authority is well within its rights to

identify any pre-existing disputes, howsoever feeble it may be, basis the

evidence available before it. It is all the more unacceptable argument in the

backdrop that the Appellant themselves have agreed to participate in the pre- Company Appeal (AT) (Insolvency) No. 1569 of 2023 13 of 14 institution mediation proceedings under Section 12A of the Commercial

Courts Act, 2015 to settle the dispute.

33. When there is no proof of completion or delivery of the services or works

in the appeal paper book or Application and with the afore-mentioned

background, it can be safely concluded that with multiple events as discussed

herein, there is sufficient evidence of pre-existing dispute regarding the

product and services in the form of e-wallet and also incorrect raising of final

invoice.

34. Adjudicating Authority has rightly held that pre-existing dispute

regarding outstanding unpaid balance was raised by the Respondent before

issuance of the notice u/s 8 of the IBC, and hence this application is liable to

be dismissed u/s 9(5)(ii)(d) and accordingly the Company Petition (IB) No.

06/ALD/2022 filed by the Operational Creditor was dismissed. We do not find

any error in these findings. Accordingly, we dismiss Company Appeal (AT)

(Insolvency) No.1569 of 2023 & I.A. No.5606 of 2023.

[Justice Ashok Bhushan] Chairperson

[Arun Baroka] Member (Technical) 10th January, 2024

pks

Company Appeal (AT) (Insolvency) No. 1569 of 2023 14 of 14