M/S Agarwal Foundries Private Limited vs Posco E&C India Pvt. Ltd

[Arising out of the Impugned Order dated 06.06.2024 passed by the Adjudicating Authority, National Company Law Tribunal, Chandigarh Bench-I in CP (IB) No. 109/CHD/HRY/2019]

In the matter of: M/s Agarwal Foundries Private Limited Through its Authorized Representative Having its Registered Office at: Rama Tower, 5-4-83, TSK Chambers Opposite Ranigunj Bus Depot, MG Road, Secunderabad-500003 Andhra Pradesh, India ...Appellant Versus

POSCO E&C India Private Limited Park Centra, 7th floor, Tower-B, Sector-30, Gurgaon, Haryana-122001 ...Respondent

Present:

For Appellant : Mr. Arijit Prasad, Sr. Advocate with Mr. Rajat Chaudhary, Advocates.

For Respondent : Mr. Savar Mahajan, Ms. Pooja Mahajan and Ms. Komal Abrol, Advocates. JUDGMENT

(Hybrid Mode)

Per: Barun Mitra, Member (Technical)

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated

06.06.2024 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, Chandigarh Bench-I)

in CP (IB) No. 109/Chd/Hry/2019. By the impugned order, the Adjudicating

Authority has rejected the Section 9 application filed by the Operational

Creditor-Appellant seeking initiation of Corporate Insolvency Resolution

Process ('CIRP' in short) against Respondent-Corporate Debtor-POSCO E&C

India Private Limited. Aggrieved by this impugned order, the present appeal

has been preferred by the Operational Creditor.

2. We have heard Shri Arijit Prasad, Ld. Sr. Counsel appearing for the

Appellant and Shri Savar Mahajan, Ld. Counsel representing the Respondent.

3. Making his submissions on behalf of the Appellant, the Ld. Sr. Counsel

outlining the sequence of events stated that the Appellant-M/s Agarwal

Foundries Pvt. Ltd. was a supplier of TMT Bars and that the Respondent-

POSCO E&C India Pvt. Ltd. vide their e-mail dated 10.06.2015 sought

quotation from the Appellant for supply of TMT Bars to their contractor-

Empathy Infra & Engineering Pvt. Ltd. ('Empathy' in short) in respect of their

Nirvana Project. TMT Bars were thereafter supplied to Empathy from time to

time for which invoices were raised by them against which payments remained

Page 2 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 outstanding. As payment was not forthcoming either from Empathy or from the

Respondent inspite of the latter being a Guarantor qua the dues of Empathy,

Demand Notices were issued on 27.07.2017, 11.10.2017 and 17.07.2018

under Section 8 of IBC. These Demand Notices were withdrawn and a fresh

Demand Notice was issued on 24.10.2018 alongwith relevant documents

followed by a Section 9 application filed on 11.02.2019 against the Respondent

being the entity which had requested for supply of TMT Bar and assured the

payment from Empathy as a guarantor. The Section 9 application was

dismissed by the Adjudicating Authority on 06.06.2024 and aggrieved by this

order, the present appeal has been preferred.

4. Assailing the impugned order, the Ld. Sr. Counsel for the Appellant

submitted that the Adjudicating Authority had erroneously held that their

claim was time barred. It was contended that since the Demand Notice was

issued to the Respondent on 27.07.2017 which Demand Notice was replied by

the Respondent, this amounted to be an acknowledgement of debt. Hence the

Section 9 petition having been filed on 11.02.2019, the petition was well within

the period of limitation of three years. It was also vehemently contended that

the Adjudicating Authority had wrongly held that there was no privity of

contract between the Appellant and the Respondent. Relying on the judgment

of the Hon'ble Supreme Court in Consolidated Constructions Consortium

Ltd. Vs M/s Hitro Energy Solutions Pvt. Ltd. in CA No. 2839 of 2020, it

was contended that since the goods and services were supplied by the Appellant

to Empathy which was hired by the Respondent for its project, the Appellant

was clearly the Operational Creditor of the Respondent. The various e-mails

Page 3 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 exchanged between the Respondent and the Appellant effectively shows that

the Respondent had undertaken to make payment in case Empathy failed to

do so thereby assuming the role of a guarantor. Contending that signed

agreement is not the only pre-requisite of a valid contract but even documents

like e-mails etc. can also be seen to infer the existence of a contract it was

further pointed out that the Adjudicating Authority had wrongly held that the

Appellant cannot be treated as an Operational Creditor of the Respondent.

The liability of the Respondent to pay the outstanding dues of Empathy to the

Appellant had become absolute and unconditional. It was incumbent upon the

Respondent to make payment on account of the goods supplied by the

Appellant and the Respondent having defaulted in clearing the liability qua the

Appellant, the Section 9 application ought to have been admitted and the

Respondent admitted into CIRP.

5. Refuting the contentions raised by the Appellant, the Ld. Counsel for the

Respondent submitted that the Appellant had neither provided any goods nor

any services to the Respondent directly and therefore cannot claim to be an

Operational Creditor of the Respondent. It was also contended that there was

no legally valid contract of guarantee executed between the Appellant and the

Respondent and unauthorized e-mails cannot be the foundation of a contract

of guarantee. It was asserted that the Respondent did not fall within the

definition of a "Corporate Guarantor" under Section 5(5-A) of the IBC. There is

no provision whereby guarantee is covered in the definition of "Operational

Debt" under Section 5(21) of IBC. Hence, application under Section 9 of the IBC

is not maintainable against a guarantor of an Operational Debt. Advancing

Page 4 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 their arguments further, it was further submitted that the Adjudicating

Authority had correctly held that the claim of the Appellant was time-barred. It

was asserted that the limitation has to be counted from the date of default

which is the point of time on which the cause of action arose. It was misplaced

on the part of the Appellant to claim that the limitation period was to be counted

from 27.07.2017 which was the date of issue of Demand Notice. The period of

limitation cannot be counted from the date of issuance of Demand Notice or

the date of reply to the Demand Notice. It was vociferously asserted that the

Section 9 application was not filed for the purpose of CIRP but for recovery of

from the Respondent money which was otherwise due from Empathy. Such

arm-twisting of the Respondent which was a solvent company, to illegally extort

monies from them tantamount to misuse of the provisions of IBC.

6. We have duly considered the arguments advanced by the Learned

Counsel for both the parties and perused the records carefully.

7. It is the case of the Appellant that they had agreed to supply TMT Bars

to Empathy since the Respondent-Corporate Debtor vide their e-mail dated

26.06.2015 had agreed to take guarantee of payment on behalf of Empathy.

Attention was adverted to certain other e-mails dated 10.06.2015, 24.06.2015,

and 30.10.2015 which emails indicate that the Respondent had assured to

make good the payment of goods and services rendered by the Appellant to

Empathy for the Nirvana Project. Submission was made that the Adjudicating

Authority had failed to take notice of a series of e-mails exchanged between

themselves which show that the Respondent had undertaken to make payment

Page 5 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 in case its Contractor-Empathy failed to do so thereby assuming the role of a

guarantor. These e-mails clearly demonstrate that the Respondent was a party

in the transaction qua the material supplied by the Appellant and attendant

default.

8. It was vehemently contended that the Adjudicating Authority had

wrongly held that there was no material on record to establish privity of

contract between the Appellant and the Respondent. Further, in support of

their contention that signed agreement is not the only pre-requisite of a valid

contract but that other documents like e-mails etc. can also be seen to infer

the existence of a contract, the Ld. Sr. Counsel for the Appellant has relied on

the judgment of the Hon'ble Apex Court in M/s Trimex International FZE Ltd.

Dubai Vs Vedanta Aluminium Ltd. in Arbitration Petition No. 10 of 2009.

It was therefore asserted that when the Respondent had undertaken to make

payment in case Empathy failed to make the payment, it was incumbent upon

the Respondent to make payment on account of the services rendered by the

Appellant. The Respondent having defaulted in clearing the liability qua the

Appellant, the Section 9 application ought to have been admitted and the

Respondent admitted into CIRP.

9. It is the case of the Respondent that there was no privity of contract

between the Appellant and the Respondent. Further, the Appellant cannot

claim to be an operational creditor of the Respondent since it had not provided

any goods or services to the Respondent directly. It has also been denied that

there was any legally valid contract of guarantee executed between the

Appellant, Respondent and Empathy. Admittedly, no guarantee agreement was

Page 6 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 executed in this regard. Hence the liability of operational debt of Empathy

cannot be fastened on the Respondent by the Corporate Debtor.

10. The primary question before us is therefore to find out whether the

Appellant is an Operational Creditor of the Respondent and whether the claim

of the Appellant is an operational debt qua the Respondent. For better

appreciation of the relationship between the Appellant and the Respondent and

the nature of transactions in question, we may first look into the statutory

provisions of the IBC to find out as to how 'Operational Creditor' and

'Operational Debt' is defined. Section 5(20) of the IBC lays down that, unless

the context otherwise requires, "operational creditor" means a person to whom

an operational debt is owed and includes any person to whom such debt has

been legally assigned or transferred. Section 5(21) provides that "operational

debt" means a claim in respect of the provision of goods or services including

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

for the time being in force and payable to the Central Government, any State

Government or any local authority. From a plain reading of the above definition

of operational debt, it is clear that it is a claim in respect of provisions of goods

or services including dues on account of employment or a debt in respect of

repayment of dues arising under any law for the time being in force payable to

Centre or State Government or local authorities. It is, thus, confined to four

categories viz. goods, services, employment and Government dues. Further the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

under Rule 5(1) provides that any operational creditor can issue a notice in

relation to an operational debt either through a demand notice or by sending

Page 7 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 copy of invoices. Also, an operational creditor who is seeking to claim an

operational debt in a CIRP can rely either on a contract or on an invoice for the

supply of goods and services with the corporate debtor under Regulation

7(2)(b)(i) and (ii) of the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate Persons) Regulations 2016.

11. When we look at the material placed before us, we find that the Appellant

has not placed on record any documentary evidence or agreement between the

Appellant, Respondent and Empathy stipulating the terms and conditions of

the guarantee of payment allegedly undertaken by the Respondent on behalf of

Empathy for the goods supplied to it by the Appellant. It has, however, been

canvassed by the Appellant that there is no need for any signed instrument to

substantiate a contract of guarantee and that the existence of such a contract

can be conclusively established from other correspondences/documents

exchanged between the parties in this context.

12. Coming to the e-mails which have been relied upon by the Appellant to

substantiate their claim that the Respondent had stood guarantee, we find that

consequent to a email dated 10.06.2015 received from the Respondent seeking

competitive quotes from the Appellant for TMT bars, the Appellant on

24.06.2015 had requested the Respondent to issue a letter of

assurance/guarantee of payment and for this purpose had even attached a

format of the guarantee. The relevant extracts of the two emails are as

reproduced below:

From: Kalpesh Sent: Wednesday, June10, 2015; 05:05 PM

Page 8 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 Subject: PISO-EM-Enquiry for TMT bar for June-2015-Nirvana Project.

Dear Sir, We would like to receive your most competitive quotation for below mentioned requirement of TMT bars.

From: Sidharath Saraf Sent: Wednesday, June 24, 2015; 4:24 PM Subject: RE: PISO-EM-Enquiry for TMT bar for June-2015-Nirvana Project.

".....It is my earnest request to kindly issue us a letter of assurance/guarantee of the payment of Empathy Infra for which we would immediately dispatch goods on receipt. A format is attached for your reference...."

Sidharath Saraf (Emphasis supplied)

The Appellant has further adverted attention to another email dated

26.06.2015 from an employee of the Respondent addressed to the Appellant

stating that "Posco E & C will take guarantee of payment for supply of TMT bars

at Nirvana Project if our contractor M/s Empathy fails to pay you." The fourth

document which has been relied upon by the Appellant is dated 19.10.2015.

This document is the minutes of a tripartite meeting purportedly held amongst

the Appellant, the Respondent and Empathy wherein it is recorded that

towards resolving the payment issue, a schedule of payment was worked out

which was to be followed by Empathy. The fifth correspondence adverted to by

the Appellant is a letter from the Respondent, on 30.10.2015, to Empathy

directing them to make payment failing which the Respondent stated that they

would think about 'another way' to make the payment.

Page 9 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024

13. From a reading of the first two emails dated 10.6.2015 and 24.06.2015,

we do not find that any offer for providing a guarantee was made by the

Respondent. To the contrary, this request was made by the Appellant to the

Respondent forwarding a guarantee format to be furnished by them. However,

the Appellant has failed to show that the Respondent had furnished any letter

of guarantee. As regards the third email dated 26.06.2015, Respondent has

questioned the bonafide and legitimacy of the email and submitted that the

email has been issued by an employee of the Corporate Debtor who was not

authorized/empowered to issue such an email and that such unauthorized

emails cannot be the foundation of a contract of guarantee. At this stage,

keeping in view our summary jurisdiction, we do not wish to dwell upon the

charge levelled by the Respondent that the said email was unauthorized and a

creature of misrepresentation. We have perused the said email which has been

placed at page 111 of the Appeal Paper Book ('APB' in short) and find that the

email does not make any mention of Empathy having agreed or consented to

the said guarantee. To our minds, the contents of the email do not reflect any

clear meeting of minds and mutual consent of all the three parties with respect

to the guarantee in question. Now coming to the fourth document dated

19.10.2015 which happens to be the minutes of a tripartite meeting, as placed

at page138 of APB, we find that though the minutes records a schedule of

payment to be followed by Empathy, nevertheless the minutes do not bear the

signature of the parties. As regards the fifth email dated 30.10.2015, we notice

that this email is addressed by the Respondent to Empathy stating that if they

falter in adhering to the payment schedule, strict action would be taken against

Page 10 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 them and that the Respondent "will think about another way" in this regard.

From a plain reading of this email, we are afraid that it cannot be treated as

admission/acknowledgement of any liability on the part of the Respondent

towards the Appellant or that the Respondent had taken the mantle of being a

guarantor to any such liability.

14. In view of our analysis above, we are of the view that the Adjudicating

Authority was not off the mark in observing that the Appellant has failed to

produce any documentary evidence/tripartite agreement stipulating the terms

and conditions of the guarantee of payment undertaken by the Respondent on

behalf of the third party for the goods supplied to it by the Appellant. In the

absence of any privity of contract between the parties, the Appellant cannot be

treated as the Operational Creditor of the Respondent.

15. This now brings us to the issue of the claim of the Appellant being an

operational debt qua the Respondent. It is a well settled legal proposition that

the operative requirement of operational debt is that the claim must bear some

nexus with a provision of goods or services, without specifying who is to be

supplier or receiver. In the present case, the absence of any contractual

agreement between the Appellant and the Respondent, defining their business

relationship is an admitted fact. We find that the Adjudicating Authority in

order to examine whether the Appellant is an Operational Creditor has referred

to the invoices attached to the Section 9 application which in the given factual

matrix was the correct course of action to adopt as invoices undoubtedly

constitute the basic edifice of operational debt. It has been correctly noticed by

the Adjudicating Authority that the invoices attached to the Section 9

Page 11 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 application were not issued by the Appellant but by some other third parties,

namely, Machine & Chemical Industries and G.S.R. Marketing Limited. Thus,

in the facts of the present case, it is undisputed that goods were not supplied

by the Appellant but supplied by some third parties. It is however the claim of

the Appellant that they had supplied the goods through the third parties who

were their local distributors. We are not impressed by the submission made by

the Appellant that the suppliers were their local distributors since there is no

agreement or documents placed on record to show that the goods were to be

supplied by the Appellant through local distributors and that any such

arrangement had been agreed to by Empathy or the Respondent. The assertion

of Appellant is therefore at best a fanciful proposition bereft of any substance.

Since the invoices were raised by third parties and not by the Appellant, basis

these invoices, the Appellant cannot justifiably claim any amount as

purportedly due to them from the Respondent. In any case, these invoices were

not raised against the Respondent but raised against Empathy and hence

liability to pay for the same cannot be fixed on the Respondent without the

specific consent of the Respondent. To cap it all, the goods were also supplied

by the third parties to Empathy and not to the Respondent. Thus, when there

is no co-relation between the goods supplied by the third parties to Empathy

and the claim raised by the Appellant in respect of such goods on the

Respondent, the Appellant/Operational Creditor had clearly failed to fulfil the

requirements of Rule 5(1) of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 to establish their operational claims. The

operative and primary requirements of Section 5(21) not having been met, we

Page 12 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 are therefore not convinced by the contention of the Appellant of their claim

arising out of supply of goods as operational debt. In the absence of operational

debt, no liability could be fastened on the Respondent to pay for these goods.

We therefore hold that the precondition for initiation of Section 9 IBC

proceedings was non-existent in the facts of the present case.

16. It is also pertinent to note that the Respondent has also denied any

liability or dues payable to the Appellant in their reply to the demand notice. It

has been contended that the allegations of existence of debt were false and

concocted as the Respondent was not a party to any transaction involving the

Appellant and that the Section 8 Demand Notice had failed to demonstrate the

basis ingredients of a debt. It may be useful and constructive to peruse the

relevant excerpts of the reply to the Section 8 Demand Notice which is as

extracted hereunder:

"4. Before adverting to the matter in detail, it is to be noted that the Notice is purely an abuse of the process of the law in as much as it is an attempt to coerce the Company into settling a baseless claim in respect of an unsecured contractual payment arising out of a transaction between M/s. Agarwal and one M/s. Empathy Infra and Engineering Pvt. Ltd. ("M/s Empathy"). There is no privity of contract between the Company and M/s. Agarwal, in relation to the said unsecured payment. The entire alleged cause of action set out in the Notice apparently relates to a routine commercial transaction between M/s. Agarwal and M/s. Empathy and POSCO has no privity of contract with respect to the same. The transaction in question was, to the extent known by the Company, a bilateral contractual arrangement between M/s. Agarwal and M/s. Empathy.

5. Furthermore; the allegations in the Notice under response is inconsistent with the actual facts and circumstances. All allegations of existence of a debt are purely false and concocted in nature as the Company is not even a party to the any transaction involving M/s. Agarwal. The Notice fails to demonstrate the basic ingredients of a debt

Page 13 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 and other applicable provisions as provided in the Insolvency and Bankruptcy Code, 2016 (the "Code").

8. The Company would like to reiterate and emphasize upon the fact that there is no privity of contract in existence between M/s. Agarwal and the Company and M/s. Agarwal did not supply any goods or services to the Company, accordingly, M/s. Agarwal does not qualify as an "operational creditor" of the Company under the Code. Therefore, the Code and the procedure prescribed thereunder ought not to be used by M/s. Agarwal as a means of recovery of monies by the M/s. Agarwal in the absence of any debt owed by the Company to M/s. Agarwal as alleged in the false and concocted Notice under response or otherwise."

(Emphasis supplied)

It is, therefore, clear that in the reply to the Section 8 Demand Notice, the

Respondent has not only denied their liability to pay the claims raised by the

Appellant but also raised question marks on the privity of contract between

them.

17. On the aspect of limitation, we find that the Adjudicating Authority has

examined the rival contention of both parties. The Adjudicating Authority has

noticed the reliance placed by the Respondent on the judgment of the Hon'ble

Supreme Court in BK Educational Services Pvt. Ltd. Vs Parag Gupta and

Associates in CA No. 23988 of 2017 wherein it had held that proceedings

under Section 9 of IBC are governed by the provisions of the Limitation Act,

1963. We are satisfied with the findings of the Adjudicating Authority that the

claim of the Appellant was time-barred since the limitation was to be counted

from the date of default which is the point of time on which the cause of action

arose. In the present case, the date of default shown in Part IV of Form 5 was

28.08.2015. However, the Section 9 application was filed on 11.02.2019 which

Page 14 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 was clearly beyond the three years limitation period and hence clearly time-

barred.

18. It is of paramount importance to keep in mind the objectives of IBC which

is, inter-alia, to promote entrepreneurship, maximize value of assets, make

available credit, and balance the interest of all stakeholders, in a time bound

manner. We need to be mindful that no stakeholder takes any undue benefit of

the provisions of the IBC. Interestingly, we find that the Appellant has been

filing multiple Section 9 applications either against the Respondent or against

the Empathy. The first Demand Notice under Section 8 of IBC was issued to

the Respondent on 27.07.2017. The Appellant sent another notice on

11.10.2017 and followed it up with Section 9 application which was however

withdrawn on 08.06.2018. Thereafter, the Appellant sent another Demand

Notice on 17.07.2018 to Empathy and filed a Section 9 application against them

which too was withdrawn on 15.10.2018. Subsequently on 24.10.2018, the

Appellant sent a fresh Demand Notice to Empathy which was followed by a

Section 9 application filed on 11.02.2019. This shows the malafide motive of

the Appellant to keep the Section 9 pot boiling so as to arm-twist the

Respondent which was otherwise a solvent company to illegally extort monies

from them. Thus, the Section 9 application was not filed for the purpose of

insolvency resolution but for recovery of money owed to them by Empathy from

the Respondent. Such behaviour on the part of the Appellant amounts to

misuse of the provisions of the IBC and is strongly deprecated.

19. For the foregoing reasons, we are of the view that the Adjudicating

Authority has rightly rejected the application of the Appellant filed under

Page 15 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024 Section 9 of IBC. We are satisfied that the impugned order does not warrant

any interference. There is no merit in the Appeal. The Appeal is dismissed.

Parties to bear their own costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Arun Baroka] Member (Technical)

Place: New Delhi

Date: 10.09.2024 Harleen Kaur/Abdul

Page 16 of 16 Company Appeal (AT) (Insolvency) No. 1492 of 2024