M/S. Shree Dhanvantari ... vs Konkan Ayur Pharma Private Limited & Ors

M/s. Shree Dhanvantari Pharmaceuticals ...Appellant

Vs

M/s. Konkan Ayur Pharma Private Limited ...Respondent

(Arising out of Order dated 07.02.2024 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench) in CP (IB) No.1309/MB- IV/2022, INVP 44 of 2023 and INVP 46 of 2023)

For Appellant: Mr. Gaurav Kumar, PCS Alpa Jain, Mr. Kishanathan Siva Kumar and Ms. Sree Kumar, Advocates

For Respondent: Mr. Jack Thalakottur, Advocate for R1. Mr. Vikas Londhe, Advocate for R2 & R3

JUDGEMENT

Per Justice N. Seshasayee, Member (Judicial)

The present Appeal is preferred challenging an Order dated, 07.02.2024, passed

by the Adjudicating Authority (NCLT - IV, Mumbai Bench) in CP (IB)

No.1309/MB-IV/2022 dismissing an application filed by the appellant under

Section 7 of the IBC.

1 Backdrop Facts

2. The Appellant is a partnership firm engaged in the development,

manufacture and trading of Ayurvedic medicines. The Corporate Debtor

was incorporated on 27.08.2008 under an AYUSH cluster initiative

promoted by the Government of India. The other material facts which are

relevant for the current purpose are:

a) Appellant claims to have advanced loans to the first

respondent/corporate debtor on multiple occasions, which aggregates

to ₹.2,26,45,568/- and it remained unpaid, and together with interest

calculated @ 18% per annum, a sum of ₹.3,55,54,900/- became due

and payable.

b) While so, on 14.05.2022, appellant issued a demand notice calling

upon the corporate debtor to repay the outstanding amount. Upon

failure of repayment, the appellant instituted the present petition under

Sec. 7 of the Code before the Adjudicating Authority, for initiating a

CIRP.

c) During pendency of the petition, Respondent No:2 and 3, both partner

or legal representative of a deceased partner of the appellant firm, took

out Intervenor Petition 44 of 2023 and 46 of 2023 respectively and

opposed the initiation of CIRP against the first respondent and

questioned the authority of the persons who had instituted the

proceedings.

d) Eventually, vide an Order dated 07.02.2024, the Adjudicating Authority

dismissed the Section 7 application holding that there is lack of clarity

2 regarding the date of default besides absence of material explaining the

nature of the transaction, and that the petition suffered from want of

proper authority and it arose out of disputes amongst the partners of

the Appellant firm.

Arguments

3. The learned Counsel for the Appellant contended:

a) the Adjudicating Authority erred in dismissing the Section 7

Application without examining the existence of financial debt and

default and instead proceeded on the basis of disputes allegedly

existing amongst the partners of the Financial Creditor. Indeed, it has

overlooked the fact that the corporate debtor has acknowledged the

debt due and payable to the appellant.

b) by order dated 13.07.2023, the Adjudicating Authority permitted

amendment of Part-IV of Form-I with respect to the date of default.

Pursuant thereto, an additional affidavit was filed specifying

30.05.2022 as the date of default, which provides requisite clarity

which the Adjudicating Authority has observed.

c) if the Adjudicating Authority found the Application to be defective in

any other respect, an opportunity ought to have been granted to cure

such defects instead of dismissing the petition, since the defects noticed

are curable, and could not have formed the basis for dismissal of the

proceedings at the threshold.

d) the Adjudicating Authority travelled beyond the scope of Section 7

proceedings by entertaining Intervention Applications filed by

3 Respondent Nos. 2 and 3 and by considering issues unrelated to debt

and default. During pre-admission stage, no third-party intervention is

contemplated and, therefore, the Intervention Applications filed by

Respondents 2 and 3 ought not to have been entertained. Indeed,

respondent No.3 is merely the legal representative of a deceased

partner, and he could not be treated as a partner of the firm, for the

partnership deed does not enable it. Very unfortunately, the

Adjudicating Authority has entertained issues questioning the

authority of partners, interpretation of the Partnership Deed and

disputes inter se amongst the partners, which, needless to state, go far

beyond the scope of the enquiry contemplated under Section 7.

e) So far as the authority of the firm to institute the petition under Sec.7

IBC, after the demise of one among the four partners (whose son is the

3rd respondent), three partners remained, and the petition under Sec.7

was instituted with two, who constituted the majority of the surviving

partners, consenting to it.

4. The learned counsel for the first Respondent contended:

a) no financial debt within the meaning of Section 5(8) of the Code has

been established by the Appellant since there exists no contract or loan

agreement, repayment schedule, due date, interest stipulation or any

other document evidencing a borrowing arrangement between the

parties. The amounts advanced were in the nature of financial

assistance extended to support the corporate debtor and were never

intended to constitute a financial debt. Indeed, the amount in question

4 was consistently reflected in the books of the Corporate Debtor as

sundry creditors, and not as financial borrowings. The financial

statements containing such disclosures were signed by Shri

Nandkishore Jaynarayan Jethale, who is one of the partners of the

appellant firm, while he was also the director of the corporate debtor.

b) the Demand Notice dated 14.05.2022 claimed only the principal

amount of Rs.2,26,45,568/- and contained no claim for interest. The

claim towards interest was raised for the first time in the Section 7

Application.

c) So far as the finding of lack of clarity as to date of alleged default to

repay what the appellant alleges as loan, the petition proceeded on the

basis that 31.03.2019 was the date of default, the additional affidavit

subsequently mentioned 30.05.2022 as the date of default. Needless to

state, there is material inconsistency in the case set up by the

appellant. The default under Section 3(12) of the Code arises only when

a debt has become due and payable and remains unpaid, whereas

neither the due date nor the event of default has been established in

the present case.

5. Learned Counsel for the 2nd respondent contended:

a) The Section 7 Application as well as the present Appeal have been

instituted without proper authority from all the partners of the

appellant firm. A partnership firm does not have a juristic entity and

proceedings instituted in the name of the firm, in substance, is

proceedings on behalf of all its partners. Reliance was placed on the

5 ratio in Purushottam Umedbhai & Co. v. Manilal & Sons [AIR 1961

SC 325] and Bombay Trading Co. v. Jai Santoshi Maa Enterprises

[2012(6) Mh.L.J]. The letter of authority that accompanied both the

petition under Sec.7 IBC and also the present appeal bears the

signatures of only two partners and not all the partners. The second

respondent opposed the filing of the Section 7 Application from its

inception and had filed Intervention Petition No.44 of 2023.

b) Indeed, disputes exist amongst the partners regarding repayment of

monies advanced to the Corporate Debtor, charging of interest and the

conduct of the affairs of the partnership. Clause 31 of the Partnership

Deed contains an arbitration clause governing disputes amongst

partners and any such dispute is required to be resolved in the manner

contemplated therein.

6. The learned counsel for the 3rd respondent adopted the submissions

advanced on behalf of Respondent No.2 and further contended:

a) Respondent No.3 is the legal representative of late Shri Mahendra

Mohanlal Sharma, who was one of the equal partners of the Appellant

firm.

b) No steps have been taken by the surviving partners to settle the share

and rights of the deceased partner in accordance with the terms of the

Partnership Deed.

c) the surviving partners cannot deal with the assets and interests of the

partnership while disregarding the rights of the estate of the deceased

partner.

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d) Respondent No.3 has a legitimate interest in protecting the estate of the

deceased partner and was therefore entitled to oppose the filing of the

Section 7 Application.

e) disputes relating to authority, rights of partners, settlement of accounts

and management of partnership affairs are governed by Clause 31 of

the Partnership Deed and are required to be resolved through

arbitration.

f) the present proceedings cannot be maintained without first resolving the

disputes arising amongst the partners and persons claiming through

them in accordance with the mechanism prescribed under the

Partnership Deed.

Discussion & Decision

7. There indeed are two aspects: (a) Has the Adjudicating Authority

overstepped the scope of enquiry when it is required to examine merely the

existence of a financial debt and the occurrence of default; (b) the other is

an anterior question and it relates to the authority of the petitioner

invoking the insolvency jurisdiction.

On the issue of Authorisation

8. Second issue first, and to reiterate it relates to the authority to institute a

petition under Sec.7. The petitioner/appellant is a partnership firm,

which came into existence vide a deed of partnership dated 14.07.1992

and is constituted of four partners. Of them, one of the partners, who is

the father of the 3rd respondent herein (one of the interveners) has died.

Of the remaining three, two are on one side, and the third one (the second

7 respondent herein) is on the other. While the majority partners have

decided to institute Sec.7 IBC, the second respondent opposes the move.

9. Before, delving into the adequacy of the decision of the two among three

surviving partners to institute a petition for commencing CIRP against the

corporate debtor, the right of the third respondent to intervene in the

matter is taken up for consideration. Has he a locus standi? The rights,

duties and obligation of the partners emanate from the partnership deed

that they have entered into. It is not in dispute that the father of the 3rd

respondent was a partner. How does the partnership deed deal with the

death of a partner? Clause 14 of the partnership deed provides that on the

death of a partner during the continuance of partnership, his nominee

shall be admitted to partnership provided such nominee is acceptable to

other surviving partners. And, clause 13 provides that lunacy, insolvency,

or death or retirement of any of the partners "shall not dissolve the

partnership, and the partnership shall be continued by the continuing or

surviving parties.." This would imply that the death of the father of the

3rd respondent would not ipso facto dissolve the partnership, and that only

a nominee of the deceased partner, who need not necessarily be his son,

is not automatically admitted to partnership, but only when he is found

acceptable to other surviving partners and is admitted to partnership. If,

however, any dispute arises between a heir of a deceased partner to be

admitted into the partnership, such dispute instantly assumes civil law

overtones, and the dispute can be resolved only by a civil court.

Admittedly, the third respondent is not yet admitted into the partnership

8 and assuming he were a nominee of his father, and if finds any resistance

from other partners to be inducted into the partnership, he only acquires

a cause of action for instituting a civil suit before appropriate civil court.

This tribunal is neither vested with the jurisdiction to take cognizance of

any such disputes, nor has it the requisite authority to decide it. Suffice

to state, unless the third respondent is a partner of the firm, he cannot

have locus standi to intervene.

10. The next aspect pertains to the resistance of the 2nd respondent to the

decision of the other two partners to institute the petition under Sec.7 IBC.

As stated earlier, there are three partners now, and the decision to file the

petition was taken by the majority of two partners. Sec.12 (c) of the

Partnership Act, 1932, instructs that, 'any difference arising as to ordinary

matters connected with the business may be decided by a majority of the

partners, and every partner shall have the right to express his opinion before

the matter is decided, but no change may be made in the nature of the

business without the consent of all the partners". If this provision is briefly

analysed, it contemplates two categories of decisions: (a) matters

connected with the business of the firm; and (b) matter relating to the

change of very business of the firm. The first part of Sec.12(c) concerns

itself with business-decision of the firm, of which we are also concerned in

this case, and it instructs that it will be decided by a majority, but only

underscores that every partner must have a right to voice his/her opinion

before the majority takes a decision. Indeed, Clause 29 of the Partnership

Deed also reflects this idea. It reads: "All the questions affecting the

9 partnership business insofar as no contrary provisions in this Deed, shall,

as far as possible, be decided unanimously; upon failing to obtain such

unanimity, each partner shall have one vote, and the question shall be

decided by majority. In case of equality of votes, the view of the senior most

partner shall prevail and be binding on all the parties." Admittedly, the

decision to institute a Sec.7 petition was taken by a majority, and

necessarily it binds the 2nd respondent. And, if the second respondent has

any grievance that the resolution of the majority-partners is invalid or void,

it can only be remedied by a civil court and not by us. Now, of the two

partners who constitute the majority one has signed the petition, but as

rightly contended by the appellant, under Sec.18 of the Partnership Act,

every partner is an agent of the other partner and under Sec.22 of the Act,

if an act of a partner should bind the firm, then such act should have been

done in the name of the firm. Therefore, the authority of Nandkishore

Jaynarayan Jethale to institute the petition under Sec.7 cannot be

questioned, since he has done the act in the firm's name. The next aspect

is whether both the partners who constitute the majority should sign the

petition. Here, Rule 4 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016, read with Form 1, is silent. When

the procedural law is silent on it, then one necessarily has to fall back on

the substantive law, the Partnership Act, and it enables one partner to act

for all. Therefore, looking from every conceivable angle, we find no merit

in the contention of the first respondent on the issue of authorisation.

10 On Merits

11. The contention of the corporate debtor is that the money which the

appellant has claimed to have advanced as a loan is not a debt, and that

it is only a financial assistance. In other words, the contention of the

corporate debtor appears to be that what was paid to it by the appellant is

not a debt. The second defence taken was on the discrepancy in the date

of default as shown in Part IV of the petition and the uncertainty it has

created as the date of default was changed from 31.03.2019 to 30.05.2022

by the appellant vide affidavit dated 13.07.2023.

12. Turning to the first aspect, the appellant relies on the balance sheet of the

corporate debtor for the years 2015-2016 and 2016-2017 wherein the

appellant was shown as sundry creditors under the head current

liabilities. This would imply that the contention of the corporate debtor

that the appellant did not advance any loan for time value of money but

only 'financial assistance' finds itself on a slippery wicket. The corporate

debtor contends that its balance sheet was signed by the very person, who

has now filed the petition under Sec.7 IBC. The corporate debtor having

admitted the receipt of money from the appellant, it may not matter that

the one who has signed the balance sheet of the debtor is also a partner of

the lender firm, the legal relationship between the parties can still be

distinct. In our efforts to ascertain these facts, we probed the ledger

account of the corporate debtor in the books of account of the appellant.

It covers the period from 12.06.2010 to 31.03.2019. And there was

apparently no transaction thereafter. This is fortified by the fact that in

11 Part IV of Form I of the petition under Sec.7, the appellant has chosen to

detail the debt for the five financial years closing on 31.03.2015 to

31.03.2019. What could now be derived from this is that the money which

the corporate debtor has received from the appellant is intended to be

repaid. If this is taken alongside the classification of appellant as sundry

creditor in the balance sheet of the corporate debtor, lends credence to the

fact that the amount paid by the appellant to the corporate debtor

constitutes only a debt. The fact that there is no formal agreement

between the parties is of no consequence, for a loan transaction does not

require a formal agreement.

13. The second aspect relates to payment of interest. The ledger account

which the appellant has produced does not show any interest component

within the amount paid by the corporate debtor. Here two facts are

required to be noted: (a) Payment of interest is not sine qua non for

constituting a debt vide ratio in M/s Orator Marketing Pvt. Ltd vs. M/s

Samtex Desinz Pvt. Ltd [(2021) ibclaw.in 68 SC] ; and (b) In Part IV, the

principal account shown to be due from the corporate debtor itself is

shown to be ₹.2,26,45,568/- which very obviously exceeds the threshold

limit of ₹. 1.0 crore. Therefore, even if the interest component is excluded,

Sec.7 petition can still be sustained.

14. The next aspect is on the date of default. The Impugned Order shows that

the date of default was noted in the main petition as 31.03.2019, and only

vide an affidavit dated 13.07.2023, it was changed to 30.05.2022. When

we perused Part IV of Form I, in the column where date of default is

12 required to be given, the same is not seen to have been given, and indeed,

we could not find anywhere in the petition under Sec.7, where the date

31.03.2019 is indicated as date of default. What then is the date of

default?

15. Date of default may not have sanctity except in computing the period of

limitation. As stated earlier, the nearest ascertainable date from which

the default has commenced was from 31.03.2019, the last date of

transaction between the parties, which to repeat even the appellant relies

on in part IV of his petition. If that is so, then the terminus a quo for

computing limitation would commence from 31.03.2022, and the petition

under Sec.7 should have been filed on or before that date. However, the

appellant has issued the notice of demand, dated 14.05.2022 on the

corporate debtor, mailed it on 17.05.2022 (gathered from the affidavit of

the appellant, dated 13.07.2023), and laid its petition under Sec.7 in

August 2022. Very evidently, the debt has become time barred and

necessarily Sec.7 petition cannot be maintained. Now, if the affidavit dated

13.07.2023 is perused, while it gives the date of default as 30.05.2022, it

does not explain, how? It appears that the date 30.05.2022 is artificially

given, and we do not find any support for it from the materials available

before us.

16. We therefore, concur with the finding of the Adjudicating Authority on the

uncertainty of date of default, and have also demonstrated how it impacts

the point on limitation. Necessarily we arrive at the same conclusion which

13 the Adjudicating Authority has arrived, and accordingly the appeal will

stand dismissed. No costs.

[Justice N. Seshasayee] Member (Judicial)

[Arun Baroka] Member (Technical) rs/beena

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