Mr. Arun Mittal vs Sun Control Systems & Anr

NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Insolvency) No. 298 of 2022 [Arising out of order dated 28.02.2022 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi, Bench-VI in (IB)- 2185/(ND)/2019]

IN THE MATTER OF:

Mr. Arun Mittal Member of the Suspended Board of Directors of Aarcity Infrastructure Pvt. Ltd. A-201 Omaxe Forest SPA, Sector 93-B, Noida - 201301. ...Appellant

Versus

1. Sun Control Systems Plot No. 88, Phase-IV, Sector-57, Kundli, Sonipat, Haryana - 131028. .... Respondent No.1

2. Mr. Arun Chadha Interim Resolution Professional 727, Brahmpuri, Meerut Uttar Pradesh - 250002. ....Respondent No.2

Present: For Appellant: Mr. Abhijeet Sinha, Mr. Kunal Godhwani, Advocate. For Respondent: Mr. Bhuvan Arora, Mr. Ramesh Gupta, Mr. Aakash Bhardwaj, Advocates for R-1. Mr. Sanjay Pal, Mr. Rishi Sood, Advocates for IRP. Mr. Parv Garg, Mr. Pawas Kulshreshtha, Mr. Piyush Hans, Advocates for Interveners (I.A. No. 2606/2022) Mr. Harsh Pratap Shahi, for itervener in I.A. No. 1697 of 2022

Company Appeal (AT) (Insolvency) No. 298 of 2022

1 JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal, filed u/s 61 of the IBC Code, 2016 ('IBC' in short) by

the Appellant arises out of order dated 28.02.2022 (hereinafter referred to as

'Impugned Order') passed by the Adjudicating Authority (National Company Law

Tribunal, Delhi Bench-VI) in C.P.(IB) No. 2185(ND)/2019. By the Impugned

Order, the Adjudicating Authority admitted the Section 9 application under IBC

filed by the Operational creditor and initiated Corporate Insolvency Resolution

Process ('CIRP' in short) against the Corporate Debtor with immediate effect.

Aggrieved by this impugned order, the present appeal has been preferred by the

Corporate Debtor.

2. The brief facts of the case necessary to be noticed for deciding the appeal

are :-

(a) The Corporate Debtor, Aarcity Infrastructure Pvt. Ltd., present Appellant

issued a Work Order to Sun Control Systems, Operational Creditor/ Respondent

No. 1 to supply and install UPVC Profile of doors and windows including

toughened glasses of Tower-A (81 Units) and Tower - F (86 Units) @ Rs. 376.50/-

per sq. ft. in the Regency Park Project of the Corporate Debtor/Appellant. This

work order was issued on 10.06.2016.

Company Appeal (AT) (Insolvency) No. 298 of 2022

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(b) The Corporate Debtor issued another work order on 05.05.2017 to supply

and install UPVC Profile of doors and windows including toughened glasses for

Tower-D (60 Units) of the above project @ Rs. 333/- per sq. ft.

(c) On 16.08.2017 another work order for additional work at Tower-A and

Tower-D was also issued.

(d) The payment terms for the work orders are as follows:-

a) 30% advance along with order;

b) 50% after delivery of material at site;

c) 15% after installation at site;

d) 5% retention after six months of completion of installation;

e) Work Contracts Tax (WCT) and Tax Deduction at Source (TDS) to be

deducted as per Rules; and

f) Service Tax to be paid extra as applicable.

(e) The details of the Purchase Orders Invoices, Debit Notes and RA bills

alongwith Invoice nos. as raised by Respondent No. 1 have been taken due note

of by the Adjudicating Authority in Para 1 (iii) of the impugned order.

(f) The present Respondent No. 1 filed an application before the

Adjudicating Authority under Section 9 of the Insolvency and Bankruptcy Code,

2016 ('IBC' in short) seeking to initiate CIRP against the Corporate Debtor on Company Appeal (AT) (Insolvency) No. 298 of 2022

3 27.08.2019. This was preceded by Statutory Demand Notice under Section 8

of IBC sent by Respondent No. 1 to the Corporate Debtor on 03.06.2019

claiming Rs. 56,38,850/-(Rupees fifty six lakh thirty eight thousand eight

hundred fifty only) as operational debt. The Corporate Debtor replied to the

Demand Notice on 10.06.2019 mentioning that more than 50% of work not

having been completed and there being defects in the execution of work,

payment for entire work cannot be demanded.

(g) The Adjudicating Authority vide impugned order dated 28.02.2022 came

to the conclusion that there being clear indication of an operational debt due

from the Corporate Debtor and the Corporate Debtor having defaulted in

making payment of the debt due and further in the absence of any pre-existing

dispute relating to the said debt, admitted the Section 9 application filed by

Respondent No. 1 and ordered initiation of CIRP.

(h) Aggrieved by the above order of the Adjudicating Authority, the Corporate

Debtor/Appellant has preferred this Appeal praying for termination of CIRP

process initiated against the Corporate Debtor.

3. The Learned Counsel for Appellant while introducing his arguments

submitted that in the present case before admitting the Section 9 application,

the Adjudicating Authority ought to have first satisfied himself that an

operational debt was actually in existence, and that the said debt had become Company Appeal (AT) (Insolvency) No. 298 of 2022

4 due and payable. Stating that examination by the Adjudicating Authority on the

dispute aspect of the debt is only of secondary importance, Learned Counsel for

the Appellant in support of his contention referred to the judgement of Hon'ble

Supreme Court in the matter of Mobilox Innovations Pvt. Ltd. Vs. Kirusa

Software Private Limited (2018) 1 SCC 353 (hereinafter referred to as

'Mobilox') Elaborating further that the scope of work order was not limited to

mere supply of UPVC profile of doors and windows alongwith toughened glasses

but also for installation of the same, he argued that as the Respondent No. 1 had

not carried out the installation work in its entirety, therefore, the payment

terms were not triggered. In the absence of installation of goods, the payment

demanded by the Respondent No. 1 under Section 8 Notice was therefore neither

due nor payable. The Learned Counsel for Appellant has contended that without

ascertaining the debt being due and payable, the Corporate Debtor has been

wrongly subjected to the rigors of CIRP.

4. It has been further submitted that against bills for Rs. 1,18,61,393/-

(Rupees one crore eighteen lakhs sixty one thousand three hundred ninety three

only) raised by the Respondent No. 1, the Appellant has already paid a sum of

Rs. 92,62,856/- (Rupees ninety two lakhs sixty two thousand eight hundred fifty

six only) which roughly accounts for 80% of the invoice amount which

corresponds with the payment terms. The remaining 20% amount of Rs.

23,72,279/- (Rupees twenty three lakhs seventy two thousand two hundred

seventy nine only) was withheld because installation work was not completed Company Appeal (AT) (Insolvency) No. 298 of 2022

5 and that the amount so withheld was in consonance with the terms of payment

which provided for 15% payment to be made after installation and 5% payment

after 06 months of installation. Further stating that the amount payable to the

Respondent No. 1 is only Rs. 2,26,258/- (Rupees two lakhs twenty six thousand

two hundred fifty eight only), it has also been added that this amount however

has neither been accepted nor demanded by Respondent No. 1 from the

Corporate Debtor/Appellant towards final settlement and hence not paid. It has

also been argued that the Adjudicating Authority should not have relied upon

the contents of an unsigned Memorandum of Understanding ('MoU' in short) as

admission of debt. Though it had been sent to the Respondent No.1 by the

Corporate Debtor, it was an outside court settlement without prejudice to the

rights of parties.

5. The Learned Counsel for Appellant vehemently objected to the outstanding

amount of Rs. 56,38,550/- (Rupees fifty six lakhs thirty eight thousand five

hundred fifty only) claimed by the Respondent No. 1 as bogus, sham and illegal.

It was pointed out that the Respondent No. 1 by his own admission had

completed installation only in 49 flats of Tower-A and 20 flats in Tower-D as

reflected at paras 8 and 12 at pages 3 and 4 of his reply and hence the amount

claimed in the Section 8 demand notice as operational debt had not became

due. It has been further pointed out that in respect of Tower-F, though the

Respondent No.1 has claimed that installation has been carried out in two flats,

no invoice has been raised. It has been also pointed out that Respondent No.1 Company Appeal (AT) (Insolvency) No. 298 of 2022

6 having admitted that the installation work could be carried out and completed

only wherever openings for installation of UPVC doors and windows were ready

indicates that installation work was not fully completed. Moreover, it has been

argued that the work order was in respect of a composite contract and the

installation amount is payable only after complete installation at the respective

towers and not flat-wise installation. Hence payment was not triggered and

therefore no debt was either due or payable. It has also been claimed that the

Corporate Debtor/Appellant had to engage third party to complete the

installation work as the same could not be completed by the Respondent No.1.

The Learned Counsel for Appellant has also contended that the Respondent No.

1 had charged price over and above what was specified in the work order.

6. Submission has also been made that the claim of Respondent No.1 that

only Rs. 83,93,717/- (Rupees eighty three lakhs ninety three thousand seven

hundred seventeen only) has been paid by the Corporate Debtor is false and

baseless as it does not take into account part payment made towards WCT and

TDS amounting Rs. 3,77,407/- (Rupees three lakhs seventy seven thousand four

hundred seven only). Explaining that further payments could not be made

because of non-reconciliation of accounts and submission of final invoices,

reliance has also been placed on judgment of this Tribunal in Amitabh Roy Vs.

Master Development Management(India)Pvt. Ltd. in Company Appeal

(AT)(Ins.) No. 274 of 2022 that default in WCT and TDS payment cannot be a

ground for invoking Section 9 of IBC.

Company Appeal (AT) (Insolvency) No. 298 of 2022

7

7. Refuting the submissions of the Appellant, the Learned Counsel for

Respondent No.1 has claimed that against total invoices raised amounting Rs.

1,18,61,078/- (Rupees One crore eighteen lakhs sixty one thousand seventy

eight only), a total of Rs. 94,88,862/- (Rupees ninety four lakhs eighty eight

thousand eight hundred sixty two only) being 80% of the work order amount had

become due and payable as material had already been delivered on site as per

payment terms. As against this, payment received was Rs. 83,93,717/- (Rupees

eighty three lakhs ninety three thousand seven hundred seventeen only) only

which accounts for only 70% of invoices raised. It has therefore been claimed

that payment of Rs. 10,95,145/- (Rupees ten lakhs ninety five thousand one

hundred forty five only) was due and payable and continues to remain unpaid.

It has been further claimed that out of the withheld amount of Rs. 23,72,215/-

(Rupees twenty three lakhs seventy two thousand two hundred fifteen only),

payment had become due and payable for Rs. 14,64,843/- (Rupees fourteen

lakhs sixty four thousand eight hundred forty three only) since 92 out of 149

flats had already been completed in Tower - A (66 units) and Tower-D (26 units)

as per admission made by Corporate Debtor/Appellant at pg. 140-142 of Appeal

Paper Book. It has been admitted that installation in respect of 2 flats in Tower-

F has been completed though invoice could not be raised. The total amount

claimed to be in debt and default is Rs. 56,38,850/- (Rupees fifty six lakhs thirty

eight thousand eight hundred fifty only) including interest upto 31.05.2019.

Company Appeal (AT) (Insolvency) No. 298 of 2022

8

8. Learned Counsel for Respondent No.1 has also stated that the claim of

Corporate Debtor/Appellant that payment of Rs. 92,62,856/- (Rupees ninety two

lakhs sixty two thousand eight hundred fifty six only) has been made is incorrect

as substantiated by bank statement at pages 62-81 in Reply Paper Book of

Respondent No. 1 indicating receipt of only Rs. 83,93,717/- (Rupees eighty three

lakhs ninety three thousand seven hundred seventeen only) thus leaving an

outstanding amount of Rs. 8,69,139/- (Rupees eight lakhs sixty nine thousand

one hundred thirty nine only). Further, it has been pointed that payments which

were made to a third party have been wrongly shown in the ledger statement of

Respondent No.1 and therefore these amounts need to be discounted. Further

deductions of Rs. 3,77,407/- (Rupees three lakhs seventy seven thousand four

hundred and seven only) made towards WCT and TDS by the

Appellant/Corporate Debtor have not actually been deposited. Pointing out a few

other instances where higher payments have been claimed while actually lesser

amount has been remitted by Corporate Debtor/Appellant, it has been submitted

that these are cases of intentional misrepresentation.

9. As regards the issue of exorbitant rate having been charged by the

Respondent No. 1, this has been rebutted as a frivolous ground since no such

dispute was raised prior to issue of demand notice. Pointing out that the

Corporate Debtor/Appellant has failed to adduce any documentary evidence to

substantiate the existence of any dispute prior to issue of demand notice, the

Learned Counsel for the Respondent No.1 relied on the ratio of the Mobilox Company Appeal (AT) (Insolvency) No. 298 of 2022

9 judgment (supra) that dispute raised should not be an assertion of fact

unsupported by evidence or a feeble legal argument.

10. The Learned Counsel for the Respondent No.1 has further contended that

the Corporate Debtor/Appellant has clearly admitted that it owes an amount of

Rs. 2,26,258/- (Rupees two lakhs twenty six thousand two hundred fifty eight

only) to the Respondent No.1 and the said amount remains unpaid and being

more than the minimum threshold of Rs. 1 lakh, default has been triggered. In

support of his contention, he referred to the judgment of the Hon'ble Apex Court

in M/s Innoventive Industries Ltd. Vs. ICICI Bank & Anr (2018)1 SCC 407

that default is defined in Section3(12) in very wide terms as meaning non-

payment of a debt once it becomes due and payable, which includes non-

payment of even part thereof or an instalment amount.

11. We have duly considered the detailed arguments and submissions

advanced by the Learned Counsel for both the parties and perused the records

carefully.

12. The short point for our consideration is whether payment to the

Operational Creditor/Respondent No. 1 as per work order is triggered in the

present case giving rise to an operational debt, and if so, whether a default has

been committed by the Corporate Debtor/Appellant in respect of payment of

such operational debt having already become due and payable and whether the

said operational debt exceeds an amount of Rs. 1 lakh and is an undisputed Company Appeal (AT) (Insolvency) No. 298 of 2022

10 debt. This examination would be in consonance with the test which has been

laid down by the Hon'ble Supreme Court in Mobilox judgment(supra) for the

Adjudicating Authority while examining an application under Section 9, the

relevant excerpts of which are as follows:-

"34. Therefore, the adjudicating authority, when

examining an application under Section 9 of the Act will have

to determine:

(i) Whether there is an "operational debt" as defined

exceeding Rs. 1 lakh? (See Section 4 of the Act)

(ii) Whether the documentary evidence furnished with

the application shows that the aforesaid debt is due and

payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between the

parties or the record of the pendency of a suit or arbitration

proceeding filed before the receipt of the demand notice of

the unpaid operational debt in relation to such dispute?

If any of the aforesaid conditions is lacking, the application

would have to be rejected. Apart from the above, the

adjudicating authority must follow the mandate of Section 9,

as outlined above, and in particular the mandate of Section

9(5) of the Act, and admit or reject the application, as the case

Company Appeal (AT) (Insolvency) No. 298 of 2022

11 may be, depending upon the factors mentioned in Section

9(5) of the Act."

13. It is an admitted fact that three separate work orders were issued on

10.06.2016, 05.05.2017 and 16.08.2017 for supply and installation of UPVC

profile of doors and windows including toughened glasses on payment terms as

at para 2(d) above. Based on the said purchase orders, the Respondent No.1

raised invoices from 22.09.2015 till 28.12.2018 which have been duly recorded

by Adjudicating Authority at para 1(iii) of the impugned order. Without going

into the intricacies of minutely examining the account statements, the ledger

accounts relied upon by the appellant (at pages 143-146 of the Appeal Paper

Book) and also by the Respondent No. 1 in his written submissions before the

NCLT (at pages 178-181 of the Appeal Paper Book) has also been considered by

us alongwith other material records. It is further noted that while the Corporate

Debtor/Appellant has claimed that bills raised against these invoices amounts

to Rs. 1,18,61,393/- (Rupees one crore eighteen lakhs sixty one thousand three

hundred ninety three only) the Respondent No.1 has claimed an amount of Rs.

1,18,61,078/- (Rupees one crore eighteen lakhs sixty one thousand seventy

eight only). The variance between the two figures being nominal, we choose to

ignore the difference. We, however, find that while Corporate Debtor/Appellant

has claimed to have paid Rs. 92,62,856/- (Rupees ninety two lakhs sixty two

thousand eight hundred fifty six only), the Respondent No. 1 has claimed to

Company Appeal (AT) (Insolvency) No. 298 of 2022

12 have received only Rs. 83,93,717/- (Rupees eighty three lakhs ninety three

thousand seven hundred seventeen only). It is pertinent to note that the

Corporate Debtor/Appellant has admittedly held back an amount of Rs.

23,72,215/- (Rupees twenty three lakhs seventy two thousand two hundred

fifteen only) on the ground that 15% payment was to be released after

installation and 5% amount as defect liability to be released after 6 months.

Again, by their own admission, we note that the Corporate Debtor/Appellant

has submitted at page 141 of the Appeal Paper Book that the Respondent No.1

completed installation in 92 out of 149 flats which accounts for 62% completion

of installation work. It logically follows that Respondent No.1 was entitled to

receive 62% payment from out of the retained amount, on pro-rata basis for the

completed installations. If that be the case, then payment to the tune of Rs

14.70 lakhs had become due and payable as per payment terms and for which

invoices had also been raised. The contention of the Appellant that payment was

to be made only after full installation was completed in the respective towers

and not on flat-wise completion cannot be acceded to for the following reasons.

Firstly, it fails to explain why composite payment was not insisted upon tower-

wise for the 80% amount for material delivery and RA bills were accepted.

Secondly, from a plain reading of the payment terms, we do not find any

embargo having been placed on the Operational creditor from claiming flat-wise

payments as long as the installation was complete.

Company Appeal (AT) (Insolvency) No. 298 of 2022

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14. Furthermore, we are in agreement with the assertion made by the Learned

Counsel for Respondent No. 1 that Corporate Debtor/Appellant has in any case

admitted that it owes an operational debt amounting Rs. 2,26,258/- (Rupees

two lakhs twenty six thousand two hundred fifty eight only) to Respondent No.1

which is yet to be paid. The explanation given by Corporate Debtor/Appellant

for not releasing this payment to Respondent No. 1 is that this amount has not

been demanded by them and that they have not agreed to accept this amount

as a final payment. To our mind, this is a lame excuse to posit a justification

to cover grounds for not having paid an admitted debt that had become due and

payable. Moreover, when the operational debt had already arisen and become

due, and invoice was also raised, in such circumstances, merely placing of

conditions prior to release of payment, does not alter the colour and character

of the operational debt and does not detract from its having become due and

payable. The above findings clearly establish that the first two conditions laid

down in the Mobilox judgment supra of operational debt exceeding Rs. 1 lakh

and having become due and payable but not yet paid is squarely met.

15. This now brings us to the third aspect as to whether there is existence of

dispute between the parties. Records reveal that no disputes were raised prior

to the issuance of statutory demand notice on 03.06.2019 under Section 8 of

the IBC. There is no exchange of correspondence raising any dispute prior to

issue of demand notice. We note that three grounds have been raised but all

post issue of demand notice. One ground is that there are defects in the work

Company Appeal (AT) (Insolvency) No. 298 of 2022

14 executed which was contained in the reply to the demand notice sent on

10.06.2019. However, it is a cryptic letter and does not flesh out any details

and therefore lacks sufficient gravitas. The second ground as cited in the same

reply dated 10.06.2019 is that 50% work is not completed but again no

supporting documents are available on record to show exchange of any

sustained correspondence with the Operational creditor having taken place in

this regard prior to issue of demand notice. The other ground raised is that of

exorbitant rates being charged by the Operational creditor but that too has also

been raised post issue of demand notice. There is nothing on record to suggest

that the Corporate Debtor/Appellant raised any such dispute before receipt of

invoices or at any period prior to the issue of demand notice. Thus even on the

third test laid down by Mobilox judgment supra we find that there is nothing

credible to substantiate the pre-existence of dispute.

16. At this stage we would also like to refer to the judgment of the Hon'ble

Apex Court in "Vidarbha Industries Power Limited Vs. Axis Bank Limited in

Civil Appeal No. 4633 of 2021 MANU/SC/0874/2022" explaining the

provisions of Sections 7 and 9 of the IBC as the precepts laid down therein are

also attracted in this case. The Hon'ble Supreme Court in the above matter

observed and held:

"76. The fact that Legislature used 'may' in Section 7(5)(a) of

the IBC but a different word, that is, 'shall' in the otherwise

almost identical provision of Section 9(5)(a) shows that 'may' and

Company Appeal (AT) (Insolvency) No. 298 of 2022

15 'shall' in the two provisions are intended to convey a different

meaning. It is apparent that Legislature intended Section 9(5)(a)

of the IBC to be mandatory and Section 7(5)(a) of the IBC to be

discretionary. An application of an Operational Creditor for

initiation of CIRP Under Section 9(2) of the IBC is mandatorily

required to be admitted if the application is complete in all

respects and in compliance of the requisites of the IBC and the

Rules and Regulations thereunder, there is no payment of the

unpaid operational debt, if notices for payment or the invoice has

been delivered to the Corporate Debtor by the Operational

Creditor and no notice of dispute has been received by the

Operational Creditor. The IBC does not countenance dishonesty

or deliberate failure to repay the dues of an operational creditor.

xxx xxx xxx

78. The Legislature has consciously differentiated between

Financial Creditors and Operational Creditors, as there is an

innate difference between Financial Creditors, in the business of

investment and financing, and Operational Creditors in the

business of supply of goods and services. Financial credit is

usually secured and of much longer duration. Such credits, which

are often long term credits, on which the operation of the

Corporate Debtor depends, cannot be equated to operational

Company Appeal (AT) (Insolvency) No. 298 of 2022

16 debts which are usually unsecured, of a shorter duration and of

lesser amount. The financial strength and nature of business of

a Financial Creditor cannot be compared with that of an

Operational Creditor, engaged in supply of goods and services.

The impact of the non-payment of admitted dues could be far more

serious on an Operational Creditor than on a financial creditor.

79. As observed above, the financial strength and nature of

business of Financial Creditors and Operational Creditors being

different, as also the tenor and terms of agreements/contracts

with financial creditors and operational creditors, the provisions in

the IBC relating to commencement of CIRP at the behest of an

Operational Creditor, whose dues are undisputed, are rigid and

inflexible. If dues are admitted as against the Operational

Creditor, the Corporate Debtor must pay the same. If it does not,

CIRP must be commenced....."

17. From the aforesaid discussion and analysis of facts and circumstances,

we are of the considered opinion that the Corporate Debtor/Appellant has

defaulted in the payment of operational debt, of an amount exceeding Rs 1 lakh,

which amount had clearly become due and payable, and further in the absence

of any pre-existing dispute, we find that no error has been committed by the

Adjudicating Authority in admitting the application under Section 9 of IBC and

initiating CIRP. We find no merit in this Appeal. Appeal is dismissed. No Costs.

Company Appeal (AT) (Insolvency) No. 298 of 2022

17 A clutch of homebuyers in Aarcity Regency Park have filed I.A. No. 2585/2022

in Company Appeal (AT)(Ins.) No. 298 of 2022 and prayed that IRP be directed

to not interfere with peaceful possession and enjoyment of property by the home

buyers and that funds collected from them for maintenance should not be

utilized for construction. The main appeal petition having been dismissed, we

are of the considered view that this Tribunal need not pass any orders on the

I.A.. With this, I.A. No. 2585 of 2022 stands disposed of, the applicant is at

liberty to file an appropriate application before the Adjudicating Authority in the

pending Company petition.

(Justice Ashok Bhushan) Chairperson

(Justice M. Satyanarayana Murthy) Member(Judicial)

(Barun Mitra) Member(Technical) Place: New Delhi Date: 20.09.2022 shashi

Company Appeal (AT) (Insolvency) No. 298 of 2022

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