Naresh Choudhary (Suspended Director ... vs Sterling Enamelled Wires Pvt. Ltd. And ...

Company Appeal (AT)(Insolvency) No. 39 of 2023 & I.A. No.137 of 2023

[Arising out of order dated 03.11.2022 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench-IV in CP(IB) No. 1057 MB- IV/2021]

IN THE MATTER OF:

Naresh Choudhary (Suspended Director of NIK-SAN Engineering Company Ltd.) 19, RC Patel Industrial Estate, Akota, Vadodara, Gujarat - 390007 ...Appellant

Versus

Sterling Enamelled Wires Pvt. Ltd. Shed No.48, Okhla Industrial Area, New Delhi - 110020 ...Respondent No.1

Rakesh Kumar Tulsyan Interim Resolution Professional of NIK-SAN Engineering Company Ltd. B-4, Vinay Tower, Kranti Nagar, Lokhandwala, Kandivali East, Mumbai - 400101 ...Respondent No.2

Present:

For Appellant: Mr. Milan Negi, Mr. Nikhil Jha, Mr. Prateek Gupta, Advocates

For Respondent: Mr. Sandeep Grover, Mr. Tarang Agarwal, Ms. Aashna Agarwal, Advocates for R1

Mr. Vivek Sharma, Advocate for R-2/RP

Company Appeal (AT)(Insolvency) No.39 of 2023

1 JUDGMENT

[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

03.11.2022 (hereinafter referred to as "Impugned Order") passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench -IV) in

CP(IB) No. 1057 MB-IV/2021. By the impugned order, the Adjudicating Authority

has admitted the petition under Section 9 of the IBC and allowed the initiation of

Corporate Insolvency Resolution Process ("CIRP" in short) of the Corporate

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

by the suspended Director of the Corporate Debtor.

2. Briefly put, the Corporate Debtor - Nik-San Engineering Company Ltd.,

which is the present Appellant was engaged in a business relationship with

Sterling Enamelled Wires Pvt. Ltd. - Operational Creditor, the present Respondent

No.1. The Operational Creditor supplied material to the Corporate Debtor for

manufacture of transformers and raised several invoices upon the Corporate

Debtor during February 2020. The Operational Creditor having not received his

outstanding dues issued a demand notice under Section 8 of the IBC on

14.08.2021 claiming an amount of Rs. 2,07,11,209/-. This was followed by filing

of Section 9 application before the Adjudicating Authority leading to the impugned

order which has been challenged by the Corporate Debtor.

3. The Learned Counsel for the Appellant admitting that Section 8 demand

notice had been received by the Corporate Debtor, it was further submitted that

a reply notice of dispute was sent to the Operational Creditor but the receipt

thereto was falsely denied. It was also submitted that the Corporate Debtor had

Company Appeal (AT)(Insolvency) No.39 of 2023

2 raised several disputes regarding sub-standard quality of goods from time to time

which were communicated to the Operational Creditor before the issue of the

demand notice. Though these disputes were subsisting, the Adjudicating

Authority failed to take cognizance of these pre-existing disputes and erroneously

admitted the Section 9 application. It was also submitted that the Adjudicating

Authority had wrongly treated a communication dated 23.07.2021 sent by the

Corporate Debtor to Citi Commercial Bank as an acknowledgment of debt. It was

also pressed that the date of default in respect of the debt claimed by the

Operational Creditor fell during the period 25.03.2020 to 24.03.2021 which

attracted Section 10A of the IBC and therefore stood barred. Submission was also

made that there was no indication of date of default in the demand notice or in

the Section 9 application. This constituted sufficient reason for non-admission of

the Section 9 application.

4. Submitting the rival contentions, the Learned Counsel for the Respondent

No.1 vehemently contended that the letter addressed to the Citi Commercial Bank

by the Corporate Debtor amounts to be a clear and unconditional

acknowledgment of the debt. The debt so acknowledged having not been repaid

by the Corporate Debtor amounts to default and there being clear debt and

default, the Adjudicating Authority had rightly admitted the Section 9 application.

Moreover, since the communications by which disputes were allegedly raised

being anterior to the date on which the Corporate Debtor had unconditionally

acknowledged the debt, these disputes have rightly been held by the Adjudicating

Authority as not sustainable.

5. It has been further pointed out that the Appellant has raised for the first

time before the Appellate Authority a plea that the purchase orders provided for

payment to be made by the Appellant through a Letter of Credit ("LC" in short)

Company Appeal (AT)(Insolvency) No.39 of 2023

3 within a timeframe of 90 days. Using this plea, the Appellant has tried to claim

that the date of default of the invoices fell within the period barred under Section

10A of the IBC. Since this plea was not raised by the Appellant before the

Adjudicating Authority, and such pleas require investigation into facts, it was

contended by the Learned Counsel for the Respondent No.1 that this may not be

entertained by the Appellate Court. Additionally, it was stated that such purchase

orders which had provision for creation of an LC of 90 days have in any case been

excluded by the Operational Creditor and the invoices which have led to the

operational debt did not have an LC of 90 days and hence the date of invoice was

the date of default and this date did not fall within the window of Section 10A of

IBC. It was submitted that these technical objections were being raised by the

Corporate Debtor for the first time before the Appellate Authority which was

merely a ploy to wriggle out of the liability to pay the outstanding debt. An

emphatic assertion was also made that the Appellant did not send any reply to

the Section 8 demand notice nor repaid the outstanding dues and hence the

Adjudicating Authority rightly admitted the Section 9 application.

6. We have duly considered the arguments advanced by both the parties and

perused the records carefully. The short points for determination are whether an

amount exceeding Rs.1 crore was due for payment to the Operational Creditor

and whether such amount was an undisputed debt which had become due and

payable. The other point which deserves consideration is whether the said

operational debt was barred by Section 10A of IBC.

7. It is the contention of the Operational Creditor that the Corporate Debtor

had unequivocally acknowledged the operational debt of Rs.2,07,11,209/- in their

letter dated 23.07.2021 to Citi Commercial Bank. Earlier to this acknowledgment

sent to the Citi Commercial Bank, it has also been pointed out that an email dated

Company Appeal (AT)(Insolvency) No.39 of 2023

4 13.05.2021 was sent by the Corporate Debtor to the Operational Creditor

acknowledging that an amount of Rs.2,15,20,344/- was outstanding and agreeing

to make 7.5% extra payment towards these dues.

8. We notice that both these communications have been taken cognizance of

by the Adjudicating Authority and reproduced at paras 23 and 24 of the impugned

order. Basis the above communications, the findings returned by the Adjudicating

Authority is as reproduced below: -

"25. On perusal of the aforesaid email, this Bench observed and have the clear picture in mind that the Corporate Debtor acknowledges the amount due which is to be repaid by the Corporate Debtor to the Operational Creditor. Thus, it clearly shows that there is a clear debt and default by the Corporate Debtor in repaying the outstanding amount with respect to pending invoices (supra) to the Operational Creditor."

9. From a plain reading of the above communications, there arises no doubt

that the Corporate Debtor had acknowledged the outstanding amount which was

due and payable to the Operational Creditor. Not only was the outstanding

amount acknowledged but an assurance had also been given by Corporate Debtor

to clear the said amount and make extra payment towards old outstanding dues.

10. This now brings us to the issue of pre-existing disputes which have been

raised by the Corporate Debtor. It is the contention of the Appellant that four

emails had been sent to the Operational Creditor on 23.06.2020, 20.07.2020,

18.08.2020 and 17.09.2020 pointing out the defects in the goods supplied by

them besides requesting the Operational Creditor to carry out inspection and

verification of the sub-standard quality of goods supplied which request had not

been complied to. Hence, the disputes raised by the Corporate Debtor remained

unresolved. In the light of the fact that disputes continued to subsist, it has been

contended that the operational debt claimed by the Operational Creditor was a

disputed debt and hence not admissible under Section 9 of IBC. Company Appeal (AT)(Insolvency) No.39 of 2023

5

11. It is an undisputed fact that letters of dispute had been raised by the

Corporate Debtor on several occasions. Since these letters pertain to the period

June 2020 to September 2020, there is no dispute that these pertain to a period

prior to the date of demand notice. The Adjudicating Authority at Para 20 of the

impugned order has taken notice of these communications but also noted in Paras

21 and 22 that subsequent to these communications, the Corporate Debtor has

acknowledged his liability on 23.07.2021. The relevant paragraphs are reproduced

below for easy convenience.

"20. The Corporate Debtor vide their letters dated 24.06.2020, 20.07.2020, 23.07.2020, 18.08.2020 and 17.09.2020 addressed to the Operational Creditor submits that the quality of materials supplied were not good and raised a contention that there is a pre-existing dispute as per section 8 (2) of the Code before filing the captioned company petition.

21. Further, the Corporate Debtor after their letters dated 24.06.2020, 20.07.2020, 23.07.2020, 18.08.2020 and 17.09.2020 regarding inferior quality of goods, sent a letter to the CITI Commercial Bank on 23.07.2021 thereby certified that invoices amounting to Rs.2,07,11,209/- raised by Corporate Debtor are outstanding as per their books.

22. The Corporate Debtor vehemently denied the fact that the letter sent to CITI Commercial Bank amount to acknowledgement of debt. On perusal of letter dated 23.07.2021, this Bench observed that the contents written in the letter dated 23.07.2021, clearly shows that the Corporate Debtor acknowledged the invoices as per their books of account as on 23.07.2021 and also promised/confirmed that they will clear the said invoices. Hence, the contention with regard to pre-existing dispute is not sustainable on perusal of letter dated 23.07.2021 and hence rejected."

12. We are inclined to agree with the findings of the Adjudicating Authority that

at the time of acknowledging the outstanding operational debt, the question of

any pre-existing dispute having subsisted lacks foundation. This is validated by

the fact that the Corporate Debtor has sent a communication dated 29.04.2021

which is seen at page 234 of the Appeal Paper Book ("APB" in short) wherein the

Company Appeal (AT)(Insolvency) No.39 of 2023

6 Corporate Debtor has clearly admitted their inability to clear the outstanding debt

as they were facing difficulties in maintaining their cash flow without any trace or

reference to disputes.

13. The only defence which has been raised by the Appellant to contend that

there were pre-existing disputes surrounding the outstanding debt is their email

dated 13.05.2021 wherein they had agreed to pay 15% extra payment towards old

outstanding amount of Rs.2,15,20,344/- to the Operational Creditor by adding a

rider "subject to our claim lodged with you". This defence is prima-facie a weak

defence since this rider was in any case admittedly withdrawn in a subsequent

email sent on the same date. Furthermore, we find that that the rider "subject to

the claims lodged" is a very generic statement without any specific reference to

past disputes and thus devoid of plausibility. Objections in terms of "claims

lodged", if relatable to existing disputes, should have been brought to the pointed

notice of the Operational Creditor which has clearly not happened in the present

case. Reliance also placed on the judgments of this Tribunal in Sanjay

Bhausaheb Bhange vs. Khushbu Dye Chem Private Limited in Company

Appeal (AT) (Ins.) No. 621 of 2022 and XYKno Capital services Pvt Ltd vs

Rattan India Power Ltd in Company Appeal (AT) (Ins.) No. 913 of 2022.

However, the facts are distinguishable as in those cases the Corporate Debtor had

not acknowledged outstanding amount unlike the present case where the

outstanding debt has been clearly admitted. Hence these judgements do not come

to the aid of the Appellant.

14. We are of the considered view that when the Corporate Debtor had admitted

the outstanding debt and agreed to pay the same, it amounts to clear

acknowledgment of debt being due and payable and belies the existence of any

dispute.

Company Appeal (AT)(Insolvency) No.39 of 2023

7

15. This brings us to the second issue for determination as to whether the debt

arising out of the invoices fell during the period which attracts the bar of Section

10A of IBC. It is the case of the Appellant that the Operational Creditor has not

provided the date of default either in the Section 8 demand notice or in the Section

9 application. Further, it has been stated that payments were to be made by the

Corporate Debtor by way of LC which was to be created within 90 days from each

invoice and hence the date of default would be 90 days post the date of each such

invoice. Since the Appellant had not created any LC within a period of 90 days

the default occurred on the 90th day from the day of invoice. After calculating the

90th day of these invoices, it has been contended that the date of default arises

between 01.05.2020 to 29.05.2020 which clearly falls in the ambit of Section 10A

and hence barred from being subject to IBC proceedings.

16. Refuting the above, it has been submitted by the Learned Counsel for the

Respondent No.1 that the Corporate Debtor had placed four purchase orders

which find place at pages 272-275 of APB. Of the four purchase orders, only two

purchase orders (3rd and 4th purchase orders) make reference to the creation of

LC of 90 days. As regards the other two purchase orders (1st and 2nd purchase

orders), there was no such stipulation of 90-day LC. Hence in respect of these two

purchase orders, the date of default was the date of invoice. It was stated that the

invoices raised under the 4th purchase order were anyways already excluded. It

was further submitted that even if the 3rd and 4th purchase orders are excluded,

the first two purchase orders cumulatively amount to default which is above the

threshold limit of Rs.1 crore necessary for filing an insolvency application. We are

satisfied with the reasoning offered by the Operational Creditor and do not find

any force in the contention of the Appellant.

Company Appeal (AT)(Insolvency) No.39 of 2023

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17. We have no hesitation in observing that in the present case, all requisite

conditions necessary to trigger CIRP under Section 9 stands fulfilled with

operational debt having been acknowledged and default committed thereto and

there being no real pre-existing disputes discernible from given facts. For the

foregoing reasons, we are of the view that the Adjudicating Authority has rightly

admitted the application of the Operational Creditor filed under 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. No order as to costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 16.08.2023

PKM

Company Appeal (AT)(Insolvency) No.39 of 2023

9