Oyster Steel & Iron Pvt. Ltd vs Brilliant Metal Pvt. Ltd

Company Appeal (AT)(Insolvency) No. 1089 of 2022

[Arising out of order dated 20.06.2022 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi, Bench-IV, in C.P. (IB) No.3151(ND)/2019]

IN THE MATTER OF:

Oyster Steel and Iron Pvt. Ltd. 102, First Floor, Roots Tower, Laxmi Nagar, Delhi - 110 092 ...Appellant

Versus

Brilliant Metals Private Limited A-7/1, Jhilmil Industrial Area, G.T. Road, Shahdara, New Delhi - 110 095

Also At: C-30, First Floor, Prithviraj Road, Adarsh Nagar, Delhi - 110 033 ...Respondent

Present:

For Appellant: Mr. Rajat Jain, Mr. Prashant Tripathi, Advocates.

For Respondent: Mr. Praveen Mahajan, Advocate

JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of the Insolvency and Bankruptcy

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

20.06.2022 (hereinafter referred as 'Impugned Order') passed by the Adjudicating

Authority (National Company Law Tribunal, Bench-IV, New Delhi in CP(IB) Company Appeal (AT)(Insolvency) No. 1089 of 2022

1 No.3151(ND)/2019. By the impugned order, the Adjudicating Authority

dismissed the application filed by Operational Creditor (the present Appellant)

under Section 9 of the IBC seeking initiation of Corporate Insolvency Resolution

Process ('CIRP' in short) against Corporate Debtor-Brilliant Metals Private Limited

(the present Respondent). Aggrieved by the impugned order, the present appeal

has been preferred by the Operational Creditor.

2. Making his submissions on the factual background of the case, the Learned

Counsel for the Appellant, pointed out that the present matter emanates from the

business relationship wherein the Respondent/Corporate Debtor purchased

copper wire rods from the Appellant/Operational Creditor. The sales made by the

Operational Creditor to the Corporate Debtor were in the nature of in-transit sales.

In this sale-purchase process, while the Corporate Debtor placed the purchase

order upon the Operational Creditor, it was submitted that the Operational

Creditor in turn would place an order on its own supplier, Vedanta Limited.

Vedanta Limited, in turn, would supply goods directly to the Corporate Debtor as

a consignee of the Operational Creditor. The Operational Creditor on meeting the

orders placed by the Corporate Debtor would raise invoices.

3. It was further added that the Operational Creditor maintained a running

account of the supplies made to the Corporate Debtor while the Corporate Debtor

made lumpsum payments to the Operational Creditor to meet outstanding dues

in the running account. The last lumpsum payment received by the Operational

Creditor from the Corporate Debtor against outstanding dues in the running

account was Rs.24 lakhs on 15.03.2018.

Company Appeal (AT)(Insolvency) No. 1089 of 2022

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4. Submitting that out of total goods supplied worth Rs.10,58,62,877/-, an

amount of Rs.5,15,41,000/- remained unpaid as principal debt, it was added that

the invoices for the outstanding dues pertained to the period 05.06.2015 to

30.06.2015 as per running account maintained between the Operational Creditor

and Corporate Debtor. Further, the Learned Counsel for the Appellant submitted

that the credit period of payment allowed to the Corporate Debtor was 120 days

from the date of transaction and interest was levied @ 18% per annum on late

payment. Since a principal amount of Rs.5,15,41,000/- remained outstanding on

goods claimed to have been supplied to the Corporate Debtor, the

Appellant/Operational Creditor sent a Demand Notice under Section 8 of IBC on

06.09.2019. Admitting that the Corporate Debtor had replied to the demand

notice denying their liability to make any payments, however, it was contended

that their denial to make payment was a bald denial without any supporting

documents and lacked credible basis. It was also argued that besides the issuance

of Form-C and TDS certificate in Form 26AS which clearly established purchases

made by the Corporate Debtor, the consignment invoices raised by Vedanta

Limited to the Appellant also evidences the supply of goods to the Corporate

Debtor.

5. It has been further vehemently contended that no evidence/document was

produced by the Corporate Debtor to validate their stand that payments were not

outstanding on their part. The Corporate Debtor's counsel emailed ledger of the

Corporate Debtor to the counsel of the Operational Creditor on the same day on

which the final arguments were heard by the Adjudicating Authority. It has been

contended that ledgers were filed belatedly after completion of pleadings and after

the matter had already been reserved for orders. Therefore, the Operational Company Appeal (AT)(Insolvency) No. 1089 of 2022

3 Creditor never got an opportunity to respond to the said ledgers which were filed

behind their back in the Court. Hence it was stated that the Adjudicating

Authority committed an error in relying upon these ledgers filed by the Corporate

Debtor.

6. The Learned Counsel for the Respondent refuting the submissions of the

Operational Creditor submitted that the Corporate Debtor received a demand

notice under Section 8 of IBC on 06.09.2019. However, the Corporate Debtor sent

a reply to the Demand Notice on 24.09.2019 denying all outstanding liabilities

and stating that nil payment was due to the Appellant/Operational Creditor. It

was further added that this nil payment was reiterated by the Corporate Debtor

in their reply to the Section 9 application on 03.03.2020 in categorical terms that

no sum was payable to the Operational Creditor.

7. It was also pointed out that the invoices raised by the Appellant were

provisional invoices and therefore the amounts indicated therein were not final. It

is also contended that the invoices of the Operational Creditor were not

acknowledged by the Respondent since the invoice prices were always provisional.

It was pointed out that the conduct of the Operational Creditor was not in

accordance with the natural conduct of commercial business and trade practices

as the final amount due was to be arrived at only after taking into account the

difference between the provisional invoice and the settled rate and the difference

between the two were captured by debit notes. Further, the ledger account of the

Operational Creditor was not supported by any acknowledgment by the Corporate

Debtor and was a self-styled and self-serving document fabricated by the

Operational Creditor. The Learned Counsel for the Respondent also pressed hard

Company Appeal (AT)(Insolvency) No. 1089 of 2022

4 that the claim of interest @ 18% per annum was an arbitrary claim as there was

no contract between the parties for payment of interest. It was also mentioned

that they had raised debit notes on account of short supply of contracted quantity

by the Operational Creditor and that on adjusting the debit notes with the claimed

amount, no liability survived against the Respondent.

8. We have duly considered the arguments and submissions advanced by the

Learned Counsel for the parties and perused the records carefully.

9. Before dwelling on the facts of the case, we may look into the statutory

scheme of IBC in respect of operational debt. Section 8 of the IBC requires the

Operational Creditor, on occurrence of a default by the Corporate Debtor, to

deliver a Demand Notice in respect of the outstanding Operational Debt. Section

8(2) lays down that the Corporate Debtor, within a period of 10 days of the receipt

of the Demand Notice, would have to bring to the notice of the Operational

Creditor, the existence of dispute, if any. Post issue of demand notice by the

Operational Creditor, if the Operational Creditor does not receive payment from

the Corporate Debtor or notice of the dispute under Sub-section (2) of Section 8,

he may file an Application under Section 9(1) of the Code.

10. In the present case, Section 8 demand notice was admittedly issued on

06.09.2019 to which the Corporate Debtor had replied on 24.09.2019 denying

liability to pay. It is also an undisputed fact in the present matter that the

Operational Creditor did not receive any payment from the Corporate Debtor

thereafter and, therefore, proceeded to file an application under Section 9 of IBC

following which the Corporate debtor filed reply affidavit on 03.03.2020.

Company Appeal (AT)(Insolvency) No. 1089 of 2022

5

11. It is the case of the Appellant that the Corporate Debtor had issued Form C

to the Operational Creditor on 18.05.2016 certifying the purchases by detailing

the bill numbers, dates of transactions and value of goods and that these are

identical to the record maintained by the Operational Creditor in its ledger thus

establishing operational debt. It is the contention of the Appellant that the very

fact that the Form C was issued shows that the contracted amount of goods has

been delivered. The Learned Counsel for the Appellant relying on the judgment of

the Hon'ble High Court of Delhi in Chemical Systems Technologies (India) Pvt.

Ltd. Vs. Simbhaoli Sugar Mills Ltd., 2013 SCC Online DEL 416 submitted

that issue of Form C is acknowledgment of having purchased the goods of value

thereof. The Learned Counsel for the Appellant also stated that the Corporate

Debtor was required to clear debts within 120 days of the sale transactions in

terms of an oral agreement and that the Corporate Debtor was liable to pay

interest on late payment @ 18% per annum from the date of sale transaction which

was mentioned on the invoices issued.

12. The Learned Counsel for the Respondent countered the submission of the

Appellant and stated that issuance of Form C/TDS is akin to statutory compliance

and does not fall under the category of acknowledgment of liability. At best, it is

a proof of receipt of invoices. The Learned Counsel for the Respondent further

contended that the Operational Creditor had not produced any statement of

account or balance sheet of the Corporate Debtor where the amount alleged to be

claimed by the Operational Creditor is shown as admitted or acknowledged as

debt in favour of the Operational Creditor. The claim is based upon mere surmises

without any concrete evidence. It was also contended that the Section 9

Company Appeal (AT)(Insolvency) No. 1089 of 2022

6 application was not maintainable as the alleged invoices were never acknowledged

by the Corporate Debtor and were generated by the Operational Creditor.

13. We are of the considered view that there is sufficient weight in the stand

taken by the Corporate Debtor that merely on the basis of TDS, no operational

debt liability can be fastened on the Corporate Debtor. Moreover, such an

assumption would fail to take into account disputes, if any, raised with regard to

adjustment of prices or quality of goods or delay in delivery of goods.

14. We next notice that it is the contention of the Appellant that the reply of

the Corporate Debtor to the Section 8 notice has merely denied the dues but is

bereft of details on how the debts have been discharged. It has also been

contended that the Respondent failed to bring to the notice of the Operational

Creditor any pre-existing disputes in respect of the said operational debt.

Moreover, the Corporate Debtor had failed to take steps to pay off the operational

debt post-receipt of the demand notice and hence the Section 9 application was

filed. Learned counsel for the Appellant also claimed that no debit notes had ever

been received by the Operational Creditor and there were no discussions for

agreement regarding alleged adjustments on account of difference in rates or on

account of any alleged short supply and that this issue has been raised for the

first time in the reply to Section 9 application.

15. It has also been asserted by the Learned Counsel for the Appellant that the

Adjudicating Authority committed an error in relying upon the ledgers filed by the

Corporate Debtor in their defence. It was argued that these ledgers were never

brought on record with the pleadings/reply of the Respondent and that they were

placed before the Adjudicating Authority after the matter had already been Company Appeal (AT)(Insolvency) No. 1089 of 2022

7 reserved for judgment and that too without the permission of the Adjudicating

Authority. These ledgers were not even relied upon during the oral arguments

made by the Corporate Debtor before the Adjudicating Authority.

16. We are not convinced about this line of argument as we note from the print-

out of the filing history of the case numbered IB-3151/ND/2019 titled M/s Oyster

Steel and Iron Pvt. Ltd. V. M/s Brilliant Metals Pvt. Ltd. as downloaded from DMS

of NCLT which has been filed by way of additional affidavit by the Appellant as

Annexure A-18 that the Respondent had submitted the ledger account on

18.05.2022. Since the matter was virtually heard, there is no reason to doubt that

the ledger was not available to the Adjudicating Authority. Moreover we cannot

lose sight of the fact that the Adjudicating Authority has clearly held in para 6 of

the impugned order that it has perused all the averments made in the application,

reply, and rejoinder and additional affidavits filed by the parties.

17. Now coming to the facts of the present case, we notice that after demand

notice was sent by the Operational Creditor on 06.09.2019, reply dated

24.09.2019 was sent by the Corporate Debtor disputing the demand categorically

denying that any debt is due on the Corporate Debtor. In the instant case, it was

emphasized that where there is no acknowledgment of any sort of liability, the

mere raising of invoices in the name of Corporate Debtor cannot create either a

right to payment or right to remedy under law. The Section 9 cannot be triggered

for non-existing debt or for disputed debts.

Company Appeal (AT)(Insolvency) No. 1089 of 2022

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18. It will be useful at this stage to notice the reply dated 24.09.2019 to the

Section 8 demand notice as under:

Date: 24.09.2019

To A.K. Vali & Co., (Advocate) Chamber No.31, Lawyers Chambers, Supreme Court of India, Tilak Marg, Delhi 110001

Subject: Reg. Demand notice in respect of unpaid operational debt due to Oyster Steel & Iron Pvt. Ltd. under the Insolvency and Bankruptcy Code, 2016.

Respected Sir,

I, Amit Gupta, Director of Brilliant Metals Pvt. Ltd., received your demand notice Dt. 06.09.2019 demanding payment of an unpaid operation debt due from Brilliant Metals Pvt. Ltd. to Oyster Steel & Iron Pvt. Ltd.

In this respect, we would like to inform you that as on date we have nothing to pay to Oyster Steel & Iron Pvt. Ltd. as per Books of Accounts of Brilliant Metals Pvt. Ltd.

As on today's date, account ledger balance of Oyster Steel & Iron Pvt. Ltd. as per Books of Accounts of Brilliant Metals Pvt. Ltd. stands at Nil.

Kindly acknowledge our submissions.

Thanking You,

Yours Faithfully

For Brilliant Metals Pvt. Ltd.

(Emphasis supplied)

19. It was further pointed out by the Learned counsel for the Respondent that

in the reply to Section 9 application, it has been contended that the Operational

Creditor had failed to supply the contracted quantity to the Corporate Debtor and

that on account of the said short supply, a debit note had been raised upon the

Operational Creditor. It has also been claimed that invoices were always Company Appeal (AT)(Insolvency) No. 1089 of 2022

9 provisional invoices and the amount stated therein not being final, there was

never any acknowledgment of the alleged invoices raised by the Operational

Creditor. Moreover, the final amount could be arrived at only after taking into

account difference between the rate settled and rate in provisional invoice, the

difference of which was captured by debit notes and that at page 235 of the

Appeal Paper Book, the ledger account of the Corporate Debtor clearly reflected

rate difference column. These debit notes had been handed over to the

Operational Creditor and therefore in the reply to demand notice on 24.04.2019,

it was clearly mentioned that there were no dues against them. It was also pointed

out that the interest claimed apart from being exorbitant was also unilateral as

provision for interest was not contracted between the parties. The Operational

Creditor had not only failed to establish debt due from the Corporate Debtor but

had also failed to provide the date of occurrence of default for initiating insolvency

proceedings. The intent of the Operational Creditor was entirely geared towards

recovery of time barred debts and not for insolvency resolution.

20. In result it is therefore clear that there existed signs of dispute between the

parties. It is well settled that Section 9 of IBC can be invoked only if no notice of

dispute has been received by the Operational Creditor. In the present case, it has

been clearly disputed by the Corporate Debtor. The invoices having been disputed,

they require detailed consideration which is beyond the ambit of the Adjudicating

Authority since IBC only provides for summary proceedings and not a full

throttled trial.

21. At this stage, it may be useful to reproduce relevant excerpts of the

Impugned Order wherein the Adjudicating Authority has held as follows: -

Company Appeal (AT)(Insolvency) No. 1089 of 2022

10

6. We have heard Ld. Counsel for the parties. We have perused the

averments made in the application, reply, and rejoinder and

additional affidavits filed by the parties. We are of the view that the

proceeding under Section 9 of the I&B Code can only be initiated after

delivery of the demand notice, upon the 'Corporate Debtor', under

Section 8(1) of the Code, and on the occurrence of the default. Section

3(11) defines "debt" as a liability or Application in respect of a claim

which is due from any person and includes Financial Debt and

Operational Debt. Section 3(12) defines "default" as non-payment of

debt when whole or any part or instalment of the amount of debt has

become 'due and payable' and is not paid by the Debtor or the

Corporate Debtor as the case may be. Further, under Section 8(1) of

the Code, an Operational Creditor can deliver a demand notice only

upon the occurrence of a 'default'.

7. In the instant case, the Operational Creditor had not filed a copy of

the bank statement. Instead of filing the relevant document, the

Operational Creditor had solely placed reliance on invoices raised by

the operational creditor, Form '26AS' and Form 'C' dated 18.05.2016.

Considering that a running account is maintained, considering the

manner in which such businesses are conducted and accounts are

kept, it would be material to consider the amount due would be

arrived at after taking into account the difference between the rate

settled and rate in provisional invoice. The corporate debtor vide its

reply to the demand notice dated 24.09.2019 have categorically

denied that that the corporate debtor have nothing to pay to the Company Appeal (AT)(Insolvency) No. 1089 of 2022

11 operational creditor. The Corporate debtor had placed on record the

ledger statement of the operational creditor in the books of account of

Corporate Debtor for the year financial years 2015-16, 2016-17,

2017-18 which evidently shows that around 26 debit notes were

issued in the financial year 2016-17 by the corporate debtor to the

operational creditor on account of short supply, difference between the

rate settled and provisional invoice. Further, the corporate debtor

made payment of the remaining balanced amount to the operational

creditor in tranches, consequently the last and final payment of

Rs.24,00,000/- was made by the corporate debtor to the operational

creditor on 15.03.2018 as evident from the books of accounts.

8. From the perusal of the facts and documents on record we find that

there is no crystallization of claim as there is no debt due or owed and

default occurred, which is the sine qua for admission of under Section

9 of the Code. The two essential requirements, i.e. existence of 'debt'

and 'default', for admission of a petition under Section 9 of the code,

2016, has not been met in this case. Accordingly, the present petition

(IB-3151/(ND)/2019) stands dismissed, as to no order to cost."

(Emphasis supplied)

22. Having regard to the factual matrix of the present case, we are satisfied that

the Adjudicating Authority has correctly recorded the findings that the

Operational Creditor having not filed any bank statement and that there was no

acknowledgment of debt on the part of the Corporate Debtor, this is not a fit case

for admission of Section 9 application. We also do not find any material to have Company Appeal (AT)(Insolvency) No. 1089 of 2022

12 been placed on record by the Operational Creditor wherein the Corporate Debtor

can be said to have admitted the operational debt claimed by the Appellant at any

stage. Moreover, in view of running account maintained between the parties and

taking note of trade practice, Adjudicating Authority has made no error of

judgment in recording the findings that the amount between the parties had not

crystallized and therefore the essential ingredients of debt and default was missing

in the present matter. For such disputed operational debt, Section 9 proceeding

under IBC cannot be initiated at the instance of the Operational Creditor. Where

operational creditor seeks to initiate insolvency process against a Corporate

Debtor, it can only be done in clear cases where no real dispute exists between

the two which is not so borne out given the facts of the present case.

22. Given this backdrop, we are satisfied with the findings of the Adjudicating

Authority. In view of the foregoing discussion, we are of the view that the

Adjudicating Authority did not commit any error in rejecting the Section 9

Application filed by the Appellant. The impugned order does not warrant any

interference. There is no merit in the Appeal. Appeal is dismissed. No order as to

costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 18.04.2023

PKM

Company Appeal (AT)(Insolvency) No. 1089 of 2022

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