P.M. Mahendran vs Tharuvai Ramachandran Ravichandran & ...

For Appellant: Appeared but did not give appearance

For Respondent: Mr. Ajay Kohli, Advocate

JUDGMENT

(22nd November, 2019)

KANTHI NARAHARI, MEMBER(TECHNICAL)

The appeal is arising out of the impugned order dated 28th

May, 2019 passed by the Adjudicating Authority (National Company

Law Tribunal, Division Bench), Chennai admitting the application

filed by the 2nd Respondent herein under Section 9 read with Rule-

6 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to

as 'IBC').

2. Learned Counsel for the Appellant challenged the said order

on the ground that the application filed by the 2nd Respondent

herein is not maintainable in view of the reason that there is

existence of dispute prior to issuance of Demand Notice by the 2nd

Respondent.

3. Learned Counsel for the Respondent submitted that the 2nd

Respondent supplied and delivered the materials in pursuance to

the Purchase Orders made by the 3rd Respondent and the 3rd

Respondent had defaulted in making payments.

4. Both the Counsel put forth their arguments extensively.

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 2 of 16

5. Heard learned Counsel appearing for the respective parties.

Perused the pleadings and documents. The Adjudicating Authority

admitted the application, vide order dated 28th May, 2019 with the

following observations:

...

7. For there being material aplenty reflecting the contract is in between the Operational Creditor and the Corporate Debtor and the supplies were made by the Operational Creditor to the Corporate Debtor basing on the purchase orders raised by the corporate debtor and the Corporate Debtor in turn made part payments to the Operational Creditor without raising any defence as stated now, we hereby hold that it is a fit case for admission, therefore this Company Petition is hereby admitted by appointing Dr. L. Natarajan as Interim Resolution professional, looking at the consent given by him with directions as follow:

(I) That Moratorium is hereby declared prohibiting all of the following actions, namely,

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, Tribunal Arbitration panel or other Authority;

(b) Transferring encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or benefits interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 3 of 16 action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)

(d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the Corporate Debtor. (II) That the supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during moratorium period.

(II) That the provisions of sub-section (1) of Section 14 shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. (IV) That the order of moratorium shall have effect from 28.05.2019 till the completion of the corporate insolvency resolution process or until this Bench approves the resolution plan under sub section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, as the case may be.

(V) That the public announcement of the Corporate Insolvency Resolution Process shall be made immediately as specified under Section 13 of the Code.

(VI) That this Bench hereby appoints Dr. L. Natarajan, as Interim Resolution Professional (Registration No. IBBI/IPA-001/IP-P00614/2017-18/11108, having office at No. 21, Jambulingam Street, Nungambakkam, Chennai - 600 034 E-Mail:

natrajan1@yahoo.com with his consent to carry the functions as mentioned under The Insolvency & Bankruptcy Code.

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 4 of 16

(Emphasis Supplied)

...

6. From the perusal of the impugned order, learned Adjudicating

Authority relied upon the Purchase Orders and a Memorandum of

Understanding (in short 'MOU') entered between the Operational

Creditor and the Corporate Debtor on 08.09.2018. From the perusal

of the Form-V filed by the Operational Creditor, i.e., 2nd Respondent

herein a claim of an amount of Rs. 41,94,575/- along with interest

of Rs. 3,97,742/- was made. The transactions as per the Form is

that Operational Creditor had supplied 64 nos. of Roof Top Units (in

short "RTU") vide Purchase Order dated 06.09.2018 and additional

materials were supplied vide another Purchase Order dated

08.09.2018. Pursuance to the Purchase Orders, invoices were raised

to the tune of Rs. 6,06,00,347/-. Further the Operational Creditor

and the Corporate Debtor had entered into an MOU dated

08.09.2018. In terms of this MOU, Operation Creditor supplied 57

nos. RTU and in terms of the said MOU, Corporate Debtor should

have completed the payment of Rs. 4,84,80,278/- before dispatch of

32 units of RTU. However, the Operational Creditor received only Rs.

3,68,34,560/-. Hence the parties have entered this MOU dated

08.09.2018 to confirm the clear understanding between them.

Further, it is seen that the Corporate Debtor issued post-dated

cheque dated 20.09.2018 for Rs. 2,37,65,787/-.

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 5 of 16

7. The contention of the Operational Creditor is that the cheque

which was issued by the Corporate Debtor bounced on 26.09.2018.

The Operational Creditor in their e-mail dated 04.10.2018

addressed to the Corporate Debtor stated that they have received a

sum of Rs. 102.50 lakhs and requested the Corporate Debtor to

clear the amount by RTGS.

8. The Operational Creditor issued Demand Notice dated

04.12.2018 to the Corporate Debtor claiming an amount of Rs.

72,53,278/- relying on the Purchase Orders and the MOU dated

08.09.2018. The only issue is whether there is a pre-existing of

dispute prior to issuance of the Demand Notice dated 04.12.2018 or

not? From the perusal of the correspondence between the

Operational Creditor and the Corporate Debtor, it is evident that the

Corporate Debtor raised the dispute with regard to the quality of the

material prior to the issuance of Demand Notice dated 04.12.2018.

A. Now we deal with the issue with regards to the pre-

existence of dispute.

9. From the documents at page 128, Annexure-A7, a letter from

Factum Law Advocates to King and Partridge, Advocates dated

13.11.2018 whereby the Lawyers of Corporate Debtor i.e., M/s A.M.

Clean Air Engineering Private Limited replied to the notice dated

25.10.2018 issued by the Operational Creditor under Section 138 of

the Negotiable Instruments Act. However, from the letter dated

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 6 of 16 13.11.2018 at paragraph-7, it is stated that the Operational Creditor

did not complete the supply of RTU as agreed. It is further stated

that even as on date, 22 RTU are to be supplied to the Corporate

Debtor failing to supply it has caused great hardship to the

Corporate Debtor. Further at paragraph-9 of the letter it is stated

that Operational Creditor yet to complete supply all 65 RTU as

ordered by the Corporate Debtor, although the Corporate Debtor

had been diligently making payments to the Operational Creditor for

the work done.

10. Further from the perusal of e-mail dated 31.10.2018 from the

Corporate Debtor to the Operational Creditor wherefrom it is evident

that

"From: "AM CLEAN AIR ENGINEERING PVT. LTD."

amcaesales@gmail.com To "S. Balaji balaji@eta-engg.com, "Radhakrishnan GN

radakrishnangan@etc.engg.com "Raman G"

ramang@eta-engg.com Date: Wed. 31 Oct 2018 21:15 Subject: Re: Deficient materials and balance payment ___

Dear Sir,

From the KIA site, we received an information that

Medium-filters of 440 nos. and some fan meshes (11

Nos.) are not supplied from your side as per the

requirement for all the RTU's till date. Also the extra

materials (i.e.) extra aluminium profiles, Fittings,

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 7 of 16 Scraps, Spider for lifting RTU's and extra Control

Panel which belongs to us have not been returned to

us so far. We have not received the 100% materials

so far and they are not paying us due to the delay in

the delivery of these materials. They are also insisting

us that they are going to charge us for the delay in the

supplies. If they charge anything for us the same will

be implemented on your company and it is because

you have not supplied 100% of the materials as per

our agreed Purchase order. And if you have supplied

100% materials on time we might have made your

100% payment. Due to the insufficient materials the

commissioning is also delaying and because of that

our customer is unable to get the money from their

client. Our customer is ready to pay 10% for us if you

have supplied on time (Meshes and Filters) but you

haven't done it so far. So, we are unable to pay to you

on time as per the MOU also.

Moreover, according to our PO (AMCA/KIA/18 dated

7th May 2018) for supply of 64 units (100%) we have

to complete 80% of the RTU'S PAYMENT. We have

paid you nearly about 86%, but still some materials

are pending from your side. Without 100% supply, we

are unable to get the balance payment from our

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 8 of 16 customer Wuhyun tech India. We have issued a

cheque without writing, date only for guarantee

purpose and trust. But, your company didn't honor it.

Rather you deposited it. How can your company

expect us to honor our cheque for 100% materials

without delivering the 100% supply? Inspite of our

mail to hold the cheque, ETA Engg Pvt. Ltd., deposited

it without honouring our mail. Consequently it has

been returned twice. So, our Companies name and

bank credibility has been damaged.

Confirm us whether the Fan meshes and filters are

ready or not and when will your company able to

deliver them?

Will your company able to make the filter delivery

within 10 days to 14 days or we shall proceed with

it? We will deduct the charges (i.e.) INR 1652/filter

including GST for the filters from ETA Engg Pvt. Ltd.

as per the PO terms which we released. Kindly, let us

know about these information within a day as the

materials are very urgent at site. If we haven't

received any return mail regarding the filters, we will

proceed with the purchasing of filters.

Thank you

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 9 of 16 Regards,

Naveen Kumar. M"

[Emphasis supplied]

11. From the above e-mail dated 31.10.2018 it is clear that the

Corporate Debtor raised a dispute prior to issuance of Demand

Notice dated 04.12.2018. The Operational Creditor did not deny the

receipt of the mail and its contents. However, vide their e-mail dated

02.11.2018 the Operational Creditor simply stated "we do not accept

the contents of your mail". One WuHyun Tech India Private Limited

to whom Purchase Orders were placed by the Corporate Debtor to

supply the material to the said WuHyun Tech India Private Limited,

the WuHyun Tech India Private Limited in their letter dated

06.11.2018 addressed to the Corporate Debtor submitted a claim

for delay in delivery and quality defect. In paragraph-2 of the said

letter, it is clearly stated that the RTU which provided by the

Corporate Debtor created leaking problem, the Corporate Debtor's

staff arrived on 28.09.2018 but did not bring any solution or

measure.

B. Provision of Law

The law relating to filing of application by Operational

Creditor:

Provision under Section 8 of the IBC which reads as follows;

8. Insolvency resolution by operational creditor

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 10 of 16 (1) An operational creditor may, on the occurrence of

a default, deliver a demand notice of unpaid

operational debtor copy of an invoice demanding

payment of the amount involved in the default to the

corporate debtor in such form and manner as may

be prescribed.

(2) The Corporate Debtor shall, within a period of ten

days of the receipt of the demand notice or copy of

the invoice mentioned in sub-section (1) bring to the

notice of the operational creditor--

(a) existence of a dispute, if any, and record of the

pendency of the suit or arbitration proceedings filed

before the receipt of such notice or invoice in relation

to such dispute;

(b) the repayment of unpaid operational debt--

(i) by sending an attested copy of the record of

electronic transfer of the unpaid amount from the

bank account of the corporate debtor; or

(ii) by sending an attested copy of record that the

operational creditor has encashed a cheque issued

by the corporate debtor.

Explanation.--For the purposes of this section, a

"demand notice" means a notice served by an

operational creditor to the corporate debtor

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 11 of 16 demanding repayment of the operational debt in

respect of which the default has occurred."

Section 9(5) (ii) (d) of the IBC reads as follows:

..

"(d) notice of dispute has been received by the

operational creditor or there is a record of dispute in

the information utility; or"

Section 5(6) of the IBC 2016 defines dispute as:

"dispute" includes a suit or arbitration proceedings relating to:-

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty

From the reading of Section 8(2)(a) of IBC, it is apparent that

the moment there is existence of a dispute, the Corporate Debtor

gets out of the clutches of the rigours of the Code. Further it is only

to be seen that where the dispute raised by the Corporate Debtor

qualifies as a dispute as defined under Section 5(6) of IBC supra.

12. From all the correspondences between the Corporate Debtor

and the Operational Creditor it is clear that there is a pre-existing

dispute raised by the Corporate Debtor prior to issuance of Demand

Notice dated 04.12.2018. It is a settled law that where there is an

existence of dispute prior to the issuance of Demand Notice, the

Adjudicating Authority must reject the application as held by the

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 12 of 16 Hon'ble Supreme Court in "Mobilox Innovations Pvt. Ltd. Vs. Kirusa

Software (P) Limited - 2018 1 SCC Online SC 353"

C) Precedents:

...

"The Hon'ble Supreme Court in "Mobilox Innovations

Pvt. Ltd. Vs. Kirusa Software (P) Limited - (2018) 1

SCC 353" it is held that the 'existence of dispute' and/or

the suit or arbitration proceeding must be pre-existing

i.e. it must exist before the receipt of the Demand Notice

or Invoice as the case may be and observed

"33. The scheme under Sections 8 and 9 of

the Code, appears to be that an operational

creditor, as defined, may, on the occurrence of

a default (i.e. on non-payment of a debt, any

part whereof has become due and payable and

has not been repaid), deliver a demand notice

of such unpaid operational debt or deliver the

copy of an invoice demanding payment of such

amount to the corporate debtor in the form set

out in Rule 5 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules,

2016 read with Form 3 or 4, as the case may

be [Section 8(1)]. Within a period of 10 days

of the receipt of such demand notice or

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 13 of 16 copy of invoice, the corporate debtor must

bring to the notice of the operational

creditor the existence of a dispute and/or

the record of the pendency of a suit or

arbitration proceeding filed before the

receipt of such notice or invoice in relation

to such dispute [Section 8(2)(a)]. What is

important is that the existence of the

dispute and/or the suit or arbitration

proceeding must be pre-existing i.e. it must

exist before the receipt of the demand

notice or invoice, as the case may be. ....."

At paragraph 51 it is held:

"51. ..... Therefore, all that the adjudicating

authority is to see at this stage is whether there

is a plausible contention which requires further

investigation and that the "dispute" is not a

patently feeble legal argument or an assertion of

fact unsupported by evidence." ....

[Emphasis supplied]

13. From the aforesaid correspondences it is clear that there is

pre-existence dispute with regard to quality and service prior to

issuance of Demand Notice. In view of the decision of the Hon'ble

Supreme Court and this Appellate Tribunal in the matter of R.S Cottmark

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 14 of 16 (India) Pvt. Ltd. Vs. Rajvir Industries Ltd. in Company Appeal

(AT) (Insolvency) No. 653 of 2018, dated 5th August, 2019 the

appeal needs to be allowed.

14. Hence the appeal is allowed and order passed by the

Adjudicating Authority dated 28th May, 2019 is quashed and set

aside. Steps taken in consequence of Impugned Order and further

Orders passed during Corporate Insolvency Resolution Process are

all quashed and set aside.

15. We release the Corporate Debtor from rigour of 'Corporate

Insolvency Resolution Process. The Interim Resolution

Professional/Resolution Professional will hand over the assets and

records to the Corporate Debtor/Promoter/Board of Directors.

Henceforth the Corporate Debtor will function independently

through its Board of Directors.

16. Operational Creditor is liable to pay the CIRP cost and fees of

the Interim Resolution Professional/Resolution Professional. The

Interim Resolution Professional/Resolution Professional will file

report before the Adjudicating Authority with regard to his fee, CIRP

cost and the Adjudicating Authority is requested to pass orders to

recover the same from the Operational Creditor.

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 15 of 16

17. The appeal is disposed of accordingly. No order as to costs.

[Justice A.I.S. Cheema] Member (Judicial)

(Kanthi Narahari) Member(Technical)

AKC

Company Appeal(AT)(Insolvency) No. 642 of 2019 Page 16 of 16