P. Vijay Kumar vs Priya Trading Company & Ors

[Arising out of order dated 12th February, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad in CP (IB) No. 423/9/HBD/2018]

IN THE MATTER OF:

P. Vijay Kumar, S/o. P. Narasimha Raju, R/o Villa No. 27, Sunny Isles Gated Community , Rushikonda, Near IT Park, Vishakhapatnam - 530 045. ....Appellant Vs

1. M/s Priya Trading Company, Represented by its Partner Sri Shyam Sunder Agarwal, #50-92-32/1, Shankaramattam Road, Shantipuram Vishakhapatnam - 530 016.

2. M/s Veda Biofuel Limited, With registered office at: #50-50-15/12, Seethammadhara, Visakhapatnam - 530 013. Represented by Interim Resolution Professional.

3. Mr. Gonugunta Murali, H. No. 16-11-19/4, G-1, Sri Laxmi Nilayam, Saleem Nagar Colony, Malakpet, Hyderabad - 500 036. ....Respondents

Present: For Appellant: Mr. S.K. Sahijpal, Ms. Raakhi Sahijpal, Ms. Manisha Saini and Ms. Mihika Gupta, Advocates. For Respondent: Mr. Sangram Patnaik and Mr. K. K. Patra, Advocates for Respondent No. 1 and 2. Mr. Gonugunta Murali, Interim Resolution Professional, Respondent No. 3. -2-

BANSI LAL BHAT, J.

An application under Section 9 of the Insolvency and Bankruptcy

Code, 2016 (hereinafter referred to as 'I&B Code') filed by Respondent No. 1

herein 'M/s Priya Trading Company' (hereinafter referred to as 'Operational

Creditor') for initiation of Corporate Insolvency Resolution Process against

Respondent No. 2 - 'M/s Veda Biofuel Limited' (hereinafter referred to as

'Corporate Debtor') came to be admitted at the hands of the Adjudicating

Authority (National Company Law Tribunal), Hyderabad Bench, Hyderabad

by virtue of order dated 12th February, 2019 and certain directions including

imposition of moratorium in regard to the assets of 'Corporate Debtor' and

appointment of Respondent No. 3 as 'Interim Resolution Professional' came

to be passed. Aggrieved thereof 'Shri P. Vijay Kumar', claiming to be the

erstwhile Chairman and Managing Director as also a shareholder of the

'Corporate Debtor' holding more than 45% of the total shareholding, has

preferred the instant appeal assailing the impugned order on the ground

that there was no privity of contract between the 'Operational Creditor' and

the 'Corporate Debtor' and that Insolvency Resolution Process could not be

triggered in wake of a pre-existing dispute interse the parties to the

proceedings before the Adjudicating Authority.

Company Appeal (AT) (Insolvency) No. 204 of 2019 -3-

2. An 'Operational Creditor' may initiate Corporate Insolvency Resolution

Process against the 'Corporate Debtor' having committed a default in respect

of 'operational debt' in the manner provided under Section 9 of the I&B

Code. However, prior to filing of an application in the prescribed form before

the Adjudicating Authority, the 'Operational Creditor' is required to deliver a

demand notice of unpaid operational debt together with the copy of invoices

demanding payment of the defaulted amount to the 'Corporate Debtor' in

terms of Section 8 (1) of the I&B Code and the 'Corporate Debtor' is, within

ten day of the receipt of the demand notice, required to respond by either

bringing to the notice of 'Operational Creditor' existence of a dispute, if any,

or record of the pendency of a suit or arbitration proceedings filed prior to

receipt of demand notice or 'Corporate Debtor' may respond by bringing to

the notice of 'Operational Creditor' the evidence qua payment of operational

debt claimed to be unpaid through electronic transfer from bank account of

'Corporate Debtor' or encashment of a cheque issued by the 'Corporate

Debtor' in the name of 'Operational Creditor'. It is only after expiry of ten

days from the delivery of demand notice and in the event of non-receipt of

the payment or notice of dispute from the 'Corporate Debtor' that the

'Operational Creditor' can file application under Section 9 to trigger

Corporate Insolvency Resolution Process. This legal position, emanating

from the combined reading of Sections 8 and 9 of the I&B Code has been

dealt with by the Hon'ble Apex Court in "Mobilox Innovations (P) Ltd. v.

Kirusa Software (P) Ltd., (2018) 1 SCC 353". The Hon'ble Apex Court

observed:-

Company Appeal (AT) (Insolvency) No. 204 of 2019 -4-

"51. It is clear, therefore, that once the operational

creditor has filed an application, which is otherwise

complete, the adjudicating authority must reject the

application under Section 9(5)(2)(d) if notice of dispute has

been received by the operational creditor or there is a

record of dispute in the information utility. It is clear that

such notice must bring to the notice of the operational

creditor the "existence" of a dispute or the fact that a suit

or arbitration proceeding relating to a dispute is pending

between the parties. 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.

It is important to separate the grain from the chaff and to

reject a spurious defence which is mere bluster. However,

in doing so, the Court does not need to be satisfied that the

defence is likely to succeed. The Court does not at this

stage examine the merits of the dispute except to the

extent indicated above. So long as a dispute truly exists in

fact and is not spurious, hypothetical or illusory, the

adjudicating authority has to reject the application."

Company Appeal (AT) (Insolvency) No. 204 of 2019 -5-

3. It is in the backdrop of aforestated legal proposition that the

contentions raised in the instant appeal are required to be appreciated.

Before noticing the rival contentions and the arguments advanced on behalf

of the parties it is apt to notice the factual matrix culminating in passing of

the impugned order. We accordingly proceed to notice the facts briefly.

4. The 'Operational Creditor' supplied broken rice and coal to the

'Corporate Debtor' in pursuance of 'Raw Material Supply Agreement' dated

9th April, 2018 (hereinafter referred to as 'Agreement'). Invoices were raised

by it upon the 'Corporate Debtor' for supply of such materials. According to

'Operational Creditor', the 'Corporate Debtor' failed to pay the amount of

pending invoices of the 'Operational Creditor' even after deduction of

shortages. Further according to the 'Operational Creditor', the coal and

broken rice (for short 'raw material') supplied and delivered to the 'Corporate

Debtor' was as per specifications and the 'Corporate Debtor', at the time of

delivery of raw material did not raise any objection in regard to the quality

thereof while the amount was deducted as regards shortages in the quantity

of raw material and same was reflected in the ledger account of the

'Corporate Debtor'. According to 'Operational Creditor', an amount of

Rs.4,80,65,149/- (Principal amount of Rs.3,31,37,601 and interest of

Rs.6,62,752/- from 8th June, 2018 to 5th July, 2018 for supply of broken

rice and Principal amount of Rs.1,39,85,095/- and interest amounting to

Rs.2,79,701/- from 2nd June, 2018 to 2nd July, 2018 for supply of coal) was

due and payable by the 'Corporate Debtor' towards invoices raised by the

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'Operational Creditor' for the delivery of raw material during 2018-2019.

The 'Operational Creditor' issued demand notice dated 5th July, 2018

supported by the copies of invoices demanding payment of outstanding dues

which was replied to by the 'Corporate Debtor' on 14th July, 2018 wherein

the liability was denied on the ground that there was no privity of contract

between the 'Operational Creditor' and the 'Corporate Debtor' for supply of

raw material to the latter and the raw material had been supplied by the

'Operational Creditor' through Arun Agrawal and Annapurna Agrawal in

terms of Agreement dated 9th April, 2018. The 'Corporate Debtor' further

stated in the reply of the notice that the 'Operational Creditor' had no locus

standi to initiate proceedings under I&B Code. However, the 'Corporate

Debtor' admitted its liability to pay an amount of Rs.2,96,54,219/- to be

paid to Arun Agrawal and Annapurna Agrawal after clearing all interse

disputes. In the counter filed before the Adjudicating Authority in reply to

the application of 'Operational Creditor' under Section 9 of I&B Code also

the 'Corporate Debtor' took the same pleas and reiterated the grounds that

there was no privity of contract between the 'Operational Creditor' and the

'Corporate Debtor'. On consideration of the rival contentions, the

Adjudicating Authority passed the impugned order admitting the application

under Section 9 of the I&B Code with the consequential directions of

slapping of moratorium on the 'Corporate Debtor' and appointment of

Interim Resolution Professional.

Company Appeal (AT) (Insolvency) No. 204 of 2019 -7-

5. Learned counsel for the Appellant submits that 'Priya Trading

Company' is not a party to Raw Material Supply Agreement and the

'Corporate Debtor' has raised a dispute in reply to the Demand Notice.

Therefore, 'Priya Trading Company' claiming to be the 'Operational Creditor'

was not eligible to trigger Corporate Insolvency Resolution Process. Per

contra it is argued by learned counsel for the Operational Creditor that the

facts in regard to the material particulars as regards liability arising out of

supply of raw material by 'Operational Creditor' to the 'Corporate Debtor' are

not at all disputed by the 'Corporate Debtor'. Besides, there is admission of

the fact that Arun Agrawal and Annapurna Agrawal are carrying on

business under the name and style of 'Priya Trading Company' and had

supplied the raw material to the 'Corporate Debtor' in respect of which

'Operational Creditor' raised invoices and claimed outstanding amount as

specified in the Demand Notice, liability in regard to the same being an

admitted fact.

6. After hearing learned counsel for the parties and wading through the

record, we find that the Raw Material Supply Agreement at page 50 of the

Appeal Paper Book was executed interse the 'Corporate Debtor' of the one

part and Arun Agrawal and Annapurna Agrawal of the other part with

regard to supply of broken rice and coal etc. required for production of ENA

for a period of three months. Our attention has been invited to registered

lawyer's notice dated 16th June, 2018 served by the 'Corporate Debtor' upon

Company Appeal (AT) (Insolvency) No. 204 of 2019 -8-

Shri Arun Agrawal and Smt. Annapurna Agrawal forming Annexure-A-3 of

the Appeal Paper Book at page 57 to 62, Para 3 whereof reads as under:-

"3. My client states that both of you are running a

business under the name and style of Priya Trading and

are inter-alia engaged in supply of raw materials i.e.

broken rice, coal and husk."

Service of this notice is not in dispute. In this regard it would be

appropriate to refer to the reply dated 14th July, 2018 furnished by the

'Corporate Debtor' to the Demand Notice dated 5th July, 2018, wherein the

'Corporate Debtor' has, in unambiguous terms, admitted the factum of

service of registered lawyer's notice dated 16th June, 2018 upon Arun

Agrawal and Annapurna Agrawal. It is therefore abundantly clear that the

'Corporate Debtor' was conscious of the fact that Arun Agrawal and

Annapurna Agrawal supplying raw material to it were operating under the

name and style of 'Priya Trading Company'. This admission on the part of

'Corporate Debtor' stares at its face and there is no scope for taking a

U-turn. The fact that 'Priya Trading Company' was the name and style

under which Arun Agrawal and Annapurna Agrawal have been operating

was never a fact required to be discovered or rediscovered. Both are

synonyms and well within the knowledge of the 'Corporate Debtor' as also

the 'Appellant'. The ground raised to offset the triggering of Corporate

Insolvency Resolution Process at the instance of 'Priya Trading Company' as

Company Appeal (AT) (Insolvency) No. 204 of 2019 -9-

'Operational Creditor' by taking plea of there being no privity of contract

between the 'Operational Creditor' and the 'Corporate Debtor' falls flat and

has to be dismissed as being absurd and repugnant to the admitted position

in regard to the status and locus standi of the 'Operational Creditor'.

Contention raised on this score is rebuffed.

7. Now coming to the issue as regards the unpaid liability in respect

whereof the 'Operational Creditor' alleged default, be it seen that as per the

settled law on the subject dispute in regard to the quantum of liability does

not defeat triggering of the Corporate Insolvency Resolution Process so long

as the amount claimed to be in default is payable in law and in fact. Default

in operational debt of an amount of Rupees One Lakh or more is enough for

triggering of the Corporate Insolvency Resolution Process. The stand taken

by the 'Corporate Debtor' in regard to the outstanding liability is not that the

debt is not an operational debt or that the same is not payable in law or in

fact. In this regard, it would be appropriate to refer to admission on the part

of 'Corporate Debtor' as emerging from his Reply to the Demand Notice

dated 14th July, 2018, para no. 6 relevant in this regard being extracted

hereinunder:-

"6. My client states that according to their accounts

my client has to pay an amount of Rs.2,96,54,219.00 only,

and that amounts to be paid to 1) Arun Agrawal, and 2)

Annapurna Agrawal only, but not to you, after clearing all

Company Appeal (AT) (Insolvency) No. 204 of 2019 -10-

the disputes as mentioned in notice, dated 16-6-2018 and

reply notice, dated 2-7-2018. As such the notice under

Rule 5 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 is invalid and

untenable."

It is manifestly clear that there is a crystal clear admission of liability of

'Corporate Debtor' to pay an amount of Rs.2,96,54,219.00 to Arun Agrawal

and Annapurna Agrawal who, we have found, were admittedly operating

under the Trade Name of 'Priya Trading Company'. This is notwithstanding

the fact that such admission of liability to pay has been subjected to

clearing of disputes as mentioned in notice dated 16th June, 2018 and reply

notice dated 2nd July, 2018. Reference to such notice and reply notice

would reveal that the dispute related to breach of terms of the agreement as

regards generating of revenue by the 'Corporate Debtor' which according to

it missed the intended target due to non-supply/ short supply of raw

material. However, such dispute does not constitute a pre-existing dispute

qua the amount payable in law or in fact respecting which default has been

committed. The admission in the Reply to the Demand Notice dated 14th

July, 2018 leaves no room for doubt that the factum of owing of an

operational debt to the tune of Rs.2,96,54,219.00 arising out of supply of

goods by the 'Operational Creditor' to the 'Corporate Debtor' is an

acknowledged liability which has been admitted in specific and

unambiguous terms. Obligation to pay such amount could not be subjected

Company Appeal (AT) (Insolvency) No. 204 of 2019 -11-

to any dispute arising out of breach of contractual provisions qua further

supply of raw materials for which the 'Corporate Debtor' could seek remedy

from the appropriate forum but not withhold such payment admitted and

acknowledged to be due and payable for the materials already supplied.

Admittedly, the 'Corporate Debtor' did not discharge the liability in regard to

the aforesaid operational debt and committed default by raising the bogey

that it owed the amount in question to Arun Agrawal and Annapurna

Agrawal but not to the 'Operational Creditor' as if they were distinct entities.

Viewed thus, the argument advanced in regard to pre-existing dispute being

devoid of merit is rejected.

8. For what has been stated hereinabove, we are of the considered

opinion that the impugned order does not suffer from any legal infirmity or

factual frailty. We have no doubt in our mind that this appeal is frivolous,

however, we are not inclined to impose costs on that score. The appeal is

accordingly dismissed. There shall be no orders as to costs.

[Justice Bansi Lal Bhat] Member (Judicial)

[Mr. Balvinder Singh] Member (Technical)

NEW DELHI 11th September, 2019

AM

Company Appeal (AT) (Insolvency) No. 204 of 2019