Satish Kumar Sethi vs M/S. Basf India Limiited & Anr

IN THE MATTER OF: Satish Kumar Sethi ...Appellant (Member of Suspended Board of Directors of the Corporate Debtor), R/o G-37, Lajpat Nagar-III, New Delhi-110024.

Versus

M/s. BASF India Ltd., ...Respondent No. 1 Regd. Office at: The Capital, 'A' Wing, 1204-C, 12th Floor, Plot No. C-70, 'G' Block, Bandra Kurla Complex, Sandra (East) Mumbai-400051.

Meghaaarika International Pvt. Ltd., ...Respondent No. 2 Through Mr. Shaikh Nafis Anjum, Regd. Office at: 7th Floor, DLF TOWER-B, District Center, Jasola, New Delhi-110044.

Present:

For Appellant : Mr. Salman Khurshid, Sr. Advocate with Mr. Mohit Chaudhary, Mr. Prakhar Mithal, Ms. Arushi Jain, Mr. Ishu Dikshit, Advocates.

For Respondents : Mr. P. Nagesh, Sr. Advocate with Ms. Geetika Sharma, Mr. Akshay Sharma, Advocates. Mr. Atul Bhatia, Advocate for R-2/RP

JUDGMENT

(Date: 31.5.2023)

[Per. Dr. Alok Srivastava, Member (Technical)] Company Appeal (AT) (Ins) No. 154 of 2023

Page 1 of 20 In this appeal the challenge is to the order dated 25.1.2023

passed by the Adjudicating Authority (National Company Law

Tribunal, New Delhi) (in short "Impugned Order"), whereby on a

section 9 application filed by BASF India Pvt. Ltd. (in short

"operational creditor"), a Corporate Insolvency Resolution Process

(in short "CIRP") has been initiated against the corporate debtor

M/s. Meghaaarika International Pvt. Ltd.

2. The Appellant, who was a director in the suspended board

of the corporate debtor has stated and argued that a sale order

bearing no. 6008159077 dated 6.1.2020 was issued by the

operational creditor in favour of the corporate debtor, where after

purchase order dated 8.1.2020 was placed by the corporate

debtor on the operational creditor for supply of product called

"Isobutanol". The Appellant has further stated that at the

request of the corporate debtor, its bankers Bank of Baroda, CSF

Branch, Parliament Street, New Delhi opened an irrevocable

Letter of Credit (in short "LC") in favour of the operational creditor

for a sum of Rs. 1.5 crores and it was also agreed between the

two parties that the LC would be discounted by the South Indian

Bank (in short "discounting bank") so that the operational

creditor receives payment in its account in Citi Bank N.A. along

Company Appeal (AT) (Ins) No. 154 of 2023

Page 2 of 20 with 'Discounted Yield'. The Appellant has further stated that a

High Seas Sale Agreement (in short "HSS Agreement") was

entered into between the corporate debtor and operational

creditor on 15.1.2020, whereby the operational creditor agreed to

sell Isobutanol to the corporate debtor in accordance with terms

set out in the HSS Agreement and has further stated that the

operational creditor sent an invoice on 15.1.2020 for payment of

the requisite amount of Rs.1.5 crores for the supply of Isobutanol

in specified quantity.

3. The Appellant has further submitted that there were

certain issues about the quality of the supplied material

Isobutanol, which were brought to the notice of the operational

creditor and an arbitration notice was sent by the corporate

debtor on 5.3.2020 through Blue Dart Express Courier. He has

further stated the LC could not be processed due to omission on

the part of operational creditor regarding submission of complete

and proper documents to the discounting bank, and as a result

the LC got dishonoured. He has added that the operational

creditor issued a demand notice under section 8 of the IBC on

19.10.2020 and thereafter filed section 9 petition on 23.12.2020,

on which the Impugned Order was passed on 25.1.2023. The

Appellant has stated that the adjudication of section 9 Company Appeal (AT) (Ins) No. 154 of 2023

Page 3 of 20 application by the Adjudicating Authority is erroneous, and

therefore, it has assailed the Impugned Order.

4. We heard the arguments of Learned Senior Counsels for

both the parties and perused the record with their able

assistance.

5. The Learned Senior Counsel for Appellant has argued that

in response to the sale order dated 6.1.2020 issued by the

operational creditor, a LC was opened by the corporate debtor as

agreed between both the parties, wherein a 90 day period from

the date of bill of lading was provided for payment through the

LC. He has further stated that the negotiated document

regarding opening of the LC notes that three lakh kilograms of

Isobutanol as per purchase order No. 6008159077 dated

6.1.2020 was given by the corporate debtor, and as per the LC

document which specified validity of LC for 90 days, interest for

the 60 days was to be free and for the next 30 days was on the

corporate debtor's account. He has brought to our attention the

definitions included in the 'Users' Handbook for Documentary

Credits under UCP 600' to point out that the LC is an

"undertaking on the part of the bank at the request of the

corporate debtor to pay the main beneficiary (which is the Company Appeal (AT) (Ins) No. 154 of 2023

Page 4 of 20 operational creditor) a specified amount of money within the

specified period of 90 days, if the beneficiary presents documents

in accordance with the terms and conditions specified in the LC."

He has further argued that the LC was as per negotiation for 90

days, even though the sale order dated 6.1.2020 mentioned that

LC will be collectable within 60 days.

6. The Learned Counsel for Appellant has referred to the

words contained in SWIFT MT700 to point out that as per Code

42C, the 'bill of exchange will depend on the contract and is

negotiable'. He has further referred to the judgment of Hon'ble

Supreme Court in the matter of Bawa Paulins Pvt. Ltd. vs. UPS

Fright Services (India) Pvt. Ltd. & Anr. (Civil Appeal No. 8298

of 2022, MANU/SC/1471/2022) to empathically argue that the

autonomy of an irrevocable letter of credit is entitled to full

protection and as a rule, courts refrain from interfering with this

autonomy. On this basis, he has argued that 90 days' limit, as

negotiated and included in the LC document, cannot be

overridden by any other document or terms contained therein.

7. The Learned Senior Counsel for Appellant has further

argued that due to issues about improper quality of the material

supplied, the corporate debtor brought them to the knowledge of Company Appeal (AT) (Ins) No. 154 of 2023

Page 5 of 20 the operational creditor and in response to the demand notice

under section 8 sent by the operational creditor, the corporate

debtor sent a reply wherein it pointed out that an arbitration

notice under section 21 has been duly served to the operational

creditor, since the goods supplied to them were of extremely poor

quality. He has further argued that as per the arrangement

between the parties, the payment was to be made on the basis of

LC, but the operational creditor failed to provide the necessary

documents to the Bank of Baroda (the bank issuing LC) and

hence, the payment due to the operational creditor could not be

received. He has further claimed that the notice for arbitration

under section 21 of the Arbitration and Conciliation Act, 1996

seeking appointment of an Arbitrator to adjudicate the dispute

pertaining to the quality of the goods supplied, was sent by the

corporate debtor to the operational creditor, which was within 30

days after the receipt of the goods as specified in the HSS

Agreement and therefore, in the light of the invocation of

arbitration clause by the corporate debtor, the section 9

application should not have been admitted in view of pre-existing

dispute.

8. The Learned Senior Counsel for Appellant has strongly

argued the 90 days limit for the payment of LC was to expire on Company Appeal (AT) (Ins) No. 154 of 2023

Page 6 of 20 25.4.2020, when the bar to filing of section 9 application had

come into force by virtue of section 10-A, and therefore, the

section 9 petition could not have been admitted.

9. In reply, the Learned Senior Counsel for

Respondent/operational creditor has argued that the 'date of

default' which was mentioned by the operational creditor in its

section 9 application, is 15.3.2020, which is the 60 day period

from the date of bill of lading, and which is in accordance with

the period of validity of LC. He has further brought to our notice

that HSS Agreement wherein clause 1 clearly sets out General

Conditions of Sale (in short "GCS"), which is annexed to the

agreement and also forms part of the seller's invoice, shall be

applicable for sale under this agreement, and further the GCS

which is part of record, in clause 8 very clearly stipulates that the

invoice value has to be paid by the due date indicated in the

invoice. He has thus argued that the date of default was

15.3.2020 and therefore, the section 9 application is not barred

by the section 10-A. He has pointed out that the sale invoice is

dated 6.1.2020 and the purchase order is issued on 8.1.2020,

where after the High Seas Sale Agreement was signed between

the two parties on 15.1.2020, which is after the LC was opened

on 13.1.2020, and therefore, in accordance with the High Seas Company Appeal (AT) (Ins) No. 154 of 2023

Page 7 of 20 Sales Agreement wherein it is stipulated that the invoice value

should be paid as per the date given in the invoice should be the

'date of default'.

10. The Learned Senior Counsel for Respondent has rebutted

the argument of the Appellant that there was a pre-existing

dispute regarding poor quality of the goods supplied. He has

contended that the clause 5 in High Seas Sale Agreement very

clearly stipulates that regarding 'quantity shortages and non-

conformance/ quality' the buyer shall notify to the seller about

non-conformity of quality or shortage within 30 days after receipt

of the goods, but no such communication or message was sent by

the corporate debtor to the operational creditor. He has further

argued that the claim of the Appellant that section 21 notice

under Arbitration and Conciliation Act, 1996 was sent by Blue

Dart Courtier as per Airway Bill No. 14905191162 dated

15.2.2020 was sent by the corporate debtor to the operational

creditor did not actually travel in the Blue Dart network as was

clarified to the operational creditor by Blue Dart Express Ltd. vide

their letter dated 10.6.2021. He has further contended that

merely producing receipt of submission consignment from Blue

Dart Express Ltd. does not imply service of the notice on the

operational creditor and therefore, no notice of pre-existing Company Appeal (AT) (Ins) No. 154 of 2023

Page 8 of 20 dispute regarding quality of the supplied goods was found tgo be

served on the operational creditor either within 30 days from the

date of receipt of the goods, as stipulated in the High Seas Sale

Agreement or on any date before the issue of section 8 notice by

the operational creditor.

11. The three issues which are relevant in the adjudication of

the present appeal are as follows:-

(i) Whether the 'date of default' in payment of the dues

for supply of Isobutanol by the operational creditor to

the corporate debtor is in the period specified under

section 10-A of the IBC?

(ii) Whether there was a 'pre-existing dispute' regarding

the poor quality of the material supplied to the

corporate debtor as defined in law?

(iii) Whether the dishonouring of the LC discounting by

the South Indian Bank was on account of negligence

of the corporate debtor?

12. On the first issue whether the 'date of default' is within the

period as specified in section 10-A during which initiation of CIRP

is suspended, we note that the purchase order was given by the Company Appeal (AT) (Ins) No. 154 of 2023

Page 9 of 20 corporate debtor Meghaaarika International Pvt. Ltd. on 8.1.2020

(page 101 of the appeal paperbook Vol. I) and it stipulated that

the payment terms are 'LC 60 days from the HSS date'. This

purchase order was preceded by a sale order dated 6.1.2020. In

this sale order the credit days as specified is 'collectable in 60

days'. Further, the LC document (attached at pp.103-106 of the

appeal paperbook Vol.I), which is found to be created on

13.1.2020 has an entry stating "BY NEGOTIATION, 42C: 90

DAYS FROM THE DATE OF BILL OF LADING". Further, the HSS

Agreement dated 15.1.2020, which is signed two days after the

creation of LC on 13.1.2020, includes the following:-

"1. General Conditions of Sale

The General conditions of Sale (GCS) as annexed in Annexure-3 and forming part of the Sellers invoice (Local Sale invoice) shall be applicable for the sale under this Agreement."

The 'General Conditions of Sale' is annexed as Annexure III with

the HSS Agreement and it includes the following regarding

'payment':-

"8. Payment

In the event the total invoice value, is not paid by the due date indicated on the invoice, seller reserves the right to change interest 18% per annum."

Company Appeal (AT) (Ins) No. 154 of 2023

Page 10 of 20

13. We thus note that the HSS Agreement, which was signed

on 15.1.2020 after the creation of LC on 13.1.2020, says that the

date of payment would be as given in the invoice. Further, the

invoice (attached at pg. 102 of appeal paperbook, Vol.I) clearly

states that the credit days are '060-LC collectable in 60 days'. It

is thus clear that the HSS Agreement, which is the last final

contract signed between the parties, clearly specifies that the

payment against invoice is to be made by 'LC which is collectable

within 60 days'.

14. We now peruse the judgment of Hon'ble Supreme Court in

the matter of Bawa Paulins Pvt. Ltd. vs. UPS Fright Services

(India) Pvt. Ltd. (supra), which is cited in support by the

Learned Senior counsel for Appellant, wherein paragraph 35, it is

observed as follows:-

"35. In Hindustan Steel Workers Construction Ltd. V G.S. Atwal & Co. (Engineers) (P) Ltd. [ (1995) 6 SCC 76] this Court held that a letter of credit is independent of and unqualified by the contract of sale or underlying transactions. The autonomy of an irrevocable LOC is entitled to protection and as a rule, courts refrain from interfering with that autonomy. If courts interfere in such transactions, it would be prone to misuse by the applicant party to gain undue advantage leaving the issuing bank at peril in the international financial market."

Company Appeal (AT) (Ins) No. 154 of 2023

Page 11 of 20

15. We note that above judgment places autonomy on an

irrevocable LC which is held to be entitled to protection. In the

present case, we note that after the opening of LC, a HSS

Agreement was entered into between the two parties, which when

seen in conjunction with the sales invoice, notes that the

payment is to be made through a LC within 60 days from the

date of issue of invoice, which is 6.1.2020. This judgment

therefore, is distinguishable on the facts of the present case,

wherein an explicit HSS Agreement has been signed between the

parties since the sale of Isobutanol was on high seas. It is thus

clear that the date of default is 60 days from 6.1.2020, which is

the date of invoice. Counting 60 days from 6.1.2020, we find that

the payment was due to be made by 5.3.2020. Thus, it is clear

that the date of default is not covered in the period as stipulated

in section 10-A of the IBC, and therefore, section 9 application

does not suffer from bar as specified in section 10-A regarding its

admission and initiation of CIRP.

16. On the issue of pre-existing dispute, we note that in reply

to the section 8 demand notice, the corporate debtor has raised

the issue of poor quality of Isobutanol supply by the operational

creditor, and as also the invocation of arbitration clause and

issuing of notice under section 21 of the Arbitration and Company Appeal (AT) (Ins) No. 154 of 2023

Page 12 of 20 Conciliation Act, 1996. Notably, the corporate debtor has not

produced any record or document before the NCLT or before us

regarding 'pre-existence of dispute' about the quality of material

supplied. We also note that a notice under section 21 of the

Arbitration and Conciliation Act seeking appointment of

arbitrator dated 14.2.2020 is submitted as part of the record, and

ostensibly this notice was sent through Blue Dart Courier by

Airway Bill No. 149045191162 dated 15.2.2020. The Learned

Senior Counsel for Respondent/operational creditor has brought

to our notice a letter dated 10.6.2021 (attached at page 261 of the

appeal paperbook, vol.II) to bring for the fact that the said AWB

No. 14905191162 dated 15.2.2020 did not travel in the Blue Dart

Express Limited network. The relevant portion of this letter is

reproduced below:-

"Date: June 20,2021

BASF India Limited, Plot No. 12, TTC Area, Thane Belapur Road, Turbhe, Navi Mumbai-400705.

Maharashtra India

K/a: Mr. Magirish Kasbekar/Nilesh Waghmode

Re: AWB#14905191162, 14905191151 As requested by you, we, Blue Dart Express Limited hereby state that as per our records and to the best of our knowledge, following airway Bills (details of which were given by you vide your e-mail dated 16/04/2021 were not travelled in our network:

Company Appeal (AT) (Ins) No. 154 of 2023

Page 13 of 20

1. AWB 14905191162 Dt. 15.02.2020 Sender Meghaaarika International, Delhi Consignee. BASF India Ltd., Turbhe.

2. AWB. 14905191151 Dt. 05.03.2020 Sender Meghaaarika International, Delhi Consignee. BASF India Ltd., Turbhe.

For Blue Dart Express Limited

Sd/-

Authorized Signatory Mumbai."

17. We thus, are of the clear opinion that while it is claimed by

the Appellant that section 21 notice under the Arbitration and

Conciliation Act, 1996 for invoking the arbitration clause under

the HSS Agreement was sent through Blue Dart courier, the

contents letter dated 10.6.2021 as mentioned above, very clearly

show that such a document did not travel in the Blue Dart

Express Ltd. network and therefore, no such notice was ever

served on the operational creditor.

18. We, therefore, follow the law propounded by the Hon'ble

Supreme Court in the matter of Mobilox Innovations Private

Ltd. vs. Kirusa Software Private Ltd. (7 SCC Online SC 1154),

that the pre-existing dispute has to be 'real' and 'genuine' one,

and not an 'illusory' or 'hypothetical' dispute. In this judgment,

the Hon'ble Supreme Court has held as follows:-

Company Appeal (AT) (Ins) No. 154 of 2023

Page 14 of 20 "39) ............................ Certainly the court will not examine the merits of the dispute other than to see if there is in fact a genuine dispute. The notion of a 'genuine dispute' in this context suggests to me that the court must be satisfied that there is a dispute that is not plainly vexatious or frivolous. It must be satisfied that there is a claim that may have some substance". In Greenwood Manor Pty Ltd v Woodlock (1994) 48 FCR 229 Northrop J referred to the formulations of Thomas J in Re Morris Catering (Australia) Pty Ltd (1993) 11 ACLC 919, 922 and Hayne J in Mibor Investments Pty Ltd v Commonwealth Bank of Australia (supra), where he noted the dictionary definition of "genuine" as being in this context "not spurious ... real or true" and concluded (at 234):

"Although it is true that the Court, on an application under ss 459G and 459H is not entitled to decide a question as to whether a claim will succeed or not, it must be satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt. If it can be shown that the argument in support of the existence of a genuine dispute can have no possible basis whatsoever, in my view, it cannot be said that there is a genuine dispute. This does not involve, in itself, a determination of whether the claim will succeed or not, but it does go to the reality of the dispute, to show that it is real or true and not merely spurious". In our view a "genuine" dispute requires that: • the dispute be bona fide and truly exist in fact; • the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived."

19. In the present case, we find that the dispute was neither

raised before the issue of section 8 demand notice and also the

notice under section 21 of the Arbitration and Conciliation Act,

1996 was not proven to be served on the operational creditor. In

such a situation, we are of the clear opinion that the corporate

debtor cannot claim 'pre-existence of dispute' in the adjudication

of the section 9 application.

Company Appeal (AT) (Ins) No. 154 of 2023

Page 15 of 20

20. The Learned Senior Counsel for Appellant has also raised

the issue of discrepancy with regard to the submission of relevant

documents to the discounting bank i.e. South Indian Bank

Limited. In this connection, we note that the documents for

discounting of LC were submitted by the corporate debtor to the

discounting bank. We further find that the documents namely

signed commercial invoices, lorry receipt of an IBA approved

transporter evidencing dispatch of goods, packing list with details

as per invoice, inland transit insurance policy, copy of High Seas

Sale Agreement and bill of lading were to be submitted to the

discounting bank for payment.

21. In the above connection, we note that South Indian Bank

was approached by the corporate debtor Meghaaarika

International Pvt. Ltd. vide letter dated 28.2.2020 enclosing

documents for the LC purchase bill discounting facility granted

by the South Indian Bank whereby the corporate debtor

instructed the South Indian Bank to credit the proceeds of the

bill net of margin, interest and other applicable charges in the

bank account of City Bank N.A. Mumbai held by the beneficiary

(seller) BASF India Limited. (This letter is attached at pp. 50-51

of the appeal paperbook vol. I). We further note that the Company Appeal (AT) (Ins) No. 154 of 2023

Page 16 of 20 operational creditor BASF India also sent a letter dated 20.8.2022

addressed to the South Indian Bank, New Delhi referring to the

letter sent by the buyer Meghaaarika International Pvt. Ltd. and

further making the same request as was made by the corporate

debtor for crediting the proceeds of the bill in its bank account in

Citi Bank N.A., Mumbai. It is noted that both these letters were

sent before the expiry of 60 days period as mentioned in the

invoice.

22. We note that the LC documents were presented by the

corporate debtor to South Indian Bank Limited to be presented to

the LC issuing bank i.e. Bank of Baroda, the South Indian Bank

would release the payment to operational creditor before expiry of

60 days validity period of the LC. It is noted that the documents

so required were not received by the South Indian Bank from the

corporate debtor and hence, the payment due to the operational

creditor by the due date 3.3.2020 could not be made.

23. We also note that e-mails were exchanged between the

operational creditor BASF India, Bank of Baroda and the

corporate debtor regarding payment due to BASF India. These e-

mails and letters are attached at pp.149-160 of the appeal

paperbook vol. I. It is also noted that the letter dated 24.2.2020 Company Appeal (AT) (Ins) No. 154 of 2023

Page 17 of 20 (at page 149 of the appeal paperbook Vol.I) is addressed to the

corporate debtor and further e-mails starting from 23.4.2020 to

3.9.2020 are all addressed to Mr. Nikhil Sethi with copy to Mr.

Satish Kumar Sethi. Notably, Mr. Nikhil Sethi is a director in the

corporate debtor company. We also note that in the e-mails

dated 24.4.2020, 19.5.2020, 25.5.2020, 16.6.2020, 2.7.2020,

10.7.2020, 27.7.2020, 10.8.2020 and 3.9.2020, there are

requests from the operational creditor for the payment of overdue

amount, and it is after the overdue payment is not made despite

such follow up, does the operational creditor send a demand

notice dated 19.10.2020 to the corporate debtor with particulars

of the operational debt.

24. On the point of the party responsible for discrepancies and

deficiencies in the documents submitted to South India Bank, we

note the letter dated 28.2.2020 sent by the corporate debtor to

South Indian Bank for making payment against the discounted

bill. The discrepancies in the documents submitted, which were

later pointed out by the South Indian Bank was, therefore,

required to be taken care of and cured by the corporate debtor.

In this connection, we also note the rejoinder filed by BASF India

before the NCLT, where in paragraph 20 the issue about

discrepancies in documents and that the discrepancy letter was Company Appeal (AT) (Ins) No. 154 of 2023

Page 18 of 20 not given by the South Indian Bank to BASF India, but to the

corporate debtor has been mentioned. We are, therefore, of the

view that when the payment could not be made to the operational

creditor in view of discrepancies in the documents submitted to

the South Indian Bank for discounting of the LC, it was the duty

of the corporate debtor to make the requisite payments, and

since the matter of non-payment was brought to the notice of the

corporate debtor repeatedly by the operational creditor, the onus

of not making the payment, was on the corporate debtor and the

default began after a lapse of 60 days from the date of bill of

lading.

25. On the basis of detailed discussion in the aforementioned

paragraphs, we are of the clear view that the operational debt

should have been paid through LC facility within 60 days from

15.1.2020, and since it could not done due to discrepancies in

submission of documents to the South Indian Bank, it was the

responsibility of the corporate debtor to make the payments,

more so when it was being repeatedly asked to do so by the

operational creditor. The issue of pre-existing dispute has been

dealt in detail earlier in this judgment and we find that the issue

does not hold any water. We also note that HSS Agreement was

executed on 15.1.2020 and under the General Conditions of Sale Company Appeal (AT) (Ins) No. 154 of 2023

Page 19 of 20 included in the HSS Agreement, the payment was to be made

with 60 days from the date of bill of lading, which would be 'date

of default' and which would not be covered in the period

stipulated in Section 10-A of the IBC.

26. We are, therefore, of the view that the Impugned Order

does not suffer from any infirmity and it does not require any

interference. The appeal is, therefore, dismissed with no order as

to costs.

[Justice Rakesh Kumar] Member (Judicial)

[Dr. Alok Srivastava] Member (Technical)

New Delhi 31st May, 2023

/aks/

Company Appeal (AT) (Ins) No. 154 of 2023

Page 20 of 20