Siraj Ali Patel Suspended Director ... vs Swiss Entertainment Pvt. Ltd

[Arising out of order dated 14.10.2022 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench-II in C.P. (IB) 1374 (MB) /2019]

IN THE MATTER OF:

Siraj Ali Patel Suspended Director, Swiss Entertainment Pvt. Ltd. 2, Patel Palace CHS, Near Jeevan Vikas Kendra Marg, Koldongri, Sahar Road, Andheri (East), Mumbai - 400 069 ....Appellant

Vs.

Epigram Through its Sole Proprietor Nabeel Abbas, Having its registered office at Roop Mangal, 3rd Floor, Near Rajesh Khanna Garden, 16th Road, Santacruz (West), Mumbai - 400 054 ....Respondent No.1

Swiss Entertainment Pvt. Ltd., Having its registered office at 2, Patel Palace CHS, Near Jeevan Vikas Kendra Marg, Koldongri, Sahar Road, Andheri (East), Mumbai - 400 069 ....Respondent No.2

Present:

For Appellant: Mr. Prakhar Tandon and Mr. Nikhil Mishra, Advocates.

For Respondents: Mr. Kushagra Bansal, Advocates

Company Appeal (AT) (Ins.) No. 1290 of 2022 1 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 order

dated 14.10.2022 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, Mumbai Bench,

Court-II) in C.P.(IB)-1374(MB)/2019. By the impugned order, the

Adjudicating Authority admitted the Section 9 application under IBC filed by

the Operational Creditor and initiated Corporate Insolvency Resolution

Process ('CIRP' in short) against the Corporate Debtor with immediate effect.

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

the suspended director of the Corporate Debtor.

2. The brief facts of the case as brought out by the Learned Counsel for

the Appellant is that Swiss Entertainment Private Limited, the Corporate

Debtor was in the business of producing and making movies which entered

into a business engagement with Epigram, the Operational Creditor which

was into integrated marketing and creative communication. The agreement

was entered into on 28.08.2017 by which the Operational Creditor was to

provide digital marketing services and carry out printing job of publicity

material for the Corporate Debtor for a film named "Haseena Parker" produced

by them.

3. Elaborating further on the terms and conditions of the engagement

letter and emphasising that these terms and conditions had been

Company Appeal (AT) (Ins.) No. 1290 of 2022 2 unconditionally accepted by the Operational Creditor, the Learned Counsel

for the Appellant submitted that the Operational Creditor was to receive an

amount aggregating Rs.66,00,000/-for executing this job and that if the work

done was not satisfactory, the Operational Creditor was liable to pay the

Corporate Debtor an amount of Rs.70,00,000/-. It has been further stated

that the Operational Creditor was reminded on several occasions about the

shortcomings in the service delivered by them which included quality of

printing job and lethargy in delivery of material which hampered the

marketing of their film. That the Operational Creditor had illegally hijacked

the login ID and password of the digital account of the Corporate Debtor was

yet another cause of dispute with the Operational Creditor. Despite providing

unsatisfactory services, the Operational Creditor continued to raise invoices

and sought payments from the Corporate Debtor. The Learned Counsel for

the Appellant submitted that the Corporate Debtor had contended that they

were not liable to pay the claims made by the Operational Creditor.

4. The Learned Counsel for the Appellant also submitted that to begin with

a Legal Notice dated 07.03.2018 was received from the Operational Creditor

seeking payment of Rs.36,85,680.18. A reply was sent thereto by the

Corporate Debtor on 17.03.2018 denying each and every allegation contained

in the said Legal Notice and a counter claim was made against the Operational

Creditor seeking payment of an amount of Rs.70,00,000/- for having failed to

provide satisfactory services to the Corporate Debtor. It was asserted that

this Legal Notice pre-dated the issue of statutory demand notice under Section

8 of IBC which therefore clearly indicates the presence of pre-existing dispute.

Company Appeal (AT) (Ins.) No. 1290 of 2022 3

5. It has been further submitted that the Operational Creditor

subsequently sent a demand notice on 02.08.2018 to which a reply was sent

on 09.08.2018 disputing the claims of the Operational Creditor. The

Operational Creditor thereafter filed a Section 9 petition to which the

Corporate Debtor filed a reply on 16.11.2019.

6. The Learned Counsel for the Appellant has contended that the Section

9 application was wrongly admitted by the Adjudicating Authority on the sole

ground that there was no ground for pre-existing dispute between the parties

though there was strict evidence proving the contrary and that aggrieved by

the impugned order, this appeal has been preferred.

7. Refuting the above submissions, the Learned Counsel for the

Respondent No.1/Operational Creditor submitted that the Corporate Debtor

had agreed to pay a sum of Rs.35,00,000/- towards digital media marketing

and another sum of Rs.31,00,000/- towards printing job besides additional

liability arising from additional printing job. The Operational Creditor claimed

that the total outstanding payment due from the Corporate Debtor amounted

to Rs.55,38,347/- which was reflected in Part IV of Form-5 submitted along

with the Section 9 application. Submitting that in terms of the engagement

letter of 28.08.2017, all printing job was to be done as per requirement of AA

Films which was the distributor of the film Haseena Parker, it was added that

they had delivered quality service and their work was appreciated by the

Director of the movie Haseena Parker which is on record. The movie was

released on 22.09.2017. It has been vehemently claimed that no defects or

Company Appeal (AT) (Ins.) No. 1290 of 2022 4 disputes were ever raised by the Corporate Debtor in the services offered by

them and that the Corporate Debtor in order to evade the outstanding

payment to the Operational Creditor has created the false pretext of lack of

quality in the material printed.

8. We have duly considered the detailed arguments and submissions

advanced by the Learned Counsel for both the parties and perused the records

carefully.

9. The issue before us for our consideration is whether the operational

debt claimed by the Operational Creditor was admitted by the Corporate

Debtor as due and payable and not surrounded by pre-existing disputes.

10. We find that the Operational Creditor has raised the issue of

outstanding payment from the Corporate Debtor both in the Legal Notice

dated 07.03.2018 and the Demand Notice dated 02.08.2018. In the Legal

Notice, the demand raised is Rs. 36,75,680.18 while in the Demand Notice

the demand raised is Rs. 55,38,347/-. On the additional expenditure incurred

beyond the engagement terms of 28.08.2017, the Operational Creditor has

claimed to have met all additional requirements placed by the Distributor after

obtaining confirmation from the Corporate Debtor about the additional costs

and expenditure thereto. It was also pointed out that the distributor of AA

Films on 22.09.2017 had acknowledged receipt of all publicity materials as

placed on record at Page 98 of Appeal Paper Book ("APB" in short). The

Learned Counsel for the Respondent No.1 submitted that the Operational

Creditor had raised invoices for supply of different printing material to the

Company Appeal (AT) (Ins.) No. 1290 of 2022 5 Corporate Debtor and that there were outstanding payments due from them.

On the contention raised by the Corporate Debtor that the demand notice

under Section 8 of the IBC was defective in that it does not specify the date of

default and does not provide detailed explanation of how the alleged debt

became due and payable, the Learned Counsel for the Respondent No.1

submitted that there was no defect in the demand notice issued by the

Operational Creditor as the date of default was clearly indicated on each of

the invoices which was incorporated in Part IV of Form 5. The Corporate

Debtor had however failed to repay the outstanding amount due and payable

by raising baseless and unsubstantiated grounds.

11. The Learned Counsel for the Appellant, however, pointed out that the

Corporate Debtor in their reply to the Legal Notice as well as Demand Notice

had categorically denied any dues outstanding or payable to the Operational

Creditor. It has been argued that the Operational Creditor owed them a sum

of Rs. 70,00,000/- for inefficient, defective and poor quality of services and

that this claim was raised in their reply to the Legal Notice and Demand

Notice.

12. We find from material on record that the Corporate Debtor had denied

the liability to pay any outstanding amount to the Operational Creditor in

their reply to the Legal Notice which predates the Demand Notice. The relevant

excerpts from the reply to the Legal Notice which has been placed on record

by the Appellant at Page 112-113 of APB is reproduced below: -

"3. At the outset, it is vehemently denied that my Clients owe your

Client a sum of Rs.36,75,680.18/- (Rupees Thirty Six Lakhs Seventy

Company Appeal (AT) (Ins.) No. 1290 of 2022 6 Five Thousand Six Hundred And Eight Rupees and Eighteen Paise

Only) along with interest at the rate of 18% per annum. Your Client

has failed to appraise you of the fact that he had failed to live up to

my Client's expectations with respect to the Digital Marketing of the

movie Haseena. That my Clients are not liable to pay your Client any

monies, on the contrary, your Client is liable to pay my Clients Rs.70

Lakhs as per the engagement letter dated 28.08.2016 which your

Client has agreed to and signed upon."

We also note that the Corporate Debtor in their reply dated 09.08.2018 (as

placed at Page 168 of APB) to the Section 8 Demand Notice had reiterated

that they do not owe any money with regard to invoices specified by them in

their demand notice and made a counter claim of Rs.70,00,000/- from the

Operational Creditor for their inefficient and defective work.

13. That the Corporate Debtor had categorically denied the liability for

payment of any outstanding amount due to the Operational Creditor has also

been taken note of by the Adjudicating Authority and the relevant excerpts of

the impugned order is as extracted hereunder: -

"7. .........After perusal of all the relevant documents, it is evident that

the primary issue for consideration is whether a dispute existed prior

to the issuance of the Demand Notice by the Operational Creditor. To

examine this issue, the following communications are relevant. The

Operational Creditor wrote to the Corporate Debtor on 7th March 2018

demanding payment of the amounts due against the 9 invoices raised

totalling to a principal amount of Rs.36,75,680/- including interest at

Company Appeal (AT) (Ins.) No. 1290 of 2022 7 the rate of 18% per annum. The Corporate Debtor replied to this Notice

vide Letter dated 17th March 2018 raising disputes regarding the

quality of the work performed and other contentions relating to

withholding of social media accounts belonging to the Corporate

Debtor leading to financial losses and vehemently denied any

obligation to pay pending dues to the Operational Creditor. On

perusal of the e-mail communications between the parties, it is

observed that there was no reference to any form of dispute regarding

quality of the work and in fact, the Operational Creditor sought

necessary approvals from those representing the Corporate Debtor

before sending or finalizing the posters and other publicity material to

which the Corporate Debtor responded positively. Later, the movie

was released and even at this stage there was no indication of any

dispute.

8. It is therefore evident that the disputes raised by the Corporate

Debtor vide letter dated 17th March 2018 were an afterthought and

there is no evidence presented to demonstrate their dissatisfaction

with the work done by the Operational Creditor before the Legal Notice

dated 7th March 2018 was issued."

14. From the above extracted paragraphs of the impugned order, we find

that the Adjudicating Authority while noting that the Corporate Debtor has

denied their obligation to pay pending dues to the Operational Creditor, it has

further held that the disputes raised by the Corporate Debtor in denying the

claims is an after-thought and that there is no evidence presented to

Company Appeal (AT) (Ins.) No. 1290 of 2022 8 demonstrate their dissatisfaction with the work done by the Operational

Creditor.

15. We therefore, now come down to examine whether there was any pre-

existing dispute between the two parties which was more than a patently

feeble legal argument.

16. It is a well settled that the guiding principles on treatment of Section 9

application have been laid down by the Hon'ble Supreme Court in Mobilox

Innovations (P) Ltd. v. Kirusa Software (P) Ltd. (2018) 1 SCC 353

('Mobilox' in short). It is relevant to refer to paras 51 and 56 of the said

Judgment which is extracted as hereunder:

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

Company Appeal (AT) (Ins.) No. 1290 of 2022 9 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."

****** ***** *****

"56. Going by the aforesaid test of "existence of a dispute", it

is clear that without going into the merits of the dispute, the

appellant has raised a plausible contention requiring further

investigation which is not a patently feeble legal argument or

an assertion of facts unsupported by evidence. The defense is

not spurious, mere bluster, plainly frivolous or vexatious. A

dispute does truly exist in fact between the parties, which may

or may not ultimately succeed, and the Appellate Tribunal was

wholly incorrect in characterizing the defense as vague, got-up

and motivated to evade liability."

17. It is the case of the Operational Creditor that the Corporate Debtor had

raised a false and concocted story of not being satisfied with the work of the

Operational Creditor only to evade payments. In terms of the engagement

letter of 28.08.2017 all the printing jobs were to be done as per the

requirement from AA Films and since the Director of the film of Haseena

Company Appeal (AT) (Ins.) No. 1290 of 2022 10 Parker had appreciated their work, that would suffice to establish that they

had discharged their services without any shortcomings. Furthermore, prior

permission was obtained by the Operational Creditor from the Corporate

Debtor before finalising the posters or sending publicity material. It has been

further submitted that if their work was not satisfactory then the Corporate

Debtor would not have awarded contract for the next film, "Omerta".

18. Challenging the findings recorded in the Impugned Order that there

were no disputes regarding quality of work, it has been contended by the

Corporate Debtor that the engagement letter of 28.08.2017 clearly provided

that the work had to be performed to the satisfaction of the Producer and not

to any third party. It will be useful at this juncture to note the contents of the

said engagement letter which is as below.

"Dt:- 28.08.2017

To, Epigram, Roop Mangal Bldg, 3RD Floor, Near Rajesh Khanna Garden, 16TH Road, Santacruz-West, Mumbai - 400 054.

Sub: -Your engagement for social media marketing and printing job for the film "HASEENA PARKAR"

Dear Sir,

Towards the performance of your services for digital media marketing and printing job for our film as needed by us we agree to pay Rs.35.00 Lakhs (Thirty Five Lakhs Only) including applicable GST for digital marketing and Rs.31.00 Lakhs (Thirty One Lakhs Only) including applicable GST for overall printing job towards our upcoming movie HASEENA PARKAR.

All printing job will be done as per the requirement from AA FILMS.

Company Appeal (AT) (Ins.) No. 1290 of 2022 11 Above mentioned amount will be inclusive for all your digital marketing services and professional charges and printing job and no extra amount will be paid other than the agreed amount towards the services for the whole movie.

Epigram will pay Rs.70.00 Lakhs (Seventy Lakhs Only) to the producer if the promotion is not done to the satisfaction of the Producer.

With this new agreement all previous related agreement of Epigram and Epigram digital will stand null and void and Rs. 8.50 Lakhs (Eight Lakhs Fifty Thousand Only) previous paid amount will be deducted from this above mentioned agreed amount.

Thanking you,

For Swiss Entertainment Pvt. Ltd. I Hereby agree to the above Authorised Signatory For Epigram

Place:- Mumbai Date: -28.08.2017 (Emphasis supplied)

19. It has been further contended by the Corporate Debtor that when the

authorised signatories of the engagement letter were the Operational Creditor

and the Corporate Debtor and there was no third party, it is absurd on the

part of the Operational Creditor to rely on an appreciation letter from a third

party to substitute the satisfaction of the Corporate Debtor. It was

strenuously argued by the Learned Counsel for the Appellant that any

comment made by the Distributor of A.A. Films, not being the signatory to the

engagement agreement, therefore, needs to be disregarded. It is further

pointed out that the appreciation letter from the third party also contain

statements which reflect that there was heated exchange of words between

the Producer and the Operational Creditor as well as between the Operational

Creditor and Corporate Debtor. It was submitted that the heated exchange

Company Appeal (AT) (Ins.) No. 1290 of 2022 12 centred around the issue of payments as well as the digital campaign which

therefore clearly establish that there were pre-existing disputes. Further, it

was submitted that the Adjudicating Authority had ignored the fact that

quality of posters was also to be kept in mind and not merely the quantity of

posters supplied.

20. It is the case of the Corporate Debtor that disputes had been raised by

the Corporate Debtor with regard to the services performed by the Operational

Creditor in their reply to the Legal Notice and Demand Notice in terms of

extremely unprofessional work and being extremely lethargic in deliveries.

The Corporate Debtor had also raised the issue of the illegal act of hijacking

of the User ID and Password of their social media accounts on YouTube,

Twitter and Facebook by the Operational Creditor and that this had come in

the way of promoting their movie thus causing financial loss. It would be

useful to extract relevant paragraphs from the reply to the Legal Notice dated

17.03.2018 as below: -

"5. I have to also bring to your notice that it is extremely preposterous

that your Client had changed and with held the YouTube channel and

Twitter account password of my Clients which has caused immense

loss to them. Your Client was in charge of the digital marketing of the

movie Haseena Parker and this illegal act of hijacking my Clients

social media accounts was completely despicable. That the said

accounts were under the name of my Clients, Swiss Entertainment.

That your Client has been extremely unprofessional in his work and

moreover extremely lethargic with his deliveries. My Clients sent

Company Appeal (AT) (Ins.) No. 1290 of 2022 13 repeated requests to your Client via several e-mails to release the

passwords as my Clients were suffering from financial losses due to

the same and were unable to promote their upcoming movies.

However, your Client refused to do so thereby committing offences

punishable under the Indian Penal Code, 1860 and the Information

Technology Act, 2000".

(Emphasis supplied)

21. Similar disputes with regard to poor services and hijacking of social

media accounts have been articulated by the Corporate Debtor in their reply

to the Demand Notice dated 09.08.2018, relevant excerpts of which is as

extracted below: -

"2..... My Clients state that the quality of work handed over by you

was extremely poor and not to the satisfaction of my Clients. It is

emphasized that the said Engagement Letter requires the Producers

i.e my Clients to be satisfied with the promotional work done by you.

Thus, the present dispute, being based on the poor services provided

by you, the present notice is not tenable.

***** ***** ******

3. ....... That you had miserably failed to promote the said movie on

the digital platform which was one of the services you were to provide

to my Client as per the Engagement Letter dated 28.08.2017.

Thereafter, my Clients sent repeated requests to you via several e-

mails to release the passwords as my Clients were suffering from

Company Appeal (AT) (Ins.) No. 1290 of 2022 14 financial losses due to the same and were unable to promote their

upcoming movies. However, you refused to do so."

(Emphasis supplied)

22. We find that the very fact that the Operational Creditor had issued a

Legal Notice is suggestive of a pre-existing dispute between the two parties.

That the contentions raised in the Legal Notice were countered by the

Corporate Debtor reinforces the existence of dispute between the parties. It is

also pertinent to note that the Legal Notice was issued much before the issue

of Demand Notice. That the reply to Legal Notice clearly predates the Section

8 Demand Notice by nearly five months has somehow managed to escape the

attention of the Adjudicating Authority. Thus to hold that the disputes raised

in the reply to the Legal Notice is an 'after-thought' is fallacious and hopelessly

misplaced on the part of the Adjudicating Authority.

23. The Learned Counsel for the Appellant has filed IA No. 4032 of 2022

seeking permission of this Tribunal to place on record certain emails

exchanged between the Corporate Debtor and Respondent No.1 as additional

documents to show that there was pre-existing dispute in regard to quality of

services provided by the Operational Creditor. This was contested by the

Learned Counsel for the Respondent No.1 stating that these documents were

never filed before the Adjudicating Authority and therefore cannot be raised

at this stage. The Learned Counsel for the Appellant countered this by stating

that these additional documents have an important bearing on the present

matter since they partake same objections as had been raised before the

Adjudicating Authority and therefore should be admitted in the interests of

Company Appeal (AT) (Ins.) No. 1290 of 2022 15 justice. In support of their contention, reliance was placed on the orders of

this Tribunal in Company Appeal (AT) (Ins) 592 of 2020 dated 20.10.2020

wherein it was held that "the placing of letters/communications as additional

documents in an appeal squarely depend upon whether the same are required

to a Tribunal to enable it to deliver a judgment". Having perused the emails,

we find that they are linked to the controversy between the two parties which

had been raised before the Adjudicating Authority and therefore find them

relevant to decide whether there was a dispute between the two parties in the

facts of the present case. Since no extraneous issues or considerations have

been raised in these emails other than what was mentioned before the

Adjudicating Authority, we find no reasons to agree with the Respondent No.1

for not taking cognisance of these emails contained in IA No. 4032 of 2022.

24. Now, coming to the material on record placed in I.A. No. 4032 of 2022,

it has been pointed out by the Learned Counsel for the Appellant that there

are several email communications from the Corporate Debtor which show

dispute relating to the quality of services performed by the Operational

Creditor which were sent much before receipt of Demand Notice. It has been

brought to our knowledge that on 19.09.2017 there is an email

communication from the Corporate Debtor to the Operational Creditor stating

that the printing material for the movie Haseena Parker has not been delivered

on time thereby affecting movie publicity as at Page 31 of APB. It was also

submitted that on 27.02.2018 the Corporate Debtor had requested the

Operational Creditor to hand over the User ID and password of their

YouTube/Twitter account to which the Operational Creditor replied on

Company Appeal (AT) (Ins.) No. 1290 of 2022 16 28.02.2018 seeking clearance of their due payment. The Corporate Debtor

on the same date has sent a reply denying any payment due from them in

terms of their ledger accounts and reiterated their request for release of the

User ID and password to which the Operational Creditor again replied that it

would be released only on receipt of payments due to them. The entire set of

related email communications relating to release of user ID and password of

YouTube Channel, Twitter and Facebook account of the Corporate Debtor by

the Operational Creditor have been placed at page 32-36 of the APB. The

email dated 02.03.2018 therein also show that the Corporate Debtor had

threatened to lodge a police complaint against the Operational Creditor for

having hijacked their social media accounts. Having perused these

communications, we are convinced that there were genuine pre-existing

disputes between the parties which is more than a moonshine defence.

25. It is well settled that in Section 9 proceeding, there is no need to enter

into final adjudication with regard to existence of dispute between the parties

regarding operational debt. What has to be looked into is whether the defence

raises a dispute which needs further adjudication by a competent court. If

we apply the above cited test laid down in Mobilox by the Hon'ble Supreme

Court to the facts of the present case, it becomes clear that the defence raised

by the Corporate Debtor is not illusory or a sham and that the nature of

dispute raised is such that it requires adjudication by the competent court.

26. In view of the foregoing discussions, we are satisfied that the Corporate

Debtor having raised genuine disputes in their detailed replies to the Legal

Company Appeal (AT) (Ins.) No. 1290 of 2022 17 Notice and the Demand Notice, the Adjudicating Authority ought not to have

admitted the Section 9 application. The Order dated 14.10.2022 passed by

the Adjudicating Authority initiating CIRP of the Corporate Debtor and

appointing Interim Resolution Professional and all other orders pursuant to

impugned order are set aside. The Corporate Debtor is released from the

rigours of CIRP with immediate effect. This appeal is allowed with the above

observations. No costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

New Delhi Dated: 25.01.2023

PKM

Company Appeal (AT) (Ins.) No. 1290 of 2022 18