Srinivasa Reddy Velagala vs Sravanthi Infratech Pvt. Ltd

Srinivasa Reddy Velagala, Director, K.P.R. Chemicals Limited, R/o Biccavolu (Village & Mandal), East Godavari District- 533 342 Andhra Pradesh Corporate Debtor/ ... Appellant Vs.

Sravanthi Infratech Pvt. Ltd. Thro. Its Vice President/Authorized Representative, Reg. Office at LG Floor, Rider House, 136, Sector-44 Gurgaon- 122 002 Haryana Operational Creditor/ .. Respondent Present:

For Appellant: Mr. Bommineni Vivekananda and Mr. Kameshvedual, Advocates

For Respondent: Mr. Sanchit Kumar Sahijpal, Advocate

JUDGMENT

(1st February, 2021)

KANTHI NARAHARI, MEMBER (TECHNICAL)

The present appeal preferred challenging the order of the

Adjudicating Authority (National Company Law Tribunal, Amaravati

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 1 of 14 Bench, Hyderabad, in TCP No. 82/9/AMR/2019 [CP (IB) No.

123/9/HDB/2018) whereby the Adjudicating Authority admitted the

Application filed by the Respondent herein and initiated Corporate

Insolvency Resolution Process (in short 'CIRP') by appointing Interim

Resolution Professional.

BRIEF FACTS:

2. Learned Counsel for the Appellant mainly raises two grounds

stating that the Application filed under Section 9 of Insolvency and

Bankruptcy Code, 2016 (in short 'IBC') by the Respondent herein

(Operational Creditor) was barred by limitation as prescribed under

Article 137 of Limitation Act 1963. Second ground raised by the

Appellant is that the contract was frustrated by efflux of time. Since

the Respondent failed to establish the above grounds he prays the

Bench to allow the Appeal by dismissing Section 9 Application. The

learned Counsel corroborated his arguments on legal and factual

issues.

3. Learned Counsel for the Respondent submitted that the

Application filed under Section 9 of IBC by them before the

Adjudicating Authority does not barred by limitation on the ground

that the contract, which they entered with the Appellant is still

subsisting. He further submitted that there is no such provision that

the contract would frustrate by efflux of time. He submitted that there

is continuous correspondence between the Respondent and the

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 2 of 14 Appellant and the Appellant even did not reply to the correspondences

and even to the Demand Notice. He further submitted that the claim

of the Respondent admittedly an operational debt the same is due and

payable. He further submitted that the Appeal does not have any merit

and prayed the Bench to dismiss the same.

Factual Matrix of the case: -

4. Heard learned Counsel for the respective parties, perused the

pleadings, documents submitted in their support. The learned

Adjudicating Authority framed issues - viz, (a) whether the Company

Petition is maintainable, (b) whether they owed an operational debt to

the Respondent and, (c) whether the Company Petition is barred by

limitation. Learned Adjudicating Authority dealt with the issues and

found that the Application filed by the Respondent herein is not barred

by limitation as contemplated under Article 137 of the Limitation Act

and held that the debt owed by the Appellant herein is an operational

debt. With the aforesaid findings, the Application filed by the

Respondent herein under Section 9 of IBC was admitted.

5. The Appellant herein invited International Competitive Bids by

publishing advertisement in newspaper on 13.12.2010 for setting up

a 225 MW gas based combined cycle Power Station at Bikkavolu, East

Godvari District, Andhra Pradesh. The Respondent being the lowest

bidder, was awarded the contract for execution of the aforementioned

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 3 of 14 project and a Letter of Award (LOA) was accordingly granted on

24.12.2010 for an amount of Rs. 827 Crores.

6. The said contract comprises of four EPC (Engineering

Procurement and Construction) for offshore and onshore equipment

supply for a value of Rs. 687 Crores, Civil & Construction works

amounting to Rs. 80 Crores, Engineering Custom clearance, erection

testing and commissioning service at a cost of Rs. 57 crores and

transportation services for offshore equipment contract for Rs. 3

crores. It is an admitted fact that the contract was signed by the

Appellant and the Respondent on 09.02.2011. It is also an admitted

fact that the Appellant paid an amount of Rs. 50.15 Crores in

instalments.

7. The grievance of the Respondent is that the Appellant did not

pay 10% of total contract amounting Rs. 82.7 Crores. Respondent

submitted that out of Rs. 82.7 Crores, they received only Rs. 50.15

Crores and the balance amount was not paid by the Appellant. He

further submitted that the Appellant did not honour the terms and

conditions of the contract. It is further submitted that the Appellant

engaged various vendors/suppliers and given them various

subcontracts to meet the time line of the EPC contract. Due to non-

payment of the amount by the Appellant herein, various sub-

contractors have raised litigations against the Respondent herein

which led the Respondent to suffer huge loss and damage.

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 4 of 14

8. From the aforesaid facts we have seen that except the grievance

raised by the Appellant herein with regard to limitation contending

that the claim of the Respondent herein does not fall under the

category of Operational debt and the contract was frustrated by efflux

of time. The other factual aspects are admitted. Therefore, we deal with

the same.

9. The EPC contract was supposed to be completed in 14 months.

It is seen from the pleadings that the work was suspended by the

Respondent vide communication dated 30.07.2011 for the reason that

the Appellant did not fulfil the contract obligation. It is also on record

that the Letter of Award signed on 24.12.2010 and the payments were

released to the extent of Rs. 50.15 Crores and the second instalment

of 10% of the contract had to be released on finalisation and

submission of un-price of such order goods. It is submitted that the

Respondent issued notice on 15.02.2011. The Respondent submitted

that they had suspended work by communicating letter dated

30.07.2011 to the Appellant herein. A copy of the letter dated

30.07.2011 is enclosed in Volume-III of the Appeal Paper Book at page

574 as Annexure-A/9. Respondent addressed the said letter to the

Appellant whereby it is stated as under;

"To

KPR Chemicals Private Limited S. No. 24/2, Nallamilli Road, Biccavolu- 533343

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 5 of 14 Kind Attn: Mr. Rajshekhar Reddy (ED)

Subject: Notice for suspension of the contract.

Dear Sir,

This is in reference to the our letter dated 15.02.2011

regarding initial advance payment, even after five

months of continuous follow up with you, the balance

payment of Rs. 32.55 crores have not been received

against initial advance.

Thus the 100% advance has not been received by SIPL

and the contractual obligation as per clause 5.1 of the

contract has not fulfilled by M/s KPR chemicals

Limited.

Therefore Sravnathi Infratech Private Limited hereby

notifies to you that all the EPC activities for the KPR

chemicals Ltd. (225 MW combined cycle power project)

will be under suspension till the all the contractual

obligation are fulfilled by you.

Kindly acknowledge the receipt of this notice.

Thanking you,

Yours sincerely

For Sravanthi Infratech Private Limited"

Wherefrom it is evident that the balance payment of Rs. 32.55 Crores

was not paid by the Appellant. For the aforesaid reason the work on

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 6 of 14 the project site was suspended till the contractual obligations are

fulfilled. Respondent further submitted that there is no reply from the

Appellant to this letter.

10. Learned Counsel for the Appellant vehemently contended that

by addressing a letter dated 30.07.2011 to the Appellant, the

Respondent themselves frustrated the contract. On the other hand,

the learned Counsel for the Respondent contended that there is no

such clause in EPC Contract with regard to frustration of contract.

However, there are clauses enumerated under the agreement dated

09.02.2011. Article 14 of the Contract dated 09.02.2011 provides for

termination of the contract. A copy of the EPC Contract is enclosed at

Annexure-A/4(page-116, Vol. I). Clause 14.1 deals with the

termination for Owner's convenience. According to the said clause,

"14.1 Termination for Owner's Convenience.

Owner may for its convenience terminate any part of the Supplies or any or all remaining Supplies hereunder at any time upon at least 30(Thirty) days' prior written notice to Supplier specifying the part of the Supplies to be terminated and the effective date of termination. Upon receipt of such notice, Supplier shall promptly initiate steps to stop provision of such terminated Supplies. In the event of a partial termination, Supplier shall continue to produce the part of the Supplies not terminated. In case of a termination of part of the Supplier's Work, Owner shall authorize a Scope Change Order making reasonable adjustments to one or more of the Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 7 of 14 Schedule Unit(s). Completion date, Scheduled Facility Completion Date, the Contract Price, the Contract Schedule, the Performance Guarantees and any other affected provisions of this Agreement, as applicable. In the event of termination by Owner under this Article 14.1, Owner shall pay to Supplier (or Supplier may retain) such amounts as are required pursuant to Article 4.4 hereof. In case of a termination of all or remaining part of the Supplier's Work, the Owner shall provide at least 30 days' prior written notice to Supplier providing details of the reasons for such termination and the effective date of termination. Owner will authorize a Scope Change Order making reasonable adjustments to the Contract Price as applicable."

11. Further, Clause 14.2 deals with termination upon non-payment

by Owner.

"14.2 Termination Upon Non-Payment by Owner. If Owner fails to pay to Supplier any payment as required hereunder and such failure continues for 25 days after written notice thereof has been given to Owner by Supplier, then Supplier shall give ten days' prior written notice thereof to Owner and the Financing Parties, and thereafter may stop all performance of Supplier's obligations hereunder until Supplier receives payment of all amounts then due plus reasonable suspension and resumption expenses. Owner shall be responsible for reimbursement of all costs incurred by Supplier as a result of the stoppage of Supplier's work. If Supplier's performance hereunder is suspended by Supplier

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 8 of 14 pursuant to this Article 14.2, Owner will authorise a Scope Change Order making an equitable adjustment to the Scheduled Unit(s) Completion Date, Scheduled Facility Completion Date and the Contract Schedule and required reasonable adjustments to one or more of the Contract Price, the Terms of Payment and any relevant terms and conditions of this Agreement, as appropriate. If such suspension continues uninterrupted for at least four months, or if two or more suspensions exist for an aggregate of at least four months, Supplier may terminate this Agreement; provided that Supplier shall give the Financing Parties a further 60 days prior written notice, and opportunity to cure, before terminating this Agreement. In the event of such a termination by Supplier, Owner shall pay to Supplier (or Suppler may retain) such amounts as are required pursuant to Article 4.4. hereof.

12. Learned Counsel for the Respondent submitted that the

Appellant could have invoked Article 14.1 for termination of contract

since the said clause provides for termination for Owners Convenience.

Before invoking the said clause, the Owner can issue a prior 30 days'

Notice to the Supplier specifying the part of the supplies to be

terminated and effective date of termination. According to this Clause,

the Owner either terminate the whole contract or terminate the part of

the supplies. While doing so, the Owner shall pay to the Supplier such

amount as are required pursuant to Article 4.4 thereof. The learned

Counsel also submitted that the Respondent can also terminate the

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 9 of 14 contract invoking clause 14.2 of Article 14 if Owner fails to pay

Supplier any payment as required thereunder and such failure

continues for 25 days' after written notice thereof has been given to

Owner by Suppler, then the Supplier shall give 10 days' prior written

notice thereof to Owner and the Financing Parties and thereafter may

stop all performances of Supplier's obligation therein until Supplier

receives payment of all amounts then due plus reasonable suspension

and resumption expenses. However, the Respondent did not invoke

this clause for terminating the contract despite several challenges and

financial constrains faced by them from their Suppliers/Vendors.

13. As stated supra, the Respondent by letter dated 30.07.2011

suspended the work for non-receipt of payment. In view of non-receipt

of payment from the Appellant, the Respondent could not pay to the

Venders/Suppliers, those who have supplied goods and rendered

services to the project of the Appellant due to non-availability of fund.

14. Apart from the above, we have also perused a letter dated

05.01.2012 addressed by the Appellant-Company to the Chief

Engineer, IRP Division, Central Electricity Authority, Sewa Bhawan, R

K Bhawan, New Delhi [page-54, Annexure-D(Colly)] to the Reply of the

Respondent. The Appellant has admitted:

..

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 10 of 14

"The project is in advance stage of development, all the

major clearances for the project has been received by

the project company and construction is in full swing."

..

Further the status of the project was given in the said letter and

requested the Central Electricity Authority to allocate 1.2 mmscmd of

gas for 225 MW CCPP so that the project can be commissioned on

schedule.

15. Further, the Respondent issued a Demand Notice dated

02.07.2018 to the Appellant under Section 8(1) of IBC (in Form-3

under Rule - 5 of the IBC Application to Adjudicating Authority) Rules,

2016. The Appellant did not reply to this Notice nor raised any

existence of dispute prior to the issuance of this Notice.

16. In answer to the plea of barred by limitation i.e., as per the

amendment to the IBC incorporating Section 238A to the IBC

applicability of the limitation to the Applications filed under IBC. It is

seen from the correspondences between the parties and from the

perusal of the clauses/articles as enumerated under the EPC contract

that the contract has not been terminated by either parties and the

contract still subsists. Therefore, the Adjudicating Authority rightly

held that there is no termination of contract and the issue raised with

regard to barred by limitation cannot be accepted. Therefore, we hold

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 11 of 14 that the Application filed by the Respondent under Section 9 of IBC

before the Adjudicating Authority is not barred by limitation.

17. Further the issue is whether the claim of the Respondent is an

Operational Debt. The Operational Debt is defined under sub-section

21 of Section 5 of IBC which reads as under:

..

"5(21) "operational debt" means a claim in respect of

the provision of goods or services including

employment or a debt in respect of dues arising under

any law for the time being in force and payable to the

Central Government, any State Government or any

local authority."

..

18. Admittedly, the claim of the Respondent is an operational debt.

Therefore, the arguments of the Appellant that the claims of the

Respondent is not an operational debt does not hold any field.

19. Efflux of time:

The other issue with regard to frustration of contract by efflux of

time is concerned, we hold that the EPC contract between the

Appellant and Respondent still subsists and there is no such clause in

the contract regarding frustration or termination by efflux of time, we

hold that there is no merit in this point and accordingly, we negate this

point issue also.

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 12 of 14

20. Learned Counsel for the Appellant relied upon a judgment in the

matter of KLA Construction Technologies Pvt. Ltd. V. CKG Realty

Pvt. Ltd., rendered in CA(AT)(Ins.) No. 67/2018. In this judgment this

Tribunal was of the view that if the machinery or equipment was not

moved to the construction site would be a debatable issue which can

be agitated before the Civil Court. However, in the facts of the present

case, the Appellant did not raise any existence of dispute prior to the

issuance of Demand Notice and there is no termination of contract as

held by us. Therefore, this judgment is not applicable to the facts of

the present case.

21. Learned Counsel for the Appellant also relied upon the decision

of Hon'ble Apex Court in B.K. Educational Services Pvt. Ltd. Vs.

Paras Gupta & Associate, AIR 2018 SC 5601 and Vashdeo R.

Bhojwani Vs. Abhudaya Co-operative Bank Ltd. (2019) 9 SCC 158

citing that the period of limitation for Applications seeking initiation of

CIRP under Sections 7 & 9 of IBC is covered under Article 137 of the

Limitation Act and therefore three years period to be taken into

consideration from the date when default occurs for the purpose of

limitation. It is reiterated that when we already held that there is no

termination of contract from either of the parties, therefore, the

contract still subsists and the claim is within limitation.

CONCLUSION:

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 13 of 14

22. From the perusal of the facts it is evident that the default has

arisen out of EPC Contract, which itself is a continuing contract. Even

from the Demand Notice dated 02.07.2018 in particulars of operational

debt at column-1, the Respondent had clearly stated that the debt fell

due on 24.12.2010 and the last payment made to the Respondent was

on 25.02.2011 through RTGS. It is also mentioned that the debt

continues to fall even today as the EPC contract between the Appellant

and Respondent never terminated by either parties.

23. We hold that the Adjudicating Authority had rightly admitted the

Application of the Respondent which in our considered opinion does

not require any interference in the instant Appeal.

24. From the facts and legal position, as explained above, the Appeal

is devoid of any merit and liable to dismissed. Accordingly, the Appeal

is dismissed. No order as to costs.

[Justice Venugopal M.] Member (Judicial)

(Kanthi Narahari) Member(Technical)

Pronounced by one Member of the Bench in terms of Rule 92(1) of the NCLAT Rules, 2016.

(Kanthi Narahari) Member(Technical)

New Delhi

Akc

Company Appeal (AT)(Insolvency) No. 188 of 2020 Page 14 of 14