Sudha Electrical vs Leena Power-Tech Engineers ...

SUDHA ELECTRICAL ...Appellant

Through it Proprietor Yogendra Chaudhary

Vs ...Respondent LEENA POWER-TECH ENGINEERS PVT. LTD.

(Arising out of Impugned Order dated 25.10.2024 passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-V, Mumbai) in C.P. (I.B) No. 515/MB/2023)

For Appellant: Mr. Chandra Shekhar Yadav & Mr. Astitva Srivastava, Advocates for Appellant.

For Respondent: Mr. Arvind Nayar, Sr. Adv. With Sinha Shrey Nikhilesh, Mr. Parth Davar, Mr. Naman Kapoor, Diskha Dadu, Ms. Swastik Verma, Ms Nayan Dubey & Ms. Faraaz Khan, Advocates for Respondent.

JUDGEMENT

Per Justice N. Seshasayee, Member (Judicial)

This Appeal is preferred by an Operational Creditor whose petition to initiate a

CIRP Proceedings under Section 9 IBC was dismissed on the ground that there 2

subsists, (a) a pre-existing dispute between the parties vis-à-vis a debt which the

appellant claims that the respondent had defaulted to pay despite a demand;

and (b) the CIRP is not maintainable under Secc.10A of IBC.

FACTS

2.1 The material facts which led up to the institution of this appeal are as

below:

(a) The appellant is engaged in the business of supplying and erecting

and testing and commissioning of electrical equipments, transformers,

gensets control penal, laying of cables, etc.

(b) Be that as it may, certain Rahul Cables Pvt. Ltd. had obtained

certain Government contract involving laying of 220 Kv copper cables and

132 Kv cables and work associated therewith in Navi Mumbai, Pune and

Andhra Pradesh. It (Rahul Cable) had awarded sub-contract to the

respondent/corporate debtor herein. According to the corporate debtor, it

engaged the appellant for performing its contracted work.

(c) According to the respondent/corporate debtor, on 18.09.2019,

23.12.2019 and 15.01.2020, it had placed three separate work orders with

the appellant. Except for the nature of work to be done thereunder, the

terms of the three work orders are identical. The appellant contends that

no work order of the kind which the respondent pleads has never been

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issued to him. In other words, its contention is that the contract between

the parties was oral.

(d) According to the appellant - Operational Creditor, it had performed

the work required to be performed by it, and raised 5 invoices dated

09.01.2020, 23.01.2020, 13.02.2020, 28.02.2020 and 13.03.2020 for a

combined total value of Rs.4,98,28,613.71.

(e) On 24.06.2020, the respondent had made part payment of

Rs.76,00,975/- and also paid Rs.4,22,277/- towards GST. As on

31.03.2022, according to the appellant, the respondent is liable to pay an

outstanding balance of Rs.4,18,05,361/-. And, the respondent had

confirmed the same on 01.04.2022. As on 09.01.2023, inclusive of

interest at 24% p.a. the respondents are liable to pay sum of

Rs.6,73,42,138/-.

(f) Since the debt due to the Operational Creditor was not paid, it

issued a demand Notice dated 09.01.2023 as required under Sec. 8 of IBC.

The notice, though was duly served, did not evoke any response or reply

from the respondent. Wasting no time the appellant invoked Sec.9 IBC.

(g) In Part IV of Form 1, the appellant has indicated that the debt

became due for repayment on the respective dates of invoices.

2.2 Notice was served on the respondent and it appeared to contest the petition

with its reply. Its defences are twofold:

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a) that the initiation of action is barred under Section 10A of the IBC and

hence the very invocation of sec.9 IBC is not maintainable. In terms of

clause 5 of the work order (something which the appellant disputes), the

respondent is required to pay only 20% of the invoice value within 90 days

of the invoice. If so reckoned, the respondent will have 90 days time to

pay the paid 20% from the respective dates of the invoices. Accordingly,

the time for payment of 20% on each of the five invoices would arise only

after 25.03.2020, the date from which Sec.10A embargo in invoking IBC

would intervene.

b) In terms of clause 5(2) of the work Order, 70% of the balance (after the

initial payment of 20% of the invoice value) is required to be paid only after

a completion certificate along with testing and commissioning report, duly

signed by the authorized person of M/s. Rahul Cables (as contemplated in

clause 3 of the work order) is made available along with few documents

indicated in clause 5. The appellant has not produced any completion

certificate as mandated in Clause 5(2) read with Clause 3(vi) of the work

order. Hence, the 70% of the invoice was not paid. So far as the balance

10% is concerned, the appellant is entitled to be paid only after a period of

12 months from the date of testing and commissioning. Therefore, till

such time the appellant establishes its right to be paid as per the terms of

payment, the respondent is entitled to withhold it. And, the appellant has

not produced any material to show that it has done the work as

contemplated in the work order nor produced any of the documents that

Company Appeal (AT) (Ins) No.2381 of 2024 5

it is required to produce as contemplated in clause 5 read with 3 of the

work Order. On the other hand, the respondent has raised a dispute that

the work has not been done even prior to the institution of CIRP under

sec.9 of IBC. In essence neither is there a debt as contemplated in the IBC

nor the claim of the appellant is dispute-free. The appellant has grossly

suppressed the material facts and consequently the very institution of

petition under Sec.9 IBC is not maintainable.

c) Admitting that it has made a part payment of Rs.76,00,975/- the

respondent would explain that it merely represents the 20% of the invoice

value as required to be paid. And the GST of Rs.4,22,277/- is also paid as

it is statutorily required to be paid on the 20% of the amount.

2.3. The Adjudicating Authority upheld the defences taken by the respondent

and refused to admit the CIRP. This Order is now under challenge.

THE ARGUMENTS:

3. Taking this Tribunal extensively through the few documents including the

GST returns etc., the learned counsel for the appellant argued that:

a) in Part IV of Form I, the appellant has indicated in unequivocal terms that

the date of default to pay the debt commenced from the date of the invoice.

In terms of Sec. 10A IBC which the Parliament thought it fit to introduce

during the Covid-days, only in cases where the default has arisen on or

Company Appeal (AT) (Ins) No.2381 of 2024 6

after 25th March, 2020 (the day on which the Government clammed

lockdown) across the country, initiation of a CIRP proceeding is barred.

However, in the instant case, the invoices are issued between 09.01.2020

and 13.03.2020 and they are well before 25.03.2020 from which date alone

the bar under Section 10A would come to play.

b) So far as the alleged pre-existing dispute is concerned, the respondent has

not denied any one of the 5 invoices issued by the appellant between

09.01.2020 and 13.03.2020. Instead it proceeded to confirm it on

01.04.2022. Indeed, acknowledging the debt, the respondent had even a

made part payment on 24.06.2020 and also deposited Rs.4,22,277/-

towards GST. And most significantly, the respondent has not even chosen

to reply the statutory notice issued on it under Sec.8 IBC denying the claim

of the appellant.

c) The CIRP was laid on 21.02.2023. During the pendency of the same, on

18.04.2023, the respondent had paid Rs.25.0 lakhs, which is corroborated

by the e-mail of the bank. Indeed, there has been WhatsApp chats between

the appellant and the representative of the respondent preceding this

payment, and is made available on record as Annexure 4. This factum

was overlooked by the Adjudicating Authority.

d) The respondent contends that the appellant transacted business with the

former based on certain work Orders, but they were never given to the

latter. The transaction was based on an Oral agreement, and work Orders

Company Appeal (AT) (Ins) No.2381 of 2024 7

produced by the respondent are unilateral documents which do not bind

the appellant.

When the debt is not challenged, and when the respondent defaults in paying

it despite a demand, it exposes the respondent to the perils of IBC. The issue

of existence of a pre-existing dispute is a hurriedly invented exit route but it

is unsupportable on facts.

4. The response of the respondent's counsel was candid and along

predictable lines. He argued:

a) The contract which the respondent had entered into with the appellant

involves both supply of goods and services associated with erection,

commissioning and testing of electrical cables. It was entered into as part

of the contract which M/s Rahul Cables was awarded by the Government.

To deny these work orders itself is denied. Indeed, in the copies of the

work Orders produced by the appellant in its paper-book (all photocopies),

the signature of the appellant's representative is seen.

b) The terms of the work Orders are unambiguous. The appellant is required

to supply goods and services, erect and commission and them and they

have to be tested, and certificates of the due commissioning and testing

must be obtained from the agent of the contractor, and produce the same

for claiming the value of the invoices raised for the purpose. It is here the

appellant chose to turn the other way.

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c) So far as the right to claim the amount which the appellant claims as debt,

in terms of the work Order, it would arise only after 90 days of the date of

the invoice. And the earliest of invoice is dated 09.01.2020, and if 90 days

is added to it, the right to claim the invoice amount would arise only in

April, 2020. And the last of the invoice is dated 13.03.2020, a few days

prior to lockdown due to Covid commenced which eventually necessitated

the introduction of Sec.10A of the IBC, but the 90 days from there would

expire only about mid-June, 2020, which fell within the period covered by

Sec.10A.

d) It is true, some amounts as stated by the appellant were paid, but they do

not indicate that the respondent has admitted the entire liability. It is still

waiting for the certificate duly signed by the authorized agent of the

respondent vis-à-vis the commissioning and testing etc. While it is not

disputed that no reply was issued to the notice under Sec.8 IBC, yet it

cannot constitute an admission of debt, and the appellant is still under an

obligation to establish that there existed an undisputed debt or the default

in paying it within the meaning of Sec.3(11) and 3(12) of IBC.

5. In his reply to the submission of the counsel for the appellant, the learned

counsel for the appellant submitted that the signatures of the representative of

the appellant in the copies of the work orders as seen in the appellant's paper-

Company Appeal (AT) (Ins) No.2381 of 2024 9

book is intended to authenticate the document as per procedure, and it should

not be construed as an admission of having received the work orders in question.

Discussion & Decision

6. Two factors that may provide a cause for a creditor to set in motion a CIRP

either under Sec.7 or under Sec.9 IBC are existence of a debt within the meaning

of Sec.3(11) and the default of the debtor to pay it as defined in Sec.3(12) of the

Code.

7.1 In the present case, there is no dispute that the appellant has not issued

any of the five invoices. It also goes as an admitted fact that on 24.06.2020

(when Covid Wave I was in full swing), that the respondent had paid Rs.

Rs.76,00,975/- towards part payment of the invoice amount besides

Rs.4,22,277 towards GST at 18%. This is followed by a payment of Rs.25.0 lakhs

on 18.04.2023, some two months after the CIRP was laid. Here, the respondent

would argue that whatever amount it had paid only constitutes 20% of the

invoice value which the respondent is required to pay as per Clause 5 of the work

Order. (This tribunal has verified it and it works out to 20.27%). This implies

that the respondent had paid substantial part of the 20% of the invoice amount

in June, 2020, and the balance after the institution of petition under Sec.9 IBC.

What could be gathered here is that the respondent had admitted that the

appellant had performed its contractual obligation, whether wholly or partly, for

the respondent would not have paid anything if the appellant had failed to

perform its part of the contract at all.

Company Appeal (AT) (Ins) No.2381 of 2024 10

7.2 Secondly, it was argued that the respondent has not challenged the

correctness of the invoice value, for it has confirmed it on 01.04.2020, and that

it is not disputed. It however, requires to be noted that the respondent contends

that payment of the balance amount could be withheld till the appellant

produces the certificate of erection, commissioning and testing as stipulated in

clause 5 of the work Order. In other words, according to the respondent, mere

assertion of the completion of the work by the appellant and raising of invoices

will not automatically entitle the latter to claim the invoice-amount, unless the

work done by the appellant is certified in the manner contemplated. In that

sense, the right to claim the value of the work done is conditioned upon

something more - the production of the certificate and few other documents

enumerated in clause 5 of the work Order. What if the quality of work at the

time of such certification itself is challenged? Will the appellant still be eligible

to claim the invoice-amount? That would then become debatable.

8. There is another issue. Even if the correctness of the invoice-amount is

presumed to be true, is there a default within the meaning of Sec.3(12) of the

Code? Sec 3(12) defines a 'default' as, "non-payment of debt when whole or part

or instalment of the amount of debt has become due and payable and is not

paid by the debtor or the corporate debtor, as the case may be". This amplifies

the fact that not only should there be an undisputed debt, but such debt must

have become due for payment at the time when the default is said to have

occurred. In the instant case, even if the existence of debt is presumed, still it

requires to be established by the appellant that it had fallen due for payment.

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9. Here there are two versions: The respondent claims that the appellant had

performed its obligation only based on the work Orders whereas the appellant

claims that no work order of the kind was ever given to it. To stretch it further,

the appellant's contention is that inasmuch as the contract between the parties

was oral, the terms of the work orders vis-à-vis the time for payment as

stipulated in Clause 5 thereof would not bind it. Here it may be stated that the

first installment of part payment of Rs.76,00,975 was paid on 24.06.2020 which

was 90 days after the last invoice dated 13.03.2020. However, it cannot ipso

facto be concluded for the purposes of working the IBC that the appellant had

undertaken the work only pursuant to a written work order. There therefore, is

an obvious dispute, and unless this dispute is resolved the time for payment

could not be ascertained.

10. IBC is not intended as a recovery mechanism for realization of debts. Only

where a company by design or default deny the creditor of their dues, law steps

into take control of the affairs of the erring company and arrange to pay off the

creditors either through the process of resolution or liquidation. Therefore, in

every case where a creditor initiates a CIRP, the burden is on the creditor to

satisfy the conscience of the Adjudicating Authority that there exists a debt

which the respondent has not disputed at any time prior to the institution of the

CIRP, and that the debt is not paid when it fell due for payment despite a demand

to pay. It does not even require a debtor to contest the issue, for the statutory

burden is on the creditor to establish that its case qualifies for initiating the CIRP

against the debtor.

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11. If the facts of the present case are spread on this plane, it raises a serious

doubt as to whether the time for payment of the entire invoice amount has

arisen. The nature of enquiry contemplated by the IBC is summary in character,

where the criteria prescribed for invoking it should be kept either beyond debate,

or at least must be capable of being ascertained without great degree of forensic

scrutiny. Contextually, the law as declared by the Hon'ble Supreme Court in the

early days of the IBC in Mobilox Innovations Pvt. Ltd., Vs Kirusa Software

Pvt. Ltd. [(2018) 1 SCC 353] is of considerable value. It says:

"51........ 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 patently feeble legal argument or an assertion of fact unsupported by evidence...."

12. The approach is to keep the allegations of the creditor a constant, and to

test the quality of defence offered by the debtor - its character and quality. Here

neither the existence of the debt or the time for payment should depend on the

proof of another independent fact, and this is the bottom line. In this case

however, there has arisen a need to investigate if there was a work order, and if

its terms determine the time for repayment. Unless a finding is entered on this

issue, it may be difficult to decide whether the respondent has committed a

default in payment. The work order whose existence the respondent asserts and

the appellant denies deserves a probe, and it is more than a plausible defence.

13. There however, is a jurisdictional limitation on the tribunal in ascertaining

the existence of the jurisdictional facts - of debt and default. The extent of

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enquiry contemplated under the scheme of the IBC does not require it to be

matched to an enquiry which civil courts may engage in - to probe one issue

linked to another issue, and enter a finding in one to feed a finding in another

based on rule of preponderance of probability.

14. Much was argued that the respondent has not replied to notice under

Sec.8 IBC. A failure to reply to Sec.8 IBC ipso facto cannot be construed as an

admission of debt or the time of payment at all circumstances. It depends on

the facts of each case. In the context of the facts of this case, given the fact that

the time of first part-payment of Rs.76,00,975/- is made on 24.06.2020, after

90 days from the date of the last invoice (dated 13.03.2020), marginally tilts the

scale in favour of the respondent yet not conclusively, for, existence of the work

order and whether the appellant had performed its part of the contract based on

the terms of the work order have to be probed independently, and as stated

earlier, the adjudicating authority cannot decide this basic fact on the thumb

rule of preponderance of probability which civil court employs without

restriction.

15. To restate the known, the IBC may not be understood as a hungry octopus

violently spreading its tentacles to prey on every corporate debtor, though

outside the IBC world it is dubbed as a monster mechanism ready to swallow

their affairs. While the scheme of the Code is creditor centric, IBC is not

unconscious of its impact on the commercial solvency of a going company and

its existential stability, the fundamental right to do business and right to

Company Appeal (AT) (Ins) No.2381 of 2024 14

property of the shareholders, besides the reputation of the corporate managers.

And, since the working of the IBC divests the right of the Board of the Corporate

Debtor to manage its affairs, it is made imperative that the existence of

jurisdictional facts - of debt and default must align perfectly with their statutory

definition and are kept beyond any controversy. In Indus Biotech Pvt. Ltd., Vs

Kotak India Venture (Offshore) Fund [(2021)6 SCC 436], the Hon'ble Supreme

court has held,

"21.... If in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in planned manner may also be pushed to corporate insolvency resolution process and get entangled in a proceeding with no point of return...."

It underscores why care should not be spared in initiating a CIRP. The

appellant's case fails right here.

16. Turning to the findings of the Adjudicating Authority, we do not propose

to interfere with its ultimate conclusion of dismissing the CIRP under Sec.9 IBC,

but modifies its line of reasoning: (a) the Adjudicating Authority has presumed

the existence of the work Order which the respondent contends, but we consider

that it requires further proof and that unless it is ascertained, it would be difficult

to hold if the time for payment of the invoice amount has arisen; (b) since the

Adjudicating Authority has presumed the existence of work Orders, it ventured

to calculate whether the date for payment of each of the invoice-amount after

the expiry of 90 days from the date of invoice fell after 25.03.2020 for invoking

Sec.10A IBC. Since we propose not to presume the Work Order as the foundation

Company Appeal (AT) (Ins) No.2381 of 2024 15

of the contract between the parties, we have decided not to speculatively apply

the 90 days waiting period for payment as contemplated in Clause 5 of the Work

Order. We therefore, refrain from entering a finding on the application of

Sec.10A of the Code vis-a-vis the facts of the present case.

17. In conclusion, we find that the Order of the Adjudicating Authority does

not require to be interfered with and consequently it is dismissed, but without

any costs.

[Justice N. Seshasayee] Member (Judicial)

[Arun Baroka] Member (Technical) rs/sk

Company Appeal (AT) (Ins) No.2381 of 2024