V.V. Nagarajan vs Vishnusudha Textiles & Anr

[Arising out of Order dated 29th November, 2017 passed by the Adjudicating Authority (National Company Law Tribunal), Single Bench, Chennai in CP/611/(IB)/CB/2017]

IN THE MATTER OF:

Mr. V. V. Nagarajan Director, M/s Sri Nagananthana Mills Ltd., No.16, Sathya Sai Nagar, Opp. To Sai Baba Temple, Madurai - 625 003, Tamil Nadu. ...Appellant

Vs

1. M/s Vishnusudha Textiles Sole Proprietor Smt. T. Sudha, Rep. by Its Power of Attorney Mr. V. Rajagopalan, No.32, K. R. P.A.D. Road, Pallipalayam, Erode - 638 006, Tamil Nadu.

2. M/s Sri Nagananthana Mills Ltd., Through Insolvency Resolution Professional No.16, Sathya Sai Nagar, Opp. To Sai Baba Temple, Madurai - 625 003, Tamil Nadu ....Respondents

Present:

For Appellant: Mr. G. Sivabalamurugan and Mr. A. Vasantha Kumar, Advocates. For Respondents: Mr. A. K. Mylsamy, Ms. Shalini Kaul and Mr. Chaman Lal Choudhary, Advocates for Respondent. Mr. Partha Sil and Mr. Tavish S. Prasad, Advocates for Intervener (UCO Bank). -2-

BANSI LAL BHAT, J.

This appeal has been preferred by Appellant - Mr. V. V. Nagarajan,

Director of M/s Sri Nagananthana Mills Ltd. (Corporate Debtor) against

impugned order dated 29th November, 2017 passed by the Adjudicating

Authority (National Company Law Tribunal), Single Bench, Chennai, in

CP/611/(IB)/CB/2017.

2. By the impugned order, the Adjudicating Authority admitted the

application for triggering the Corporate Insolvency Resolution Process filed by

the Respondent - M/s Vishnusudha Textiles (Operational Creditor) under

Section 9 of the Insolvency and Bankruptcy Code, 2016 (in short 'I&B Code'),

slapped Moratorium prohibiting certain activities in terms of provisions of

Section 14 of the I&B Code and appointed the Interim Resolution Professional

to take charge of the Corporate Debtor's management.

3. The issue raised in this appeal is that the Adjudicating Authority failed

to notice the existence of a pre-existing dispute inter-se the parties warranting

rejection of application under Section 9 of the I&B Code.

4. The factual matrix may briefly be adverted to as follows:-

Company Appeal (AT) (Insolvency) No. 30 of 2018 -3-

(i) The Respondent/Operational Creditor claimed to have supplied

Polyster Staple Fibre products to the Appellant/Corporate Debtor

between 15.02.2016 to 07.05.2016, in respect whereof she

claimed an amount of Rs.1,18,86,658/- from the

Appellant/Corporate Debtor in terms of demand notice dated 28th

August, 2017.

(ii) Appellant/Corporate Debtor contested the claim on the ground

that the amount owed to the Respondent/ Operational Creditor

was settled. Appellant/Corporate Debtor further maintained that

the Respondent/Operational Creditor had willfully suppressed

material facts in regard to the bus permits, promissory notes

alongwith blank cheques for a value of Rs.1.50/- crore held by it

as security. It was further stated in the counter that the

Appellant/Corporate Debtor had paid an amount of

Rs.1,93,60,000/- towards outstanding amount.

(iii) The Adjudicating Authority overruled the objections raised by the

Appellant/Corporate Debtor in his counter observing that the

Appellant/ Corporate Debtor failed to produce certificate from his

bank to show the details of payments made to the

Respondent/Operational Creditor and passed the impugned

order assailed through the medium of instant appeal.

Company Appeal (AT) (Insolvency) No. 30 of 2018 -4-

5. The stand taken by the Appellant is that in terms of agreement dated

28th June, 2012, Respondent had agreed to supply Polyster Staple Fibre to

Appellant and Appellant had agreed for name transfer of the bus permit route

from Madurai to Kamuthi in favour of the Respondent. However, the

Respondent had agreed to retransfer the said route permit in favour of the

Appellant once the liability was settled. Appellant also claimed to have issued

six cheques of the value of Rs.25/- Lakh each together with promissory note

for Rs.1.50/- Crore alongwith interest @15% per annum from the date of

demand till the date of payment to the Respondent. According to the

Appellant, the Stage Carriage Permit in respect of Vehicle No. TN 58 H 7921

was transferred in the name of Respondent in terms of the aforestated

agreement which was subsequently renewed in the name of Respondent by

Regional Transport Authority, Madurai South for a period of 5 years w.e.f.

26.01.2015. Subsequently, Respondent falsely claimed to have delivered the

original registration certificate of the aforesaid vehicle to Appellant's staff.

Respondent and one Mr. Thiyagarajan filed a joint application dated

18.01.2016 before Regional Transport Authority for transfer of the bus permit.

It happened on 18.01.2016. Respondent stated that she had no objection to

such transfer. According to the Appellant this was a Modus Operandi adopted

by Respondent to get over the agreement dated 22.06.2012 though the bus

permit had been given to Respondent only as the security. Appellant claimed

to have paid the amount of Rs.50/- lakhs to the Respondent against receipt

dated 21.03.2016. The Appellant further claimed that in response to the

Company Appeal (AT) (Insolvency) No. 30 of 2018 -5-

demand notice dated 02.08.2017, he had sent a reply notice dated 19.08.2017

to the Respondent disputing the amount claimed by the Respondent.

Respondent is said to have sent 2nd demand notice dated 28.08.2017 reducing

the claim amount from Rs.95,21,232 to 94,61,148 alongwith interest @15%

per annum. Appellant sent a short reply dated 07.09.2017 to the Respondent

intimating the Respondent that he is collecting documents from Accounts

Department and Bank and the detailed reply would follow. Appellant claims

to have issued legal notice dated 27.09.2017 to Respondent highlighting

transfer of Stage Carriage Permit and other issues. It is admitted that the

Respondent had by then filed application under Section 9 of the I&B Code

before the Adjudicating Authority (National Company Law Tribunal), Chennai

on 16.09.2017.

6. In the counter affidavit filed by the Respondent, it is stated that the

Respondent had issued demand notice dated 02.09.2016 claiming the sum of

Rs.98,10,525/- from the Appellant in respect of the invoices raised in regard

to supply of Polyster Staple Fibre. The Appellant replied the notice

claiming temporary setback in his business and sought time to repay the

outstanding amount after verifying the accounts. Respondent further

claimed to have issued another notice dated 02.08.2017 calling upon the

Appellant to pay in respect of another set of invoices raised for outstanding

amounts. To this the Appellant replied that he had already paid the amount.

Respondent had issued another notice dated 28.08.2017 calling upon the

Appellant to make payment in respect of another set of invoices raised

Company Appeal (AT) (Insolvency) No. 30 of 2018 -6-

between 15.02.2016 to 07.05.2016 for the Polyster Staple Fibre supplied by

Respondent. This demand notice was replied by the Appellant on

07.09.2017 wherein he sought time to respond after collecting relevant

documents. However, no reply was sent by the Appellant within 10 days

in terms of Section 8 of the I&B Code prompting the

Respondent/Operational Creditor to file petition under Section 9 of I&B

Code before Adjudicating Authority (National Company Law Tribunal)

Chennai on 16.09.2017 to trigger Corporate Insolvency Resolution

Process.

7. Learned counsel for the Appellant submits that the Respondent adopted

unique modus operandi to cheat the Appellant and grab his valuable bus route

permit on the basis of forged letters. It is contended that the value of the bus

route permit has not been adjusted by the Respondent and material facts have

been willfully suppressed. Learned counsel for the Appellant submits that

the Respondent has triggered Corporate Insolvency Resolution Process to

compel the Appellant to cough up the money at the same time retaining the

bus permit given to her as security for the transaction. Per contra it is argued

on behalf of Respondent that only documents of the buses were endorsed by

Appellant as a security in favour of Respondent. The buses were being

operated by the Appellant. Respondent could not have sold the said buses as

the same were only hypothecated in her favour. It is submitted that the bus

plying on Madurai to Kamuthi route was sold by one Mr. Veeraswamy - Father

of the Appellant to one Mr. Thiyagarajan and the Respondent had only made

Company Appeal (AT) (Insolvency) No. 30 of 2018 -7-

the necessary endorsements in the documents of the bus. It is submitted that

the sale consideration of the bus was received by Mr. Veeraswamy and only

an amount of Rs.50 lakhs was paid to Respondent for which credit was given

and Rs.1,18,86,658/- remained outstanding.

8. Heard learned counsel for the parties' and perused the record. The

requisite conditions necessary to trigger the Corporate Insolvency Resolution

Process under Section 9 of the I&B Code by an Operational Creditor are:

(i) occurrence of a default;

(ii) delivery of a demand notice of an unpaid operational debt;

(iii) non-receipt of payment by the Operational Creditor from the

Corporate Debtor within the period of 10 days of receipt of the

demand notice or receipt of reply from the Corporate Debtor not

indicating existence of a pre-existing dispute or repayment of the

unpaid operational debt.

If the aforesaid conditions exist, the Operational Creditor may file an

application under Section 9(2) of the I&B Code in the prescribed manner

alongwith the requisite fee. A copy of the invoice demanding payment or

demand notice delivered by the Operational Creditor to the Corporate Debtor

has to be furnished with the application. This is clearly borne out by conjoint

reading of Section 8 and 9 (1) of the I&B Code. The Hon'ble Apex Court while

dealing with this aspect in "Macquarie Bank Limited Vs Shilpi Cable

Technologies Ltd." in Civil Appeals No. 15135, 15481 and 15447 of

Company Appeal (AT) (Insolvency) No. 30 of 2018 -8-

2017 decided on 15th December, 2017 held that the requirement of an

application filed under Section 9(2) of the I&B Code being accompanied by an

invoice/ demand notice is a mandatory condition precedent to the filing of the

application.

9. While dealing with triggering of Corporate Insolvency Resolution

Process at the instance of an Operational Creditor in "Mobilox Innovations

Private Limited V/s. Kirusa Software Private Limited", Civil Appeal

No.9405 of 2017 decided on 21.09.2017, the Hon'ble Apex Court held:-

"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 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

Company Appeal (AT) (Insolvency) No. 30 of 2018 -9-

unsupported by evidence. It is important to separate the grain

from the chaff and to reject a spurious defence which is mere

bluster. However, in doing so, the Court does not 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."

10. Adverting to the facts of the instant case, be it seen that the

respondent/Operational Creditor claims to have issued three demand notices

to the Appellant in respect of the amounts claimed to be due and payable for

invoices raised by the Respondent in respect of Polyster Staple Fibre supplied

by her. It is significant to note that to the first notice dated 02.09.2016

emanating from the Respondent reply was furnished by the Appellant

claiming "temporary setback" in its business and seeking time to repay

the outstanding amount after verification of accounts. In response to

second notice dated 02.08.2017 from Respondent, the Appellant replied that

the invoices for which demand notice had been sent had already been paid to

the Respondent as the same were discounted invoices against letter of credit

opened by the Appellant in favour of the Respondent. The Respondent claims

to have issued demand notice dated 28.08.2017 in respect of invoices raised

between 15.02.2016 to 07.05.2016 for the Polyster Staple Fibre supplied to

Appellant. This was replied to by the Appellant stating that he was in the

process of collecting relevant documents including the bank statement.

Company Appeal (AT) (Insolvency) No. 30 of 2018 -10-

However, the Appellant does not appear to have either repayed the

Operational Debt claimed by the Respondent or brought to his notice the

existence of a dispute. In the given circumstances Respondent was within his

rights to file application before the Adjudicating Authority for initiating

Corporate Insolvency Resolution Process.

11. As regards Appellant's contention that the Respondent did not disclose

the factum of buses being provided as security, be it seen that the transfer of

buses was effected prior to the demand notice issued by the Respondent to

the Appellant as has been claimed by the Respondent. Therefore, it cannot

be said that this fact had been willfully suppressed and non-disclosure thereof

justified rejection of the application.

12. In so far as the "Debt" and "Default" is concerned, it emerges from

record that the parties continued to engage in business even after

confirmation of outstanding balance by the Appellant on 31.12.2015. 27

invoices have been raised by the Respondent/ Operational Creditor in respect

of supplies of Polyster Staple Fibre made to Appellant. Details of LC's from

Catholic Syrian Bank relied upon by the Respondent/ Operational Creditor

reflects outstanding balance of Rs.1,18,86,658/- in respect whereof the

Appellant committed default. The Appellant has failed to demonstrate that

he had within the period of 10 days of the receipt of the demand notice

brought to the notice of the Respondent/ Operational Creditor existence of

dispute or repaid the outstanding operational debt. His plea that the

Respondent had suppressed from the Adjudicating Authority the factum of

Company Appeal (AT) (Insolvency) No. 30 of 2018 -11-

two buses of Appellant being provided as security does not materially affect

the Respondent's claim qua the debt in respect whereof default was

committed by the Appellant. Admittedly the buses given as security merely

stood hypothecated with the Respondent. Such securities can, by no stretch

of imagination, be counted towards payment of outstanding debt. If the

Respondent has manipulated transfer of the vehicles on the basis of

endorsements made in regard to hypothecation of these buses, it is for the

Appellant to seek appropriate legal remedy. However, triggering of Corporate

Insolvency Resolution Professional cannot be declined once there is default of

a debt.

13. For the foregoing reasons we are of the view that the impugned order

admitting respondent's application under Section 9 of I&B Code does not

suffer from any legal infirmity. The appeal being devoid of merit is accordingly

dismissed. There shall be no orders as to costs.

[Justice S. J. Mukhopadhaya] Chairperson

[Justice Bansi Lal Bhat] Member (Judicial) NEW DELHI 10th May, 2018 AM

Company Appeal (AT) (Insolvency) No. 30 of 2018