Tuesday 15 June 2021

Southern Engineers Vs Innoventive Industries Ltd - Cost of goods supplied to CD during CIRP will be treated as CIRP Cost.

NCLT Mumbai (2018.11.19) in Southern Engineers Vs Innoventive Industries Ltd [MA 441/2018 in C.P. (IB)-01(MB)/2016] held that;

  • In this case, the alleged amount  of Rs.1,15,80,188/ - is due on account of supply of goods made by the  applicant to the Corporate Debtor company, in compliance of the order given  by the IRP to keep the Corporate Debtor company as a going concern.

  • Section 53 itself provides priority to the  corporate Insolvency Resolution Process (CIRP) costs in the waterfall, over  remaining dues. Section 53 (1)(a) provides payment to the Insolvency  Resolution Process costs.

  • Insolvency Resolution Process costs and IRP Costs as defined under Section  5(13)(c) of the C includes any cost incurred by the Resolution Professional in  running the business of the Corporate Debtor as a going concern. 

 

Excerpts of the order;

MA 441/2018 has been filed by the applicant Southern Engineers   against the Liquidator seeking directions against the Respondent Liquidator  to forthwith pay the admitted sum of Rs.1,15,80,188/- alongwith the interest  at 20% p.a., being the sum due and payable by the Liquidator to the Applicant  for the goods supplied by the applicant to the company after commencement  of the CIRP and to give first priority to the applicant upon liquidation of the  Company’s assets, for repayment of its dues for goods supplied after  commencement of the CIRP, i.e. the sum of Rs.1,15,80,188/ - alongwith  interest at 20% p.a. 

 

The applicant has stated in the application that “ Innoventive Industries  is a Corporate Debtor which was engaged in the business of supplying and  manufacturing precision tubes, cold rolled steel products, motor vehicle  components etc. However, now the company is in Liquidation. The Respondent  was the Interim Resolution professional appointed by the company and is now  the Resolution Professional in-charge of the company in liquidation.

 

The applicant has further stated that “ the company was a regular  customer of the applicant, as the applicant was a major supplier of raw  materials for the company. On account of the various transactions between the  company and the applicant, the company was admittedly liable to pay a sum  of Rs.6,72,73,220/ - to the application on 17.1.2017. The respondent was  appointed as the Interim Resolution Professional. One of the responsibilities of  the IRP was to do all acts necessary for the running of the company.  

 

Consequently, for the business of the company and for running of the company  as a going concern, the IRP contacted the applicant for supply of goods which  were essential to keep the company running as a going concern. Based on the  assurances given by the IRP and considering the reputation of IRP and the  protection for payment offered under the Code itself, that the applicant agreed  to supply goods for running the business of the company during such insolvency  resolution period. Thus, during the period from 17.1.2017 to October 2017,  under these new purchase orders, the applicant supplied goods worth  Rs.14,03,26,302/- to the company upon orders placed by the IRP from time to  time. The payment terms stipulated that the goods would be supplied with a  credit of 90 days from the date of receipt of the goods. The applicant supplied all goods under the purchase orders,but the Respondent failed to make the  timely payments. After repeated reminders to the Respondent/IRP and after  some period of delay, the Respondent/IRP made some payment aggregating to  Rs.12,96,64,767/- to the applicant towards part payment for the goods  supplied by the applicant during the CIRP. As on 18.10.2017, the balance  amount of Rs.1,15,80,188/ - is remained outstanding and payable by the  Respondent/IRP, concerning the goods supplied by the applicant after the  commencement of CIRP.

 

The Claim of the applicant being the Operational Creditor of  Innoventive Industries has been admitted in its entirety, i.e. Rs.7,88,53,408/- and out of the aforesaid entire claim admitted by the Liquidator, the  Applicant’s claim to the extent of Rs.1,15,80,188/- is in respect of the goods  supplied by the applicant to the company after the insolvency commencement  date, i.e. 17.1.2017, which fact was also intimated to the Liquidator in the  prescribed Form C submitted under Regulation 17 of the Insolvency and  Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 

 

The controversy has arisen on account of the email reply dated  10.5.2018 which has necessitated the filing of the present application,  wherein the Respondent has illegally taken the stand that supplies made by  the applicant to the respondent after commencement of the Insolvency  Resolution process does not form part of the Insolvency Resolution Process  costs. The Respondent/Liquidator has failed to acknowledged that out of the  entire admitted claim of Rs.7,88,53,408/ - of the applicant, the sum of  Rs.1,15,80,188/- is not merely an operational debt of the company but rather  a debt which was agreed to be paid within 30/90 days (as the case may be)  and is also and  an insolvency resolution process cost the same are costs,  on account of goods supplied after commencement of the CIRP essential  for the running of the company as a going concern and are, therefore,  immediately due and payable to the applicant. Therefore, the applicant has  filed this applicant seeking directions against the Respondent. In the reply to the above application, the Respondent/Liquidator has  filed counter wherein it is stated that the supplies of steel coils made by the  applicant to the Corporate Debtor during its CIRP period were of operational  nature, and had direct input to the output produced/supplied by the  Corporate Debtor, and the same was also not covered by the definition of CIRP  costs, being not in the nature of costs incurred for carrying out the CIRP  of the Corporate Debtor Liquidator that the  .It is further stated by the Liquidator that the payment towards the said claim would be made to the applicant as an  unsecured operational creditor as per the liquidation waterfall provided  under Section 53 of the Code

 

We have heard the arguments of both the parties and perused the  records. It is necessary to point out that Section 5(13)(c) provides that “ any  cost incurred by the Resolution Professional in running the business of  the Corporate Debtor as a going concern.”  In this case, the alleged amount  of Rs.1,15,80,188/ - is due on account of supply of goods made by the  applicant to the Corporate Debtor company, in compliance of the order given  by the IRP to keep the Corporate Debtor company as a going concern.  Contention of the Respondent is that the payment towards the said claim  would be made to the applicant as operational debt, as per the liquidation  waterfall as provided under Section 53 of the Code. This Contention of the  liquidator is not sustainable, because Section 53 itself provides priority to the  corporate Insolvency Resolution Process (CIRP) costs in the waterfall, over  remaining dues. Section 53 (1)(a) provides payment to the Insolvency  Resolution Process costs. In the waterfall mechanism, priority is given to the  Insolvency Resolution Process costs and IRP Costs as defined under Section  5(13)(c) of the C includes any cost incurred by the Resolution Professional in  running the business of the Corporate Debtor as a going concern. 

 

The alleged supply made by the applicant is undoubtedly made to the  company during the CIRP to keep it as a going concern. Therefore, it became  a part of the Insolvency Resolution process costs defined under Section 5(13)  of the Insolvency Resolution process costs. 

 

In the light of the statutory provisions of Section 53 of the IBC read with  Section 5(13)(c), we hereby decide that the alleged payment of Rs.1,15,80,188/- shall form part of the Insolvency Resolution process costs  and it can be paid in accordance with the provisions of Section 53 of the Code. 

 

MA 441/2018 is hereby disposedof accordingly. 

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.