ATE Projects Pvt. Ltd. V. Rajasthan Drugs and Pharmaceuticals Ltd. - Adjudicating Authority allowed section 9 application against a PSU, which has not been carrying out any functions since 2017.

NCLT Jaipur (11.11.2021) In ATE Projects Pvt. Ltd. V. Rajasthan Drugs and Pharmaceuticals Ltd. [(IB)-324/9/JPR/2019] held that; - 

• The above-mentioned facts indicate that the Corporate Debtor has not been carrying out any functions since 2017. Therefore, it can be safely inferred that no Government or sovereign functions of the State have been performed by the Corporate Debtor since 17.01.2017 onwards.

Excerpts of the order;

M/s. ATE Projects Pvt. Ltd. (for brevity ‘Applicant/ Operational Creditor’) has filed the present Petition through its Authorized Representative Mr. Yogesh Sharma under Section 9 of the Insolvency and Bankruptcy Code, 2016 (for brevity ‘IBC, 2016’) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 with a prayer to initiate the Corporate Insolvency Resolution Process against M/s. Rajasthan Drugs and Pharmaceuticals Ltd. (for brevity ‘Respondent/ Corporate Debtor’).

# 5. It is stated by the Applicant that the Corporate Debtor is a Central Public Sector Enterprise having its Manufacturing Unit & Registered office in VKI Area, Jaipur (Rajasthan). It has been added that the Corporate Debtor is a Government of India enterprise under the administrative control of the Ministry of Chemicals & Fertilizers, Department of Pharmaceuticals, Government of India.

# 9. It is further stated that the Applicant received a letter dated 17.01.2017, wherein it was mentioned that the Government of India vide letter file no. 54014/1/2016-PSU dated 09.01.2017 has ordered the shutting down of the Corporate Debtor and therefore, the Corporate Debtor directed the Applicant to stop the work at site and further informed that the outstanding liabilities, whatsoever, shall be cleared in accordance with the decision of the authority concerned. Copy of the letter dated 17.01.2017 is annexed as Annexure E of the application. Further since the work was stopped at site, the Applicant resubmitted the running bills, which were duly accepted by the Corporate Debtor on 09.03.2017.

# 10. The Applicant has stated that vide letter dated 22.03.2017, the Corporate Debtor asked the Applicant to send the certified copy of total outstanding dues along with proposal for a one-time settlement within 3 days and in response thereto, the Applicant submitted the details of the total principal amount outstanding of Rs.1,80,36,531/- as on 26.03.2017 against all the three agreements, which was due since October 2016 and demanded payment of the same at the earliest. The Applicant further stated that through various email communications, it demanded the payment due and payable from the Corporate Debtor, however, no action was been taken by the Corporate Debtor.

# 11. The Applicant has added that since it was left with no remedies, it sent a legal notice dated 11.01.2019 demanding the outstanding payment. However, no payment was made. It is pertinent to mention here that the sales tax department started demanding C-Form, qua the material supplied and since the Corporate Debtor neither issued the C-Form nor made the payment, therefore the Applicant filed an Application before the Commercial Court, Jaipur under Section 9 of the Arbitration and Conciliation Act, 1996 seeking direction qua the

Corporate Debtor to handover the C-Form for the material supplied. However, the Commercial Court vide order dated 26.08.2019 rejected the Application on technical ground holding that mandatory injunction cannot be granted.

# 12. That it is submitted by the Operational Creditor that since the Corporate Debtor did not make the due payment of its operational debt, it had issued a Demand Notice dated 13.11.2019 under Section 8 of IBC, 2016 at the Registered office of the Corporate Debtor. The Operational Creditor has also annexed the notice of dispute dated 04.12.2019 sent by the Corporate Debtor through Advocate Mr. Tarun Kumar Mishra. The Applicant has filed the Affidavits under Section 9(3)(b) and 9(3)(c) of IBC 2016.

# 13. That the Applicant has claimed an outstanding amount of Rs.2,98,79,294.12/- as operational debt in the Part IV of the Application.

# 15. It is stated by the Corporate Debtor that the Present Application filed under Section 9 is not maintainable in view of the existence of the Arbitration clause in all the Agreements executed between the parties. One of such clause relied by the Corporate Debtor is at page no. 43 of the Application.

# 16. That the Corporate Debtor has further placed emphasis on Section 5 of the Arbitration and Conciliation Act 1996 in order to support its submission that the present petition is not maintainable. The contents of the Section 5 of the Arbitration and Conciliation Act 1996 are reproduced overleaf –

• 5. Extent of judicial intervention.—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

# 17. It is further stated by the Corporate Debtor that the Application filed under Section 9 of IBC, 2016 is based on some disputed sums. Therefore, the same does not warrant any action by this Adjudicating Authority unless the disputes are converted into actionable claim by way of an award issued by the Arbitrator.

# 19. Further in the notice of dispute dated 04.12.2019, the objections which is taken by the Corporate Debtor is that it informed the Operational Creditor vide letter dated 17.01.2017 that the Government of India has taken the decision for closure of the Corporate Debtor and the outstanding liability will be cleared/ regularized in accordance with the decision of the authority concerned. Therefore, there was a notice for closure of the agreement of the work. It has added that no work was carried out at the site beyond 17.01.2017.

# 21. After going through the averments made in the Application, Reply of the Corporate Debtor, documents placed on record and hearing submissions, this Bench is of the view that before examining the present Application on merits, it is necessary to examine whether an application to initiate CIR process is maintainable against the Corporate Debtor herein, which is a Government Company.

# 22. That as per the submissions of the Applicant, 51% of the share capital of the Corporate Debtor is held by Central Government and rest 49% is held by State Government of Rajasthan. The same has also been admitted by the Corporate Debtor in its reply.

# 25. From perusal of the letter dated 17.01.2017 of the Corporate Debtor, it is observed that the Corporate Debtor has closed its functions and objects. Further from the Master Data of the Corporate Debtor, it is reflected that the Corporate Debtor has not filed its balance sheets post-31.03.2016 and defaulted in filing its statutory returns for the year 2016-17 and 2017-18. Furthermore, the present filing status of the Corporate Debtor is also reflected as ‘inactive’.

# 26. The above-mentioned facts indicate that the Corporate Debtor has not been carrying out any functions since 2017. Therefore, it can be safely inferred that no Government or sovereign functions of the State have been performed by the Corporate Debtor since 17.01.2017 onwards.

# 27. Here, it is worthwhile to refer to the Judgment of the Hon’ble Supreme Court passed in the matter of Hindustan Construction Company Limited and Anr. vs. Union of India, Writ Petition (Civil) No. 1074 of 2019) dated 27.11.2019 :

• “57. As correctly argued by the learned Solicitor General, Shri Tushar Mehta, the first part of ‘corporate person’, as defined in Section 3(7) of the Insolvency Code, means a company as defined in Clause 20 of Section 2 of the Companies Act 2013. Sections 2 (20) and 2(45) of the Companies Act, 2013, which define ‘company’ and ‘Government company’ respectively, are set out herein below:

- “2(20). “company” means a company incorporated under this Act or under any previous company law;”

-  “2(45). “Government company” means any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.”

• 58. From a reading of the aforesaid definition, Shri Tushar Mehta is clearly right in stating that the three entities who owe monies under arbitral awards to the Petitioner No. 1, being Government companies, would be subsumed within the first part of the definition. However, so far as NHAI is concerned, Dr. Singhvi's argument of either deleting certain words in Section 3(7) of the Insolvency Code, or adding certain words in Section 3(23)(g) of the Insolvency Code into Section 3(7) cannot be accepted.”

• …..

• “63. From a conspectus of the above provisions, what is clear is that NHAI is a statutory body which functions as an extended limb of the Central Government, and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. For all these reasons, it is not possible to accede to Dr. Singhvi’s argument to either read in, or read down, the definition of ‘corporate person’ in Section 3(7) of the Insolvency Code.”

# 28. From the Judgment of the Hon’ble Supreme Court (Supra), it is observed that a “Government Company” as defined under Section 2(45) of the Companies Act, 2013 is covered under the definition of a “Company” as defined under Section 2(20) of Companies Act 2013. 

# 29. Since the Corporate Debtor, has not been performing any Governmental Functions or the Functions of State, the Corporate Debtor cannot be immune from the IBC proceedings merely on the basis of being a Government Company. Therefore, we find that the present Application is maintainable and worth considering on merits.

# 30. That the objection taken by the Corporate Debtor that the present Application is not maintainable in view of the Arbitration clause in the Agreements between the Parties and Section 5 of Arbitration and Conciliation Act 1996 bars this Adjudicating Authority from hearing this Application, does not merit consideration since Section 238 of IBC, 2016 is having overriding effect over the Arbitration and Conciliation Act, 1996. The contents of Section 238 of IBC, 2016 are reproduced below -

• “238. Provisions of this Code to override other laws. - The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

# 31. That the Corporate Debtor nowhere in its reply has mentioned that there was any deficiency in the works performed by the Operational Creditor nor it had brought any communication of any date prior to the issuance of demand notice, which could depict that there is a pre-existing dispute between the parties.

32. That vide letter dated 17.01.2017 to the Applicant/Operational Creditor, which states that “…..the outstanding liabilities whatsoever shall be cleared/regularized in accordance with the decision of the authority concerned. You are requested to kindly bear with us till then”, the Corporate Debtor had shown its intention to clear its liability. And we observe that the aforesaid letter has been issued after raising of all the invoices by the Corporate Debtor. Therefore, the contention of the Corporate Debtor regarding no attachment of measurement sheets along with the invoices cannot be a ground for non-payment of dues the Applicant/Operational Creditor.

# 33. That the Corporate Debtor has not been able to give any cogent reason as to why the CIR Process shall not be initiated against it. 

# 34. That on perusal of the Affidavit filed by the Operational Creditor under Section 9(3)(b) of IBC 2016, it is observed that it has been averred by the Applicant that no notice of dispute has been given by the Respondent/Corporate Debtor. However, during the course of hearing, Ld. Counsel for the Operational Creditor confirmed that the notice of dispute was received, which is enclosed on Pages from 290 to 295 of the Application. Therefore, we are of the view that since the notice of dispute has been annexed by the Applicant with the Application, no prejudice shall be caused to anyone. 

# 35. In sequel to the facts, circumstances and analysis above, we observe that the Operational Creditor has been able to establish the default on the part of Corporate Debtor in payment of the operational debt. Therefore, the petition is admitted in terms of Section 9(5) of the IBC, 2016. Accordingly, the CIRP is initiated and moratorium is declared in terms of Section 14 of the IBC, 2016. .

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Blogger’s Comments; The basic premise of “Insolvency Resolution Process” is to look into the reasons of insolvency & to remove the same, so that company is taken out of insolvency. In case the company can not be taken out of insolvency, the same is liquidated so that the assets of the company are put to productive use for the society.

In the present case a sovereign decision has been taken to stop the working of the company. In the present circumstances, what can be the objective of the insolvency process ? In my opinion AA could have ordered for direct liquidation of the company, so that the assets of the company could be put to productive use for the society as early as possible.

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