M/s Agarwal Veneers Vs. Fundtonic Service Pvt. Ltd. - If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise.

 NCLAT (05.08.2022) in M/s Agarwal Veneers Vs. Fundtonic Service Pvt. Ltd. [Company Appeal (AT) (Ins) No. 968 of 2020] held that

• # 16 . . . . . . .If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise. . . . . . .

• # 17. The Hon’ble Supreme court in ‘Vidarbha Industries Power Ltd. vs. Axis Bank Ltd’. 2022 SCC Online SC 841 has observed that even if there is a ‘debt’ and ‘default’, the Adjudicating Authority should use its discretion in admitting/ rejecting an Application. In the instant case, the Adjudicating Authority has rightly rejected the Application on this ground too.

 

Excerpts of the order;

This Appeal challenges the order dated 29.09.2020, passed by Learned Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench, Ahmedabad) Court-2 in C.P. (I.B) No. 824/NCLT/AHM/2019, whereby the Application under Section 9 of the Insolvency and Bankruptcy Code,2016(herein after referred to ‘the Code’) was rejected. By the impugned order, Ld. Adjudicating Authority has observed as follows:

• “9. On perusal of the records it is found that the Respondent has issued two demand notices (page 28-55), the first one dated 24.06.2019 and second one dated 20.07.2019. Demand notice which is a pre- requisite under Section 8 of the Insolvency & Bankruptcy Code, 2016 for filing the petition under Section 9, is signed and issued by an advocate on behalf of M/s. Nehru & Co. (Advocates and Legal Consultants), whereas, the petition is signed by Mr. Rohit Agarwal, Partner of the applicant firm on the basis of authority letter dated 20.08.2019 issued by the other partner of the partnership firm. On perusal of the records it is found that no authority is given to the advocate to issue demand notice or for filing an application u/s 9 of the IB Code. Similarly, no document is produced by the applicant showing that the advocate who has signed the application is associated with the company for a long period and can take such steps on behalf of the company. Therefore, the demand notice which is a prerequisite for filing an application under Section 9 of the itself is bad in the eye of law.

• 10. On perusal of the records it is found that the Respondent Company is a going concern and at present giving employment to 20 employees. Hence, it would defeat the very purpose of the Code, if a going concern generating revenue, the employees and stakeholders are subject to the rigors of the CIRP. It appears that the operational creditor has filed the instant petition as a tool of recovery mechanism which is not the objective of the IBC. It is a settled law that the Code is not intended to be a substitute to a recovery forum. More so, when the corporate debtor company falls within the category of Micro, Small and Medium Enterprise (MSME), CIRP proceedings against a going concern Jeopardising livelihood of several families is against the objectives of IB Code and cannot be used to jeopardise the financial health of a solvent company by pushing it into insolvency Initiating

• 11. Notwithstanding above, it is found that the petitioner has not produced on record documents like copy of the purchase order and delivery challan to substantiate its claim. Moreover, the applicant has not produced on record a copy of bank statement showing that no payment is received from the corporate debtor towards the invoices against which the claim has been raised.

• 12. Under the facts and circumstances discussed above, the Adjudicating Authority has no other option but to dismiss the petition as it is bad in the eye of law and not maintainable on the very reason that the demand notice is issued without any authority.

• 13. In the result, company Petition No. CP (IB) 824 of 2019 stands dismissed and disposed of. However, this will not stand in the way of the Petitioner approaching the appropriate forum seeking to enforce its claim against the Respondent, as this petition has been dismissed on the issue of maintainability taking into consideration the provisions of IB Code, 2016”.

 

# 2. Submissions of the Ld. Counsel appearing on behalf of the Appellant.

• Ld. Counsel appearing for the Appellant strenuously submitted that the Adjudicating Authority has overlooked the Principle laid down by the Hon’ble Supreme Court in “Macquarie Bank Ltd. vs. Shilpi Cable Technologies Ltd., (2018) 2 SCC 674 , wherein the Hon’ble Apex Court has observed that an advocate can issue the demand notice on behalf of its client. It is submitted that an advocate from Nehru & Co. (Advocates and Legal Consultants) issued the demand notice under Section 8 of the Code upon instructions from the Appellant/Operational Creditor. It is further submitted that the Adjudicating Authority has erroneously observed that the Corporate Debtor is an MSME and a going concern having twenty employees and that initiating CIRP proceedings would defeat the purpose of the Code. This cannot be a ground for dismissal of the Application under Section 9 of the Code. It is argued that a perusal of the Section 20 of the Code would make it amply clear that the objective of the Code is not to put the Operational Creditor through rigours of the CIRP Process, but to instead maximize the value of assets of such persons, to promote entrepreneurship and balance the interest of all stakeholders.

• Ld. Counsel further contended that the Adjudicating Authority has failed to appreciate the evidence of acknowledgment in the Ledger Statement and ought to have given a reasonable opportunity to the Appellant to file other documents. The Corporate Debtor did not raise any dispute regarding the products supplied or the invoices raised by the Appellant either before issuing the demand notice, or after receiving the same. In fact, the Respondent has also made part payments towards the invoices raised by the Appellant. It is strenuously argued that a copy of the certificate from the ‘financial institutions’ maintaining the accounts of the operational creditor and conforming that there is no payment of an unpaid operational debt by the corporate debtor is not a condition precedent for triggering the CIRP. The Adjudicating Authority has failed to take into consideration that Section 9(3) (c) of the Code was amended and the words ‘by the Corporate Debtor, if available’ was substituted.

 

# 3. The Ld. Counsel relied on the following judgments in support of his case:

• Macquarie Bank Ltd. vs. Shilpi Cable Technologies Ltd., 2018 SCC Online SC 264 [Pg. Nos. 159-201, Appeal].

• M/s Bannari Amman Spinning Mills Ltd. vs. M/s. My Choice Knit & Apparels Pvt. Ltd., 2019 SCC NCLAT 1121 (Para.3, Pg. No. 220, Appeal).

• International Road Dynamics vs. Reliance Infrastructure, CA (AT) (Ins) No. 72 of 2017)

• Sagufa Ahmed & Ors vs. Upper Assam Plywood Products Pvt. Ltd. & Ors. Civil Appeal Nos. 3007-3008 of 2020.

 

# 4. Submissions of the Ld. Counsel appearing on behalf of the Respondent:

• The Ld. Counsel for the Respondent/Corporate Debtor vehemently argued that the present Appeal is not maintainable, as the Appellant has not placed on record any purchase order/ delivery challan/bank statements in support of their Application before the Adjudicating Authority. There can be no sale or supply of goods without a purchase order. The operational creditor is only attempting to recover their claims through these CIRP proceedings.

• It is submitted that the demand notices issued by the Operational Creditor were never served on the Corporate Debtor and the same was pointed out by the Corporate Debtor in their ‘Affidavit in Reply’ filed before the Adjudicating Authority. The Corporate Debtor is a ‘going concern’ and an MSME with a sales turnover of Rs. 1,61,74,968/- and the present Application preferred by the Appellant is only an attempt to recover the dues.

 

# 5. The Ld. Counsel for the Respondents placed reliance on the following judgments to buttress his arguments:

• Mr. V Nagarajan Resolution Professional vs. SKS Ispat & Power Ltd. (CA (AT) (Ins) No. 561 of 2020, dated 13.07.2020.

• Neeraj Jain Director of M/s Flipkart India Pvt. Ltd. vs. Cloud walker Streaming Technologies Pvt. Ltd. & Ors. in CA (AT) (Ins) No. 1354 of 2019, dated 24.02.2020.

• Anand Natvarlal Khant vs. Kush Structure Pvt. Ltd. in CA (AT) (Ins) No. 502 of 2021, dated 23.07.2021.

• Pankaj Aggarwal vs. Union of India & Ors. , W.P. (C) 3685 of 2020 & CM Appls. 13194/2020,13195/2020,13196/2020.

Assessment:

 

# 6. The brief point for consideration which arises in this Appeal is whether the Adjudicating Authority was justified in rejecting the Section 9 Application preferred by the Appellant herein.

 

# 7. It is the main case of the Appellant/Operational Creditor that the Adjudicating Authority has wrongly observed that the demand notice under Section 8 of the Code was issued by an advocate and is therefore not valid.

 

# 8. The Adjudicating Authority in para 9 of the impugned order has observed that the demand notice which is a prerequisite for filing of the Application under Section 9 is bad as no document was produced by the Applicant/Appellant showing that the advocate who has signed the Application is associated with the Company for a long period and can take such steps on behalf of the Company.

 

# 9. We are of the considered view that as far as this issued is concerned, an advocate can, on behalf of the Company issue a demand notice under Section 8 and no such document is required to establish his ‘period of association’ with the said Company. At this juncture, we place reliance on the observations of the Hon’ble Supreme Court in ‘Macquarie Bank Ltd. vs. Shilpi Cable Technologies Ltd., 2018 2 SCC 674’ , in which the Hon’ble Apex Court in para -49 has observed as follows:

• “49. Since there is no clear disharmony between the two parliamentary statues in the present case which cannot be resolved by harmonious interpretation, it is clear that both statutes must be read together. Also, we must not forget that Section 30 of the Advocates Act deals with the fundamental right under Article 19(1) (g) of the Constitution to practice one’s profession. Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the Code together with the Adjudicating Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order”.

 

Therefore, we are of the earnest view that the observation by the Adjudicating Authority in para -9 be set aside.

 

# 10. However, the Application was not dismissed on this ground alone. A perusal of the impugned order shows that the Adjudicating Authority has dismissed the Application even on merits, the grounds being that the Corporate Debtor is an’ MSME’ and a ‘going concern’ and a ‘viable entity’.

 

# 11. It is also observed by the Adjudicating Authority that the Operational Creditor had filed the Petition as a tool of recovery and that the Code is not intended to be a substitute to a Recovery Forum. Further, the Adjudicating Authority has also noted that the Appellant/Applicant has not produced on record any bank statements to show that payments were received from the Corporate Debtor against the invoices based on which the claims have been raised.

 

# 12. The Contention of the Ld. Counsel for the Appellant submitted that a reasonable opportunity ought to have been given to the Appellant to file further documents namely the Purchase orders and the corresponding delivery challans and that the Adjudicating Authority had erroneously dismissed the Application, on this ground too, is untenable, as the record shows that the Appellant herein, had sought time before the Adjudicating Authority and has failed to produce the relevant documents. Part –V of Form 5 mandates that relevant document(s) under which the debt has become due must be annexed in compliance of this requirement, the Appellant ought to have filed the relevant Purchase Orders based on which its claim was raised. Part-V, Column 7 of form 5 also mandates that a statement of the bank account where deposit or credit is received, ought to be attached.

 

# 14. It is clear from the aforenoted provisions of the Code and also the Regulations therein that unless the Operational Creditor along with its Application furnishes a copy of the invoices, the bank statements and the financial accounts, the Adjudicating Authority is empowered to reject an incomplete Application.

 

# 15. Lastly, we address to the Contention of the Ld. Counsel for the Appellant that merely because the Corporate Debtor is a going concern and an MSME, the Adjudicating Authority ought not to have rejected the Application on this ground also. 

 

# 16. The Preamble of IBC is carefully worded to describe the spirit and objective of the Code to be ‘Reorganisation’ and ‘Insolvency Resolution’, specifically omitting the word ‘Recovery’. The Parliament has made a conscious effort to ensure that there is a significant difference between ‘Resolution’ and ‘Recovery’. The Hon’ble Supreme Court has time and again observed that the fundamental intent of IBC is ‘maximising the value of assets’ in the process of ‘Resolution’. In ‘Mobilox Innovations Private Limited’ Vs. ‘Kirusa Software Private Limited’, (2018) 1 SCC 353, the Hon’ble Apex Court has examined in detail the United Nations Legislative Guide on Insolvency, in which the IBC finds its roots. Any Application to commence CIRP can be denied when the Creditor is using Insolvency as an inappropriate substitute for Debt Recovery Procedures. If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of ‘Reorganising’ or ‘Resolution of the Company’ does not arise. This Tribunal in ‘Binani Industries Limited’ Vs. ‘Bank of Baroda & Anr.’, Company Appeal (AT) (Ins.) No. 82 of 2018, has differentiated between ‘Recovery’ and ‘Resolution’ and has observed that IBC is not a Recovery Proceeding. ‘Recovery’ dispossesses the ‘Corporate Debtor’ of its assets while a Resolution is an effort to keep it afloat. Further, this Tribunal in ‘Asset Advisory Services’ Vs. ‘VSS Projects’, CP (IB) No. 96/7/HDB (2017), and also in ‘Praveen Kumar Mundra’ Vs. ‘CIL Securities Ltd.’, 2019 SCC OnLine 21 | P a g e Company Appeal (AT) (Insolvency) No. 512 of 2021 NCLAT 334, has noted that CIRP cannot be initiated with fraudulent intent ‘for any purpose other than the Resolution of Insolvency or Liquidation’ and therefore it is clearly covered under Section 65 of the Code.

 

# 17. The Hon’ble Supreme court in ‘Vidarbha Industries Power Ltd. vs. Axis Bank Ltd’. 2022 SCC Online SC 841 has observed that even if there is a ‘debt’ and ‘default’, the Adjudicating Authority should use its discretion in admitting/ rejecting an Application. In the instant case, the Adjudicating Authority has rightly rejected the Application on this ground too.

 

# 18. For all the aforenoted reasons, this Appeal fails on merits and is accordingly dismissed. No order as to costs.

 

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Blogger’s Comments; The above judgement is “per-incuriam”.  The judgement of the Hon’ble Supreme court has been misquoted. 

 

SCI (12.07.2022) in Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. [Civil Appeal No. 4633 of 2021] held that;

• # 75. Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor.

• # 76. The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC but a different word, that is, ‘shall’ in the otherwise almost identical provision of Section 9(5)(a) shows that ‘may’ and ‘shall’ in the two provisions are intended to convey a different meaning. It is apparent that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. An application of an Operational Creditor for initiation of CIRP under Section 9(2) of the IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of the IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the Corporate Debtor by the Operational Creditor and no notice of dispute has been received by the Operational Creditor. The IBC does not countenance dishonesty or deliberate failure to repay the dues of an operational creditor.

 

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