Sanjay Sharma Partner of MA Jagadamba Enterprises vs. Super Iron Foundry Pvt. Ltd - it is observed that merely citing the interest rate in the invoices by itself wouldn't render it legally binding for the Corporate Debtor,

 NCLAT (2024.05.03) in Sanjay Sharma Partner of MA Jagadamba Enterprises  vs. Super Iron Foundry Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 670 of 2024] held that; 

• Learned NCLT, New Delhi Bench in the case of Rohit & Company v. Twenty First Century Wire Rods Ltd. order dated 14.09.2023, reported in (2023) ibclaw.in 627 NCLT that:

• “7. … it is observed that merely citing the interest rate in the invoices by itself wouldn't render it legally binding for the Corporate Debtor, …” 

Excerpts of the order;

.03.05.2024 : Heard Counsel for the Appellant.

# 2. This appeal has been filed against the order dated 30.11.2023 in Company Petition (IB) No. 314/KB/2022 passed by the Learned Adjudicating Authority (National Company Law Tribunal, Division Bench, Court – II, Kolkata), by which Section 9 application filed by the Appellant has been rejected.

# 3. Adjudicating Authority in paragraphs 14 to 16 has made following observations:

• “14. It is evident from the invoices filed with this application by the Operational Creditor, annexed at Pages 56 – 67 as Annexure “2” that the Operational Creditor has claimed the interest at the rate of 24% per annum if the bill is not paid within 30 days. It very clearly appears at the bottom of the invoices under the “Terms & Conditions” clause in para 3 that one “4” has been inserted by pen later after “2” thus “2%” can be read as “24%”. Further, it is evident that the “7” days were overwritten by pen as “30” days. The same fact  has rightly been raised by the Ld. Counsel for the Corporate Debtor in its reply affidavit as well as in the reply to the demand notice dated 16.08.2022 in para 12.

• 15. Further, it is evident from the Indian Post Track Consignment, annexed with the Demand Notice dated 16.08.2022 at Page 19-20 to the Application that the demand notice was issued on 16.08.2022 at 06:37 PM and delivered to the Corporate Debtor on 18.08.2022 at 03:16 PM. It is admitted that on 16.08.2022, the Corporate Debtor has paid Rs. 10 Lakh to the Applicant at 08:19 PM. Thus, the averment made by the Applicant that the Respondent has intentionally transferred the money of Rs. 10 Lakh after receiving the Demand Notice to reduce the threshold financial limit as prescribed under Section 4 of the I&B Code is bald and has no merits. Further mere mention in invoices about the interest component is not sufficient to hold that interest is payable by the Corporate Debtor. To fortify the view, we would reply upon the decision passed by the Learned NCLT, New Delhi Bench in the case of Rohit & Company v. Twenty First Century Wire Rods Ltd. order dated 14.09.2023, reported in (2023) ibclaw.in 627 NCLT that:

• “7. … it is observed that merely citing the interest rate in the invoices by itself wouldn't render it legally binding for the Corporate Debtor, …” (Emphasis Added)

• 16. Hence, we are of the view that the Operational Creditor, having a frivolous or vexatious intention, has filed this application with tempered documents by claiming 12 times more interest rate with the principal amount to reach the threshold financial limit as prescribed under Section 4 of the I&B Code. Further, the Operational Creditor deliberately did not bring the payment of Rs. 10 Lakh before filing this application on record. It is evident that the payment of 10 Lakh was made on 16.08.2022 by the Corporate Debtor before the receipt of demand notice under Section 8 of the I&B Code and the Applicant filed this application with the Registry of this Adjudicating Authority on 14.09.2022. Thus, we are of the view that this is a fit case to invoke the provision of Section 65 of the I&B Code, 2016.”

# 4. Adjudicating Authority was satisfied that this was not a fit case in which Section 9 proceeding can be initiated and dismissed the application with the cost.

# 5. Learned Counsel for the Appellant sought to contend that an interest amount was verbally agreed and hence the 24% interest was claimed.

# 6. Adjudicating Authority has also noted that there is some interpretation made in the invoices by the Appellant and if the interest is not allowed, the amount claimed was less than the threshold period.

# 7. We are of the view that present is not a fit case where this Court in exercise of Appellate Jurisdiction may interfere with the impugned order. However, we are satisfied that sufficient case has been made out to delete the cost of Rs. 5 Lakh penalty imposed on the Applicant. We, thus subject to deletion of the penalty of Rs. 5 Lakhs, dismiss the Appeal. It shall be open for the Appellant to take such other remedy for its claim as available in law.

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Siddharth Enterprises Vs. Shapoorji Pallonji and Company Pvt. Ltd..- However, it is now settled in the context of the Code that if interest is not agreed upon between the parties, it cannot form a part of ‘operational debt’ within the meaning of Section 5(21) of the Code and that no such interest can be claimed in an application under Section 9 of the Code.

 NCLT Mumbai-IV (2024.03.12) in Siddharth Enterprises Vs. Shapoorji Pallonji and Company Pvt. Ltd.. [(2024) ibclaw.in 291 NCLT, CP (IB) No. 3340/MB/2019] held that;

• However, it is now settled in the context of the Code that if interest is not agreed upon between the parties, it cannot form a part of ‘operational debt’ within the meaning of Section 5(21) of the Code and that no such interest can be claimed in an application under Section 9 of the Code.

Excerpts of the order;

1. BACKGROUND

1.1 This Application bearing C.P.(IB) No.3340/MB/2019 was filed by M/s. Siddharth Enterprises, the Operational Creditor on 12.09.2019 under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) in respect of M/s. Shapoorji Pallonji And Company Private Limited, the Corporate Debtor.

1.2 The Operational Creditor is a proprietary concern of Ms. Sadhana Kanodiya and is engaged in wholesale business of electrical items. The Corporate Debtor is engaged in the business of providing construction services.

1.3 Upon receipt of Purchase Orders from the Corporate Debtor, the Operational Creditor supplied various electrical items and goods for its various projects as specified in the Purchase Orders from July, 2016 to February, 2018. Invoices were subsequently raised and duly delivered to the Corporate Debtor. Initially, the outstanding amount of operational debt prior to the issuance of Demand Notice under Section 8 of the Code was Rs.18,82,448.64. However, the Corporate Debtor made partial payments leaving an outstanding amount of Rs.2,49,237/- towards the principal debt. Besides, the Operational Creditor has claimed Rs.10,25,953.94/- towards interest on the overdue amount of invoices in the Application.

1.4 The Operational Creditor issued a Demand Notice on 07.05.2019 to the Corporate Debtor, as required under Section 8 of the Code demanding release of payment of the outstanding operational debt. Despite issuance of the notice, the Corporate Debtor failed to make payment of the entire operational debt due to the Operational Creditor. Consequently, the Operational Creditor filed the present Application seeking the commencement of the CIRP in respect of the Corporate Debtor.

2. AVERMENTS OF OPERATIONAL CREDITOR

2.1 The Operational Creditor submits that goods of total value of Rs.74,80,757/- were supplied and delivered to the Corporate Debtor between 20.07.2016 and 28.02.2018. Invoices were raised by the Operational Creditor against purchase orders issued by the Corporate Debtor. The first purchase order is dated 20.07.2016 and the first invoice is dated 22.07.2016. The last purchase order is dated 16.02.2018 and the last invoice was raised on 28.02.2018. As per the terms of the Purchase Order, payment was to be made within thirty days from the date of receipt/acceptance of the material at site. The Corporate Debtor had from time to time paid a sum of Rs.66,24,262/-, although none of the invoices was settled within the agreed credit period. An amount of Rs.8,56,495/- (Rs.74,80,757/- minus Rs.66,24,262/-) remained due and outstanding despite e-mail reminders to the Corporate Debtor. It is submitted that out of the said amount of  Rs.8,56,495/-, the Corporate Debtor made further payments aggregating to Rs.6,07,258/- on 01.06.2019 after issuance of the Demand Notice. 

2.2 The Operational Creditor in the present Application has claimed the amount in default to be an aggregate sum of Rs.12,75,190.54 (Twelve lakhs seventy-five thousand one hundred and ninety rupees and fifty-four paise). This comprises a principal operational debt of Rs.2,49,237/- (Rs.8,56,495/- minus Rs.6,07,258/-) and further interest of Rs.10,25,953.54/- up to 06.05.2019. It is submitted that the Corporate Debtor is liable to pay further interest at the same rate of 24% per annum from 06.05.2019 until the date of payment or realisation.

2.3 The Operational Creditor relies on its status as an MSME Enterprise and thus holds the Corporate Debtor liable to pay interest on delayed payments and unpaid invoices. Moreover, the terms of all invoices stipulate that interest as mentioned therein shall be payable if payment is delayed beyond the credit period. Additionally, the Corporate Debtor never raised objections to these terms rendering them a binding contract.

2.4 Despite follow-ups and numerous emails, no payment was made by the Corporate Debtor. In one email exchange dated 24.02.2018, the Corporate Debtor explicitly admitted its financial difficulties and inability to pay. 

2.5 The Operational Creditor further submits that a Demand Notice dated 07.05.2019 was served on the Corporate Debtor on 14.05.2019 seeking payment of outstanding operational debt of Rs.18,82,450/-. Subsequently, Rs.6,07,258/- was paid by the Corporate Debtor on 01.06.2019 after the receipt of the Demand Notice. The Corporate Debtor responded to the Demand Notice vide its letter dated 20.05.2019, contending that there was  a failure to comply with the contractual obligations as set out in the Purchase Orders and, therefore, nothing remained due and payable to the Operational Creditor from the Corporate Debtor. However, the Corporate Debtor failed to specify which portion or clause of the contract the Operational Creditor had violated, rendering its allegations devoid of material particulars and

specifics.

2.6 All allegations of the Corporate Debtor regarding the supply of defective materials and goods by the Operational Creditor are vague and devoid of material particulars. The Corporate Debtor has not made any specific allegations stating that certain goods in a particular unpaid invoice have been materially defective. Therefore, the allegation of the Corporate Debtor cannot be termed as dispute between the parties. The Corporate Debtor has paid up the entire principal amounts of 89 out of 97 invoices raised by the Operational Creditor. Therefore, the Corporate Debtor cannot claim that there is an existing dispute between the parties regarding the said invoices. 

2.7 The Operational Creditor contends that since 2020, CareEdge Ratings (a leading credit rating agency) has reported the Corporate Debtor as a financially stressed company.

2.8 The Operational Creditor submits that to date, there has been no reconciliation of accounts between the parties, as asserted by the Corporate Debtor. Further, the Operational Creditor had previously disclosed during oral arguments that it had filed an application before the Micro and Small Enterprises Facilitation Council (MSEFC) but did not pursue it further.

2.9 The Operational Creditor submits that all unpaid invoices mentioned in the statement of account of the Corporate Debtor (Pages 540-546 of the Application) were within the limitation period at the time of filing the present Application. It is also pertinent to note that the Corporate Debtor made substantial payments after receiving the notice under Section 8 of the Code, thus extending the limitation period for the Operational Creditor concerning the invoices as per the provisions of the Limitation Act, 1963.

3. CONTENTIONS OF CORPORATE DEBTOR

3.1 The Corporate Debtor in its Affidavit-in-Reply has denied all allegations and contentions of the Operational Creditor and opposed the present Application on various grounds.

3.2 The Corporate Debtor submits that all payments due to the Operational Creditor have been remitted. The Corporate Debtor has placed on record a reconciliation statement indicating that nothing remains due and payable by it to the Operational Creditor. Further, it claims that the present Application, along with the Demand Notice dated 07.05.2019 served upon the Corporate Debtor, lacks detailed information regarding the transactions between the parties, rendering the Application incomplete and liable to rejected.

3.3 The Corporate Debtor contends that the Operational Creditor has combined purchase orders from six different projects to meet the threshold requirements. The Corporate Debtor argues that claims arising from different purchase orders/ agreements, with varying amounts and dates of default, cannot be consolidated for alleged default. As the causes of action are separate, the Corporate Debtor seeks the dismissal of this Application.

3.4 In its letter dated 04.06.2019, the Corporate Debtor claims to have informed the Operational Creditor that outstanding dues of Rs.6,07,258/- pertaining to the High Level Cancer Institute project and BEL project had been paid on 01.06.2019 with no further amount owed to the Operational Creditor. Then there were certain invoices in respect of which deductions had been made after ascertaining the quality of the material and the balance amounts had been transferred to the Operational Creditor.

3.5 Moreover, the Corporate Debtor alleges pre-existing dispute regarding the quality of materials supplied by the Operational Creditor which was raised before the issuance of the Demand Notice. The Corporate Debtor also asserts that it raised concerns regarding the quality and quantity of goods provided in various invoices. The Corporate Debtor has furnished copies of various e-mails evidencing pre-existence of dispute regarding the quality of goods supplied which ought to have been disclosed by the Operational Creditor in its Affidavit in accordance with the provisions of Section 9(3)(b) of the Code. The Operational Creditor has instead submitted general affidavit without any details of the Corporate Debtor’s e-mails disputing the quality of certain materials supplied.

3.6 The Corporate Debtor submits that the present Application suffers from wrongful calculation of claims in so far as several invoices alleged by the Operational Creditor to be due were actually paid by the Corporate Debtor. Specific reference is made to invoice numbers 61, 53, 59, 78, 81, 72, 63, 64, 66, 70, 75, and 91 raised between the period 25.10.2017 and 28.02.2018.

3.7 According to the reconciliation statement prepared by the Corporate Debtor, there are no outstanding dues for the mentioned projects. The Corporate Debtor denies acknowledging any interest payments and points out that several invoices did not mention any interest component for delayed payment. Additionally, the Corporate Debtor argues that the claim of interest alone does not fall under the definition of 'Operational Debt' under the Code. When the principal amount has already been paid, application under Section 9 of the Code on the basis of the clause for entitlement for interest is not maintainable, as the Operational Creditor has to approach a court of competent jurisdiction for any relief. Reliance is placed on the judgments of Hon’ble NCLAT in cases of Krishna Enterprises v. Gammon India Limited 2018 SCC OnLine NCLAT 360 and S. S. Polymers v. Kanodia Technoplast Limited [Company Appeal (AT) Insolvency No.1227 of 2019] wherein it has been held that interest cannot be claimed as a matter of right when there is no agreement between the parties for the same. Additionally, the Hon'ble Karnataka High Court in Jyothi Limited vs. Bouving Fouress Limited (2001) 3 Comp LJ 413 held that a clause for interest contained in an invoice is a unilateral act which cannot bind the counterparty in the absence of a clear agreement or acknowledgment. Moreover, the Hon'ble NCLAT in its judgment dated 17.01.2022 in Amsons Communications Private Limited v. ATS Estates Private Limited [(2021) SCC OnLine NCLAT 223] held that if interest is not agreed upon, then it cannot form a part of "operational debt". Therefore, the imposition of interest at the rate of 2% in the invoices, not mentioned in the Purchase Orders and solely unilateral in terms of the invoices, is not applicable to the Corporate Debtor.

3.8 It is contended that the Operational Creditor is indulging in forum shopping, highlighting a previous legal notice demanding payment issued by the Operational Creditor's advocates. It asserts that an application under Section 7 or Section 9 of the Code is not meant for debt recovery. Further, the Corporate Debtor alleges that the Operational Creditor had failed to disclose that it had approached the Micro and Small Enterprises Facilitation Council under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), thereby engaging in forum shopping. It relies on judgement of S. S. Engineering v. Hindustan Petroleum Corporation Limited 2022 SCC OnLine SC 1385 wherein the Hon’ble Supreme Court while explaining the scope and object of the Code, has held that NCLT cannot act as a debt recovery forum.

3.9 The Corporate Debtor is a financially viable and stable company which does not have to be admitted to CIRP merely for recovery of interest unilaterally charged by the Operational Creditor through these invoices.

3.10 The Corporate Debtor submits that it had expressed willingness to reconcile statements and also engaged in working out amicable settlement with the Operational Creditor, as directed by this Tribunal. However, it alleges that the Operational Creditor has repeatedly demanded amounts beyond what was claimed, including advocate fees and filing fees, which are not part of the original claim. Thus, it is contended that the Corporate Debtor merely intends to use this forum for recovery of claims settled or disputed. In light of the above, it is prayed that the case against the Corporate Debtor ought to be dismissed with costs.

4. ANALYSIS AND FINDINGS

Upon due consideration of the pleadings as well as written submissions along with the materials available on record and hearing the Ld. Counsel for the Operational Creditor and Corporate Debtor, our findings in the matter are as under:-

4.1 It is well-settled that while considering an application under Section 9 of the Code, the Adjudicating Authority will have to determine-

• (i) Whether there is an ‘operational debt’ as defined under Section 5(21) exceeding the threshold limit under Section 4 of the Code;

• (ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid and

• (iii) Whether there is existence of a dispute between the parties or the record of pendency of a suit or arbitration proceeding filed before the receipt of the Demand Notice of the unpaid operational debt in relation to such dispute?

If any of the aforesaid conditions is lacking, the application would have to be rejected [Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353]. It is also a settled proposition of law that an application under Section 9 of the Code has to be mandatorily admitted if all the conditions stipulated in clauses (a) to (e) of Section 9(5)(i) are satisfied. 

4.2 It is also well-settled that an application under Section 9 of the Code, inter  alia, requires strict proof of debt and default. The Applicant must prove with credible evidence and materials that there is an ‘operational debt’ owed to it by the Corporate Debtor and that there has been a default in payment of such debt on the date on which it fell due and payable. Coming to the facts of the present case, it is observed that while the Operational Creditor claims the amount of operational debt in default to be Rs.12,75,191/- (rounded off) including interest as per the Application, the Corporate Debtor provides a reconciliation statement and claims that all payments due to the Operational Creditor towards principal debt have been remitted and there is no amount due and payable to the Operational Creditor any more. It is noticed from the record that a total of 97 invoices were raised by the Operational Creditor against purchase orders issued by the Corporate Debtor aggregating to Rs.74,80,757/- out of which payments of Rs.66,24,262/- were made by the Corporate Debtor from time to time, leaving an outstanding principal amount of Rs.8,56,495/- and overdue interest charges of Rs.10,25,954/- (rounded off) prior to the issuance of the Demand Notice on 07.05.2019. Subsequently, the Operational Creditor issued the Demand Notice to the Corporate Debtor demanding payment of outstanding dues of Rs.18,82,449/- (Rs.8,56,495+Rs.10,25,954).

4.3 After receipt of the Demand Notice, the Corporate Debtor its reply dated 20.05.2019 disputed the quantum of debt. The Corporate Debtor then made further payments of Rs.6,07,258/- on 01.06.2019 against the bills related to the High Level Cancer Institute project and BEL Project. These payments were evidenced by bank transactions which the Operational Creditor acknowledged and adjusted. After making these payments, there was no amount left due and payable by the Corporate Debtor to the Operational Creditor whereas the latter still claims outstanding principal dues of Rs.2,49,237/- (Rs.8,56,495 - Rs.6,07,258) from the Corporate Debtor. In this connection, it is noticed from the record that the present Application does not contain any authentic and credible documents supporting the alleged debt. For example, the Operational Creditor has not placed on record its bank statement or certificate from the bank showing that any payments made by the Corporate Debtor in respect of the alleged operational debt of Rs.2,49,237/- were not credited to its bank account during the relevant period. Nor has it furnished ledger account of the Corporate Debtor as per its books of account evidencing alleged amount of Rs.2,49,237/- due from the Corporate Debtor. Nor has it produced any record of debt and default, if any, available with the information utility. Moreover, it has not pointed out any defect or discrepancy in the reconciliation statement furnished by the Corporate Debtor demonstrating that it had made payments against all the invoices raised by the Operational Creditor.

4.4 In view of the above, we find that the documentary evidences attached by the Operational Creditor with the Application are not adequate to substantiate the existence of operational debt as claimed to be due and payable by the Corporate Debtor, although these indicate business transactions between the parties. Hence, it is not possible to determine whether any debt to the tune of Rs.2,49,237/- was due and payable by the Corporate Debtor to the Operational Creditor or to conclude whether the Corporate Debtor has committed a default in payment of such outstanding operational debt. The Operational Creditor thus fails to discharge the onus cast upon it in this behalf.

4.5 As regards the claim of interest made by the Operational Creditor, it is noticed from the record that neither the purchase orders nor several invoices contained any interest liability for delayed payment. The claim of interest so made rests primarily on the status of the Operational Creditor as an MSME enterprise. It is true that MSMED Act specifically states that interest shall be paid on delayed payments irrespective of whether there is an express agreement or not to that effect. However, it is now settled in the context of the Code that if interest is not agreed upon between the parties, it cannot form a part of ‘operational debt’ within the meaning of Section 5(21) of the Code and that no such interest can be claimed in an application under Section 9 of the Code. The correct forum for such claims is the MSEFC. It is settled that NCLT is not a forum to resolve the disputes pertaining to interest claims of a MSME entity. As stated above, the Operational Creditor has already made an application before MSEFC in this behalf. For the purpose of this Application, the claim of the Operational Creditor for treating the interest amount of Rs.10,25,954/- (rounded off) as part of ‘operational debt’ is found to be legally untenable and is accordingly rejected.

4.6 Upon examining the e-mail correspondences exchanged between the parties prior to the issuance of the Demand Notice dated 07.05.2019, it is observed from the record that the Corporate Debtor had raised disputes regarding the poor quality of goods such as LED lights, Earth Leakage Circuit Breaker (ELCB), Miniature Circuit Breaker (MCB) etc, supplied and the delay in repair/replacement of defective goods by the Operational Creditor. These disputes were raised by the Corporate Debtor through emails dated 05.03.2018, 23.03.2018, 02.05.2018 and 05.07.2018 addressed to the Operational Creditor. For instance, the Operational Creditor was informed vide e-mail dated 02.05.2018 that the Corporate Debtor was issuing debit note of Rs.2,15,040/- at purchase rate for all 32 pieces of defective LED lights. Further, by an email dated 07.05.2018, the Operational Creditor had acknowledged the existence of such dispute by agreeing to replace/repair the LED lights and ELCBs. Even in its reply to the Demand Notice dated 20.05.2019, the Corporate Debtor has referred to the “poor quality of materials” delivered by the Operational Creditor and adverted to the facts relating to “delay in repair/replacement of defective works” which had been suppressed by it in the Demand Notice. It was categorically stated the said reply of the Corporate Debtor dated 20.05.2019 “should be treated as notice of dispute under Section 8(2) of the Code”.

4.7 In view of this, there is no valid basis for the Operational Creditor to claim in the Affidavit in support of the Application that the Corporate Debtor has failed to bring to notice of the Operational Creditor the existence of any dispute or pendency of a suit or arbitration proceedings filed before the service of the Demand Notice and that the Operational Creditor has not received notice of dispute from the Corporate Debtor regarding the pending amount. It is also noticed that the Affidavit under Section 9(3)(b) of the Code submitted by the Operational Creditor is a general affidavit without any affirmation about the notice of dispute given by the Corporate Debtor relating to a dispute of the unpaid operational debt. Considering the above facts and circumstances, we find that the Corporate Debtor has made out a case of pre-existing dispute with the Operational Creditor that arose well before the receipt of the Demand Notice. Such dispute is found to be duly supported by concrete and credible evidence which is not vexatious or frivolous and grounds for which are real and not spurious, illusory or hypothetical.

4.8 It is well-established that the Code cannot be used as a recovery mechanism or as a substitute for debt enforcement procedures. In this connection, it is now recognised that NCLT is not a debt collection forum and that it is not the object of the Code that CIRP should be initiated to penalise solvent companies for non-payment of disputed dues claimed by an Operational Creditor.

4.9 In view of aforesaid discussions, it clearly emerges that the Operational Creditor has failed to establish the existence of an operational debt exceeding the prescribed threshold limit under Section 4 of the Code due and payable by the Corporate Debtor but remaining unpaid which is the sine qua non for admission of an application under Section 9 of the Code. Further, it is found that notice of dispute had been received by the Operational Creditor from the Corporate Debtor. In these circumstances, we are of the considered view that the present Application filed by the Operational Creditor under Section 9 of the Code deserves to be rejected.

ORDER

This Application bearing C.P.(IB) No.3340/MB/2019 filed under Section 9 of the Code by M/s. Siddharth Enterprises, the Operational Creditor, for initiating  CIRP in respect of M/s. Shapoorji Pallonji and Company Private Limited, the Corporate Debtor is rejected. However, the rejection of this Application shall not cause any prejudice to the right of the Operational Creditor to pursue such other remedies as may be available in accordance with law.

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Beetel Teletech Ltd. Vs. Arcelia IT Services Pvt. Ltd. - “If the default is committed prior to Section 10A period and default continues there is no prohibition in initiating proceedings under Section 7 and we are not persuaded to accept the submission of the counsel for the respondent that the liability of interest which accrued during Section 10A period should be ignored or should not be computed in the amount while finding the threshold.

 NCLAT (11.09.2023) In Beetel Teletech Ltd. Vs. Arcelia IT Services Pvt. Ltd.  [Company Appeal (AT)(Insolvency) No. 1459 of 2022] held that;.

• “If the default is committed prior to Section 10A period and default continues there is no prohibition in initiating proceedings under Section 7 and we are not persuaded to accept the submission of the counsel for the respondent that the liability of interest which accrued during Section 10A period should be ignored or should not be computed in the amount while finding the threshold. 

• Liability to pay interest which default committed prior to Section 10A period continues and is not obliviated by Section 10A.”

• Thus, the aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing. It was never intended to cover any default which occurred before Section 10A period and continuing thereafter.

• A plain reading of Section 60 of the Indian Contract Act 1872, shows that if the debtor makes any payment without any appropriation, then the creditor can use his discretion to wipe out any of the remaining debt(s) which is/are due. The right of appropriation lies with the creditor if the debtor does not indicate in what manner the debt is to be discharged.

Excerpts of the Order;    

The present appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ in short) by the Appellant arises out of the order dated 17.10.2022 (hereinafter referred as ‘Impugned Order’) passed by the Adjudicating Authority (National Company Law Tribunal, Delhi Bench (Court-II) in CP(IB) No. 58(ND)2022. By the impugned order, the Adjudicating Authority has dismissed the Section 9 application filed by the Operational Creditor-M/s Beetel Teletech Limited (the present Appellant) seeking initiation of Corporate Insolvency Resolution Process (“CIRP” in short) against the Corporate Debtor-M/s. Arcelia IT Services Private Limited (the present Respondent). Aggrieved by this impugned order, the present appeal has been preferred by the Operational Creditor.

# 2. Briefly recapitulating the factual matrix of the present case, the Corporate Debtor and the Operational Creditor had executed a Channel Partner Registration Form wherein both parties had agreed to work on mutually accepted terms and conditions. The Corporate Debtor raised a purchase order on 25.10.2019 pursuant to which the Operational Creditor supplied goods and services and raised an invoice No.RV1927813879 dated 31.12.2019 for which payments remained due. Despite several reminders including meetings held between the two parties as the entire payment assured by the Corporate Debtor was not received by the Operational Creditor, a demand notice under Section 8 of the IBC was issued by the Operational Creditor. The Corporate Debtor did not file any reply to the statutory demand notice. Subsequently the Operational Creditor filed a Section 9 application on 15.12.2021 seeking initiation of CIRP of the Corporate Debtor. The Corporate Debtor filed a reply to the Section 9 application. On hearing the matter, the Adjudicating Authority dismissed the Section 9 application as not maintainable on the ground that the Appellant had failed to establish beyond doubt that the unpaid operational debt was subsisting above the minimum threshold limit of Rs.1 crore. Aggrieved by the impugned order, the Operational Creditor has come up in appeal.

# 3. The Learned Counsel for the Appellant submitted that as per payment terms followed by the two parties, the payments were to be made by the Corporate Debtor 60 days from the date of invoice. It was further submitted that in terms of payment conditions as laid down at Clause 12.8.2, the Corporate Debtor was liable to pay interest at the rate 18% per annum if payment was not cleared within 60 days. The invoice raised vide No.RV1927813879 for Rs. 1,32,45,904.84 which was dated 31.12.2019 fell due for payment on 29.02.2020. It was further submitted that though certain payments were received from the Corporate Debtor post this invoice, these payments were adjusted both against invoice No.RV1927813879 and other outstanding invoices. After carrying out these adjustments, the payments still continued to remain outstanding in respect of invoice No.RV1927813879.

# 4. It is further contended by the Learned Counsel for the Appellant that though the Appellant took up the matter with the Corporate Debtor for release of the outstanding operational debt, the Corporate Debtor released only part payments. It was also added that a cheque issued by the Corporate Debtor also got dishonoured compelling the Appellant to issue a Section 8 demand notice which was allegedly never replied to nor disputed by the Corporate Debtor. It has been further admitted that post issue of demand notice, two cheques of Rs.5 lakhs were issued which were adjusted against other pending invoices. However, as the operational debt in respect of invoice No. RV1927813879 continued to subsist, this constituted sufficient basis for admission of Section 9 application. It was further pointed out that in Part IV, the operational debt claimed by the Operational Creditor is confined only to Invoice No. RV1927813879 for an amount of Rs.1,15,11,486/- which included a principal amount of Rs.1,01,80,986 and an interest amount of Rs.13,30,500/- at the rate of 18% per annum as agreed. It was vehemently contended that the Adjudicating Authority erroneously dismissed the Section 9 application on the ground that the threshold limit of Rs.1 crore is not fulfilled.

# 5. We have duly considered the detailed submissions advanced by the Learned Counsel for the Appellant and perused the records carefully.

# 6. None appeared for the Corporate Debtor before this Tribunal right since the first date of hearing on 13.12.2022. This Tribunal had directed issue of Notice to the Respondent – Corporate Debtor on 13.12.2022. Noticing that the Notice sent to the Respondent by speed post having been returned undelivered, the Appellant was permitted to hand over Dasti Notice personally on 30.01.2023. The Learned Counsel for the Appellant informed this Tribunal on 24.03.2023 that the Appellant having been denied entry by the security staff, the Notice could not be served. This Tribunal had therefore directed that Notice be published in two leading newspapers which is found to have been complied with and an affidavit of service has also been filed. It is, therefore, held that service of Notice on Corporate Debtor is sufficient and that the Corporate Debtor has not appeared despite Notice.

# 7. We notice that the Adjudicating Authority has dismissed the Section 9 application of the Appellant on two grounds. One ground taken is that the period for which interest has been claimed by the Operational Creditor falls during the period 25.03.2020 to 24.03.2021 for which no CIRP could have been initiated in terms of Section 10A of the IBC. This ground has been elucidated in Paragraph 9 of the impugned order, where the following has been held: –

“9. On perusal of the Part IV of the application, it is observed that the Applicant has claimed an amount of Rs.1,15,11,486/-, comprising of the principal amounting to Rs.1,01,80,986/- and interest Rs.13,30,500/- from 29.02.2020 to 15.12.2021 @ 18% per annum. From the period for which the interest is being claimed by the Applicant, we observe that the majority of the period is falling under the suspension period of IBC (i.e., from 25.03.2020 to 24.03.2021), for which no CIRP can ever be initiated as stipulated under Section 10A of IBC, 2016. Hence, in our view, no interest can be claimed for the suspension period of IBC for triggering CIRP. Further, as held in the catena of the Judgements, this Tribunal is not a court of recovery, therefore, we will not indulge in calculating the interest amount for the remaining period.”             (Emphasis supplied)

# 8. This finding of the Adjudicating Authority has been challenged by the Appellant on the ground that the default in payment having arisen before 25.03.2020, the interest that accrued on the principal amount so defaulted is also liable to be treated as part of operational debt and taken into account while computing the minimum threshold limit.

# 9. At this stage, it may be useful to have a look at Section 10A of IBC which is as follows: –

Section 10A: Suspension of initiation of corporate insolvency resolution process.

10A. Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation. – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.

# 10. A plain reading of Section 10A signifies that no application/ proceedings under Sections 7, 9 and 10 can be initiated for any default in payment which is committed during Section 10A period. Thus, what is essentially barred is initiation of CIRP proceedings when the Corporate Debtor commits any default during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, this statutory provision does not put any bar on the initiation of CIRP proceedings.

# 11. The law of Section 10A is well settled. The object and purpose of Section 10A has been explained in the ordinance by which Section 10A was brought into operation. Further, the object and intent underlying the insertion of Section 10A has also been propounded by the Hon’ble Supreme Court in its judgment of “Ramesh Kymal vs. M/s Siemens Gamesa Renewable [Civil Appeal No. 4050 of 2020]”. In consonance with the tenor and spirit of the above-mentioned judgment of the Hon’ble Supreme Court, this Tribunal on 18.08.2023 in Company Appeal (AT) (Ins.) No. 914 of 2023 in the matter of Raghavendra Joshi v. Axis Bank Limited & Anr (“Raghavendra” in short) had the occasion to notice the object of Section 10A of IBC and observed as follows:

• “8. In Ramesh Kymal’s Case, the Appellant had filed an Application under Section 9 on 11th May, 2020 on the ground of default. The ordinance No. 09/2020 was promulgated by the President of India on 05th June, 2020 by which Section 10A was inserted into the I&B Code, 2016. An Application was filed by the Corporate Debtor for dismissal of Section 9 Application, the Section 9 Application was dismissed on the ground of Section 10A. Challenging the order of the Adjudicating Authority as well as Appellate Tribunal, Appeal was filed in the Supreme Court. Argument which was advanced before the Hon’ble Supreme Court was that Section 10A having been inserted in the statute book with effect from 05th June, 2020, it shall not apply on the Applications filed prior to the said date, which argument was rejected by the Hon’ble Supreme Court and relevant observations have been made in Paragraphs 22, 23 and 24 as has been noted above. The Hon’ble Supreme Court affirmed the Order of the Adjudicating Authority holding that default in Section 9 Application being on 30th April, 2020 it being covered by Section 10A, Application was rightly rejected. The above judgment of the Hon’ble Supreme Court has laid down that if the default is after 25th March, 2020, the Application is hit by Section 10A. The object as was indicated in the ordinance for bringing Section 10A in the statute book is relevant to notice which is to the following effect:

• “AND WHEREAS a nationwide lockdown is in force since 25th March, 2020 to combat the spread of COVID-19 which has added to disruption of normal business operations: AND WHEREAS it is considered expedient to suspend under Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings under the said Code for some time; AND WHEREAS it is considered expedient to exclude the defaults arising on account of unprecedented situation for the purposes of insolvency proceeding under this Code.”

# 12. Further this Tribunal while taking cognizance of the above judgment of this Tribunal in Raghavendra (supra), in the matter of Company Appeal (AT) (Ins.) No. 294 of 2023 in Narayan Mangal v. Vatsalya Builders & Developers Pvt. Ltd it proceeded further to answer as to whether interest payments accrued during the Section 10A period is to be deducted while computing the threshold and it has been held that: –

• “If the default is committed prior to Section 10A period and default continues there is no prohibition in initiating proceedings under Section 7 and we are not persuaded to accept the submission of the counsel for the respondent that the liability of interest which accrued during Section 10A period should be ignored or should not be computed in the amount while finding the threshold. Liability to pay interest which default committed prior to Section 10A period continues and is not obliviated by Section 10A.”

# 13. Thus, the aim and objective of Section 10A was to protect a Corporate Debtor from the filing of any insolvency application against it for any default committed during the period when Covid-19 pandemic was prevailing. It was never intended to cover any default which occurred before Section 10A period and continuing thereafter.

# 14. The present is a case where default has been committed by the Corporate Debtor since 29.02.2020 which is prior to commencement of Section 10A period. Hence, this is a case where the default was undisputedly committed before the bar of Section 10A came into play. There being categorical default by the Corporate Debtor prior to Section 10A period, the Corporate Debtor was clearly not entitled to claim the benefit of Section 10A period.

# 15. Further, since the default was committed prior to Section 10A period and the liability to pay interest having clocked prior to Section 10A period, we are of the considered opinion that the view taken by the Adjudicating Authority that the liability of interest which accrued during Section 10A period should be ignored or should not be computed for triggering CIRP is misconceived.

# 16. The second ground which has been taken by the Adjudicating Authority to hold that the quantum of unpaid operational debt cannot be held to be above the minimum threshold limit of Rs.1 crore is that part payments received from the Corporate Debtor have been adjusted by the Appellant towards other debts instead of adjusting the first against Invoice No.RV1927813879. The finding recorded by the Adjudicating Authority in this regard is as follows: –

• “12. From perusal of the aforesaid table, it is observed that whereas the payments made on the earlier dates except the payment reflected at Serial no.1 are adjusted against the invoice no. RV1927813879, the part-payments dated 03.11.2021 and 08.11.2021 made by the respondents as reflected at serial. no. 8 and 9 are adjusted towards the interest outstanding of the invoice bearing No. RV2027804572. Hence, we do not find any consistency or pattern in the treatment accorded to the part-payments, while adjusting the same towards the outstanding dues. Had the amounts mentioned at Serial No. 8 and 9 been adjusted towards the invoice RV1927813879, the principal amount would be less than the minimum stipulated threshold of Rs 1 (one) Crore.

• 13. We further observe that the invoice claimed in Part IV of the present application is only RV1927813879 and the other invoices as referred in aforesaid table are neither produced nor are the subject matter of the present petition. Hence, in our considered view, further investigation and scrutiny of facts is required that as to why the subsequent payments made on 08.11.2021 are adjusted against the invoice no. RV2027804572, whereas the previous payments made on 24.03.2021 and 25.03.2021 are adjusted towards the Invoice under reference i.e., RV1927813879.”

• (Emphasis supplied)

# 17. This finding of the Adjudicating Authority has been challenged by the Appellant on the ground that a creditor is entitled to apply his own discretion to appropriate any on-account payment received from the debtor against any outstanding debt(s) due from the debtor in terms of the Indian Contract Act, 1872.

# 18. At this stage, it may be useful to have a look at Section 60 of the Indian Contract Act, 1872 which is as follows:

• Section 60. Application of payment where debt to be discharged is not indicated. – Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitations of suits. — Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitations of suits.“

# 19. A plain reading of Section 60 of the Indian Contract Act 1872, shows that if the debtor makes any payment without any appropriation, then the creditor can use his discretion to wipe out any of the remaining debt(s) which is/are due. The right of appropriation lies with the creditor if the debtor does not indicate in what manner the debt is to be discharged. In such circumstances, the creditor has a lot of scope for exercising his right in such a manner so as to put himself in the most advantageous position. It is also a well settled business practice that in a debt where the principal amount is outstanding and interest has also accrued on the debt, sums paid by the debtor is applied by the creditor first to the interest. In the present facts of the case, payments received by the Operational Creditor have been duly adjusted also against the principal amount or interest accrued in respect of invoices other than RV1927813879 which were all pending for payment. Without explaining how this action has Operational Creditor has been in contravention of the statutory provisions contained in the Indian Contract Act, it has therefore been unreasonable on the part of the Adjudicating Authority to hold that there is an inconsistency in the pattern adopted by the present Appellant while adjusting payments received against outstanding dues.

# 20. Given the above backdrop, we therefore do not commend the finding of the Adjudicating Authority that the Appellant/Operational Creditor by adjusting payments received from the Corporate Debtor against the principal amount outstanding in respect of other pending invoices or setting off these payments against interest accrued qua these invoices had committed any anomaly. There is no foundational basis shown by the Adjudicating Authority for disregarding the discretion exercised by the Operational Creditor which it was clearly entitled to exercise.

# 21. In sum, we have no hesitation in holding that the finding returned by the Adjudicating Authority that the criterion of minimum threshold limit of Rs 1 crore is not met in the facts of the present case is not tenable. Considering the overall facts and circumstance of the present case, we are of the considered view that the order of the Adjudicating Authority is unsustainable. The impugned order dated 17.10.2022 is set aside. In result, the appeal is allowed. The Section 9 application filed by the Appellant is revived and remanded back to the Adjudicating Authority to be considered again in accordance with law. We however would like to add that our observations contained herein may not influence the Adjudicating Authority in deciding the matter on merits. No order as to costs.

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