2019 (5) TMI 1736 - Tri - Insolvency and Bankruptcy

Tribunal prohibits withholding goods in insolvency process, deems behavior deceptive, orders supply & costs

Levcon Valves (P.) Ltd. Versus Energo Engineering Projects Ltd.

The Tribunal ruled that withholding goods during the corporate insolvency resolution process due to pre-insolvency debts was impermissible. The ... CIRP Process - withholding of supply of goods - recovery of arrears - whether during the period of corporate insolvency resolution process supply of goods paid for could be with held on the ground that the supplier has to recover arrears of a debt in respect of the pre-corporate insolvency period? - HELD THAT:- There is a basic distinction between the transaction & payments pertaining to period prior to CIR period & the transactions /payments which are required to be made during CIR period. The pre-CIR period payments are to be part of the claims made before the Resolution Professional whereas the post CIR period transactions are not treated on the same footing. The goods & services supplied during CIR period has to be fully paid in order to carry on the business of the Corporate Debtor as a going concern. In that connection the Resolution Professional and Committee of Creditors are fully empowered to place an order for supply of goods against the consideration for those goods. In the present case it has not been disputed that the petition was admitted on 05.09.2017 and the Purchase Order was placed thereafter on 16.07.2018. Obviously, this was a transaction post admission of the petition and a payment for a sum of ₹ 34,47,075/- was made which was inclusive of packing charges, IGST, etc. - Clearly after accepting the amount it got the goods unloaded and defence now put forward is that in respect of pre-CIR period Corporate Debtor owed Non-Applicant-Respondent huge amount which must be paid and supply of goods in that garb had been withheld. Such a conduct emerges from the intention to violate law which is well settled that pre CIR period claims are on a different pedestal than the one made post CIR period. Therefore it is not possible to accept the defence that on account of debt in respect of pre-CIR period the goods could be detained. The Respondent are directed to supply the goods and dispatch the same to the end user namely Sanjay Gandhi Thermal Power Project, Madhya Pradesh Power Generating Company Ltd. - application disposed off. Issues:- Whether goods can be withheld during the corporate insolvency resolution process due to pre-insolvency period debts.Analysis:1. The main issue in this case was whether goods could be withheld during the corporate insolvency resolution process based on debts from the pre-insolvency period. The Liquidator filed an application under section 60(5)(c) read with section 35(1) of the Insolvency and Bankruptcy Code, 2016, seeking directions for the release of goods paid for. The goods in question were related to a Purchase Order dated 16.07.2018 for the Corporate Debtor's project.2. The Corporate Debtor's insolvency resolution process was initiated on 05.09.2017, leading to the appointment of an Interim Resolution Professional. Subsequently, the decision was made to liquidate the Corporate Debtor, and a Liquidator was appointed. The Liquidator, in accordance with statutory duties under section 35 of the Code, placed a Purchase Order with the Respondent for the supply of goods for the ongoing project.3. Despite the payment made by the Corporate Debtor for the goods, the Respondent withheld the supply citing outstanding payments from the pre-insolvency period. The Respondent failed to file any claim for these outstanding payments despite a Public Notice inviting claims. The non-supply of goods hampered the project's progress, as confirmed by the Material Dispatch Clearance Certificate issued by project authorities.4. The Respondent's defense included denying knowledge of the Corporate Debtor's insolvency status at the time of placing the order and arguing lack of privity of contract with the project authorities. However, the Tribunal emphasized the distinction between pre-insolvency and post-insolvency period transactions, highlighting the necessity to pay for goods and services supplied during the insolvency resolution process.5. The Tribunal found the Respondent's behavior deceptive and in violation of the law, as the goods were unloaded after accepting payment. It was ruled that withholding goods due to pre-insolvency debts was not permissible, and the Respondent was directed to supply the goods to the end user within one week, bearing additional costs of Rs. 50,000 to be deposited in the account of the company in liquidation.