TaxTMI 
TaxTMI 
2024 (8) TMI 407
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....r referred to as 'Impugned Order') passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench- IV) in CP (IB) 1007/ND/2018. By the impugned order, the Adjudicating Authority has admitted the Section 9 application filed by Shri Pawan Gaur- Operational Creditor against M/s Schneider Prototyping India Pvt. Ltd.- Corporate Debtor and admitted the Corporate Debtor into Corporate Insolvency Resolution Process ('CIRP' in short). Aggrieved by the impugned order, the present appeal has been filed by the Suspended Director of the Corporate Debtor. 2. We have heard Shri Nalin Kohli, Ld. Counsel appearing for the Appellant and Shri Krishnendu Datta and Shri Abhijeet Sinha, Ld. Senior Counsels representing the Operational Creditor-Respondent No. 2. Shri Vishal Ganda appeared on behalf of the IRP. 3. Making his submissions, the Ld. Counsel for the Appellant submitted that the Corporate Debtor-M/s Schneider Prototyping India Pvt. Ltd. ('SPIN' in short) had entered into an Employment Agreement ('EA' in short) with Mr. Pawan Gaur-Operational Creditor/Respondent No.2 whereunder Respondent No. 2 was to act as Managing Director of SPIN on a salary of Rs. 2.50 lakhs per ....
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....so pointed out that Respondent No. 2 had made unauthorised big-ticket payments to himself and other related parties thus draining the Corporate Debtor's bank accounts. These payments were made in collusion with a CFO appointed by himself. Taking advantage of the deep and pervasive management control enjoyed by Respondent No. 2, he also misused the sole signatory rights to operate the bank account of the Corporate Debtor to transfer money to himself. This included transfer of adhoc payment of Rs. 1.87 cr; alleged bonus payments of Rs. 1.72 cr; additional bonus payments of Rs. 53 lakhs and payments to a related company of Rs. 1.37 cr. It is also pointed out that following the resignation of Respondent No. 2, it had come to light that he had defrauded and siphoned away more than Rs. 7 cr by abusing the trust reposed on him by the Corporate Debtor. Thus, the Corporate Debtor had paid himself sums vastly in excess of the actual dues under the EA which cannot be ignored. 6. It was vehemently contended that the Adjudicating Authority while admitting Section 9 application had wrongly held an amount of Rs. 4.18 lakhs as salary payable to Respondent No. 2 besides another Rs.24.44 lakhs as....
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....le along with salary as it constituted a part of the EA in clauses 4 and 5 thereof. It was also mentioned that the application of Lonkar judgment supra by the Corporate Debtor in the given factual matrix is misplaced. 9. Since there is only a need to show that there is an operational debt of more than Rs. 1 lakh to qualify admission of Section 9 application, and the same having been met, the Adjudicating Authority had rightly admitted the Section 9 application. Moreover, the admission of outstanding dues payable to Respondent No. 2 is also borne out from the email dated 08.06.2018 sent by the Corporate Debtor to Respondent No. 2 while accepting his resignation wherein information was sought on outstanding dues. It was also contended that the Corporate Debtor was trying to defeat and frustrate their legitimate claims by claiming adjustment of counter claims which the Adjudicating Authority rightly refused since claims and counter-claim set-off falls outside the domain of the summary jurisdiction of the Adjudicating Authority as has been held by this Tribunal in Rakesh Kumar Vs. Flourish Paper & Chemicals Ltd. in CA (AT) (Ins) No. 1161 of 2022. 10. It was contended that there w....
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....nce the financial statement for 31.12.2018 and 31.12.2019 was filed much after Respondent No. 2 had left employment of the Corporate Debtor and that these entries were manipulated as an after-thought. It was submitted that the balance sheets of 2018 and 2019 are unreliable documents with no probative value as they were prepared after filing of Section 9 application. Hence, the same cannot be held against Respondent No. 2 as it is clearly a cover-up attempt to defeat their valid claims. 13. We have duly considered the arguments advanced by the Learned Counsel for both the parties and perused the records carefully. 14. The issue for our consideration is whether payment to the Respondent No. 2 was due from the Corporate Debtor and, if so, whether a default has been committed by the Corporate Debtor in respect of payment of such debt and whether there was any pre-existing dispute surrounding the debt. 15. Before dwelling on the facts of the present case, a quick glance at the relevant statutory construct of IBC would be useful. Section 8 of the IBC requires the Operational Creditor, on occurrence of a default by the Corporate Debtor, to deliver a Demand Notice in respect of th....
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....ute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process." Section 9(5)(ii) is as follows: "(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under subsection (2), by an order- (i)..... (ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if- a) the application made under sub-section (2) is incomplete; b) there has been payment of the unpaid operational debt; c) the creditor has not delivered the invoice or notice for payment to the corporate debtor; d) Notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or e) any disciplinary proceeding is pending against any proposed resolution professional: Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the dat....
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....mand notice or invoice, as the case maybe. In case the unpaid operational debt has been repaid, the corporate debtor shall within a period of the self-same 10 days sent and attested copy of the record of the electronic transfer of the unpaid amount from the bank account of the corporate debtor or send an attested copy of the record that an operational creditor has encashed a cheque or otherwise received payment from the corporate debt [Section 8(2) (b)]. It is only if, after the expiry of the period of the said 10 days, the operational creditor does not either receive payment from the corporate debtor or notice of dispute, that the operational creditor may trigger the insolvency process by filing an application before the adjudicating authority under Sections 9(1) and 9(2)......... 34. Therefore, the adjudicating authority, when examining an application under Section 9 of the Act will have to determine: (i) Whether there is an "operational debt" as defined exceeding Rs.1 lakh? (See Section 4 of the Act) (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 ....
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....may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability." 20. When we look at the impugned order, we find that the Adjudicating Authority has also clearly noted the tests to be satisfied for considering the Section 9 application. We have no hesitation in observing that the tests as outlined in the impugned order are very much in conformity with the tests laid down by the Hon'ble Supreme Court in the Mobilox judgement supra. The relevant extracts of the impugned order as reproduced below: "17. ......However, this Adjudicating Authority's jurisdiction is limited to the test of the ingredients which have to be satisfied, in particular with the mandate of Section 9(5) of the Code, 2016 which are as follows:- (i) Whether there is an "operational debt" as defined in Sec. 5(20) of the Code exceeding the pecuniary threshold limit as envisaged under Section 4 of the Code, 2016? (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 ....
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....by Hon'ble NCLAT Principal Bench in Rakesh Kumar Vs Flourish Paper & Chemicals Limited & Anr. in Company Appeal (AT) (Insolvency) No. 1161 of 2022, dated 27.09.2023 that a counter-claim cannot be adjudicated in a section 9 application. Accordingly, the contention of the Corporate Debtor based on counter claim/set off cannot sustain. 26. It is pertinent to note that once the Debt above the pecuniary threshold is shown as due, it is for the Corporate Debtor to establish that there are no Outstanding Dues to be paid to an Operational Creditor/Applicant u/s 9 of the Code. In this connection, it is not out of place, for this Adjudicating Authority, to make a significant mention that the Corporate Debtor, had not placed on record any conclusive document to show that the amount due to the Applicant has been paid. The sum and substance of the Corporate Debtor's defence is that the amount due to the Applicant has been set off by the Corporate Debtor towards the counter claims as raised by the Corporate Debtor. 27. In view of the aforesaid discussion and the judgements referred to above, this Adjudicating Authority, without delving into the exercise of determining t....
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....e 2018 Dear Mr. Gaur, We have received your resignation from SPIN, which we hereby accept. HR will get into contact to complete the required formalities and settlement of dues." 7 June 2018 Dear Mr. Gaur, Subsequent to my earlier message accepting your resignation and for records sake, please be informed that we disagree in summary with allegations and claims made in your letter." 25. It is the case of Respondent No. 2 that the second follow-up email was sent by the Corporate Debtor on hindsight to mitigate the impact of their having accepted and acknowledged in the first email that they were ready to settle the dues owed towards salary claims of Respondent No. 2. It is also the case of Respondent No. 2 that the Corporate Debtor had made a bald and summary denial of the dues payable without any substantiation or explanation as to how the payments had been met by them. Because of these reasons the contention of the Appellant that there was no debt due and payable falls flat. 26. To our minds, from a plain reading of the above two emails, which followed each other in a gap of less than an hour on the same day, it is quite clear that ....
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....agreements other than the EA to work out their salary and other dues which could be the basis for working out the due amount and default. It is also contended that when salary advance of Rs. 1.31 cr was already available with Respondent No. 2 as was reflected in the Balance sheet of 2016-2017, the Adjudicating Authority should have taken cognisance of this fact. It has been vehemently contended that Respondent No.2 has tried to mislead the Adjudicating Authority in believing that the salary advance of Rs.1.31 cr was towards meeting arrears of salary entitlement flowing from a hand written paper agreement of 18.09.2013 entered between Respondent No. 2 and Dr. Topf, Group Chairman of the Corporate Debtor. It has also been argued that any further claim under the EA to have been found admissible as debt should have been over and above the advance which had been released to and retained by Respondent No. 2. Assailing the impugned order, it has been contended that these advance payments made in excess of the entitlements have been side-stepped by the Adjudicating Authority and erroneously treated as claims and counter claims. 29. When we look into the issue of default having been comm....
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....d 09.05.2023, to compute the salary figures basis the EA and approved business plans to arrive at the outstanding dues. In terms of this affidavit, the Respondent No.2 had voluntarily scaled down his claims and limited the amount to Rs. 3.59 cr without prejudice to their claim raised in the Section 9 petition. It is the contention of Respondent No. 2 that even if this computation of 09.05.2023 is considered and salary advance of Rs. 1.31 cr purportedly given by Corporate Debtor is factorised, yet Rs. 2.60 cr still remained payable to them which proves debt and default. 31. Admittedly, the detailed break-up of the monies claimed in the affidavit dated 09.05.2023 is Rs. 1.20 cr for past salary dues; Rs. 56.65 lakhs for Full and Final Settlement; Rs. 27.86 lakhs for Balance Gratuity and Rs. 1.79 cr for TDS not reflected. By their own admission, as recorded by the Adjudicating Authority in paras 6 and 7 of the impugned order, this also included amounts which relate to contractual dues such as LTA, Insurance premiums, bonus, car reimbursement, PF, Gratuity etc other than salary. It is the case of the Corporate Debtor that these amounts which fall in the category of welfare claims and....
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....lied upon by the Appellant of this Tribunal in Greymatter Entertainment Pvt. Ltd. Vs. Pro Sportify Pvt. Ltd. in CA (AT) (Ins) No. 1043 of 2021 which was subsequently upheld by the Hon'ble Supreme Court of India in SLP (Civil) Dy. No. 20506/2023 stands in good stead in that it held that when it is clear from material on record that there are claims and counter-claims with respect to the amounts to be paid, the defence raised on this ground cannot be held to be spurious or a mere bluster. Present is not a case where the Corporate Debtor has harped on a set-off claim. In the present factual matrix, the Appellant is contending on the strength of financial statements that Respondent No. 2 has received more than what he is entitled to receive as per the EA. The Adjudicating Authority ought not to have brushed this contention aside by treating it as part of a plethora of claim and counter-claims and turn a blind eye to the entries in the financial statements adverted to by the Corporate Debtor. This critical misappreciation of facts has led the Adjudicating Authority to the erroneous conclusion that default had been committed by the Corporate Debtor. We are satisfied that the balance amou....
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....2019. We also agree with the Adjudicating Authority that these do not qualify as pre-existing disputes. Therefore, we do not wish to take cognisance of these disputes as such since these purported developments did not predate the Section 8 notice. 36. Be that as it may, at this stage, it may be pertinent to recall the statutory provisions of Sections 8 and 9 which have been referred to in Paras 16 and 17 above. From a plain reading of the said statutory provisions, it is clear that the existence of dispute and its communication to the Operational Creditor is statutorily provided for in Section 8. In the present case, it is an undisputed fact that Section 8 demand notice was issued by the Operational Creditor- Respondent No. 2 on 20.06.2018 and in response a notice of dispute was also raised by the Corporate Debtor on 29.06.2018. 37. It may be useful to peruse the notice of dispute to find out whether the debt and default was admitted or not by the Corporate Debtor and whether any disputes related to the debt amount was raised therein. The relevant extracts are as placed below : 5. However, during the course of employment with our Client, it appears that the performan....
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....nt of our Clients to settle his accounts. It appears that your Client has not come out clean in the said Demand Notice and has only brought miniscule facts to your notice. The said act of your Client only shows his malafide intentions and ill motives. 9. As stated above, the relationship between the parties herein is governed only by the Employment Agreement and no other documents/agreement, whatsoever. Our Clients have at all times complied and performed all their obligations, duties and responsibilities as provided under the Employment Agreement. On the other hand, your Client has miserably failed to perform his obligations. The acts of your Client have not only let SPIN being systematically squeezed but also brought it to a position where it is unable to pay its debts. Not only did your Client hamper the growth and success of SPIN, your Client most importantly abused his position of CEO of the Company and his signing authorities for bank accounts of SPIN to make unapproved payments to himself and related parties thereby causing breach of trust and cheating. In fact, the acts of your Client have subjected our Clients and SPIN to unnecessary financial liability. The acts ....
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....d in a detailed and exhaustive manner outlined the various disputes ranging from financial crisis suffered by the Corporate Debtor due to mismanagement of Respondent No. 2, raising of frivolous and false disputes by Respondent No. 2 pertaining to his employment dues and remuneration, abuse of position of office held by Respondent No. 2 in financial squeezing the Corporate Debtor including siphoning of funds, institution of investigation and forensic audit to pave the way for initiating criminal action, if necessary besides denial of claims raised by Respondent No. 2 in the demand notice. 39. We also find that communications were exchanged between the Corporate Debtor and Respondent No. 2 prior to issue of Section 8 notice which show that there were seeds of discord and dispute between the two parties. Two sample letters are as placed below out of a host of such correspondence exchanged between them which find place at pages 656-680 of the APB. From: Henri-Jacques To: Pavan Gaur Dated: 08, May 2018 Subject: My employment with you. Dear Pavan, Let me clarify the extreme severity of the situation as a result of 6 years of your m....
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....g of the workers in the plant at NOIDA on May Ist and Pondicherry plant on May 2nd, 2018. I have offered and agreed to support him to the best of my capabilities. On May 3rd, we met in the morning to understand how my past dues/ outstanding from Schneider International Holding GmbH and Schneider Prototyping India Pvt Ltd. (SPIN) shall be paid. It was confirmed by you that the company would pay the following dues: -Valuation for transfer of business from my past company of Euro 825,000 as on March 31st, 2013 (then valued at approximate of Rs 574.11 Lacs) and compounded with interest (prevalent bank lending rate in India) to be calculated on the outstanding amount. - Cash Salary of Euro 120,000 (then valued at approximate of Rs 8.35 Lacs monthly) per year with perks extra effective from September 19th, 2013 and in line with the earlier Employment Agreement. These had already been jointly agreed, signed and accepted on September 19th, 2013 through a joint signed agreement made out in handwriting. It has been offered that the pending amount shall now be drawn from the cash generation of SPIN with the understanding that it would be the surplus over th....
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.... Section 8 demand notice while blatantly glossing over the disputes raised in the Notice of dispute. There is no mention of the series of correspondence exchanged between the two parties prior to the issue of demand notice regarding their difference of opinion on the outstanding salary dues claimed by the Respondent No. 2. That these letters clearly preceded the demand notice, establish evidence of dispute between the two parties. These letters along with the notice of dispute provide sufficient foundation of genuine disputes between the two parties which cannot be disregarded as patently feeble. 42. It is well settled that in Section 9 proceeding, there is no need to enter into final adjudication into the disputes between the parties regarding operational debt. In terms of the Mobilox judgement supra, all that the Adjudicating Authority was required to do was to see whether any notice of dispute was raised by the Corporate Debtor and take a call on the plausibility of these disputes which in the present facts of the case the Adjudicating Authority has hopelessly failed to do. Disputes once raised and found plausible, they require detailed consideration which is beyond the ambit....