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2025 (4) TMI 1071
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....porate Insolvency Resolution Proceedings ('CIRP') against Corporate Debtor-Exclusive Linen Fabrics Pvt. Ltd. The Appellant herein is the suspended Director of the Corporate Debtor. The Impugned Order has been passed by the Ld. Adjudicating Authority on an Application filed by the Respondent No.1-Shree Hari Yarns Pvt. Ltd. under Section 9 of the Insolvency and Bankruptcy Code, 2016 ('Code'), alleging a default of an amount of Rs.1,29,08,449/- on the part of the Corporate Debtor. Submissions of the Appellant: 2. The Respondent No.1 in its application has alleged that a principal amount of Rs.88.16.301/- and an interest of an amount of Rs.40,92,148/-, is outstanding from the Corporate Debtor. However, it is an admitted fact that there is no agreement between parties which can demonstrate the consensus of the Corporate Debtor regarding levy of interest on delayed payment, if any. The Adjudicating Authority has relied on payment of interest paid in February 2021 and June 2021. Even the invoices say interest @ 18% without saying per annum or per month or any other period. So the time period is indefinite. the date of default has been arrived at. No document has been....
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....9.2024 without notifying the Corporate Debtor. The Tribunal proceeded to pass the Impugned Order on 05.09.2024 without allowing the Corporate Debtor an opportunity to rebut the Additional Affidavit or advance arguments. The Appellant also contends that the date of default cited in the Additional Affidavit, 08.05.2021, is incorrect, as it does not consider a payment made on 02.06.2021. The Respondent has failed to substantiate how the default date was determined, and the Tribunal overlooked these deficiencies while passing the Impugned Order. Accordingly, the Appeal has been filed, challenging the initiation of CIRP on the grounds of maintainability, procedural irregularities, and violation of natural justice. 5. The Impugned Order does not take into consideration that the Code provides for definition of the term operational debt under Section 5 (21), wherein 'interest' has not been specifically mentioned as a part of the debt, unlike in the definition of financial debt provided under Section 5 (8) of Code, wherein the legislation has expressly included the term 'interest' to be a part of the debt, that can form a part of the claim against the Corporate Debtor. This delib....
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....o not specific. The interest clause is vague in nature and not agreed by the Appellant. 10. The Respondent No-1 is attempting to misuse the provisions of the Code to initiate CIRP against the Respondent, which is a healthy and solvent company and is regularly meeting all its debt obligations. This clearly runs contrary to the object and purpose of the Code, which mandates reorganisation of the Corporate Debtor and maximisation of its assets. 11. The appellant has relied upon the judgement of this Appellate Tribunal in Binani Industries Limited vs. Bank of Baroda in 2018 SCC OnLine NCLAT 521 where it was held that the first order objective of the Code is resolution. The second order objective is maximisation of value of assets of the firm and the third order objective is to promote entrepreneurship, availability of credit and to balance the interests of the stakeholders. 12. The focus on maximising the value of the Debtor's assets was further reiterated in Swiss Ribbons Pvt Ltd vs Union of India in (2019) 4 SCC 17. Thus, the Respondent No-1 has only turned a blind eye to the existing issues between the parties and made misleading submissions before this Tribunal to seek rec....
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....issue of quantity and quality of yarn material supplied by it. 16. The Adjudicating Authority was wrong in taking into consideration the debit note, dated 11.09.2023, which was a document prepared by the Respondent No 1 itself and ought not to have been considered relevant for adjudication of the instant case. 17. The Adjudicating Authority ought to have dismissed the Application filed by the Respondent No 1 under Section 9 of the Code in the absence of a clear date of default in the Application. After the conclusion of final arguments and reserving the matter for final order on 06.08.2024, the Adjudicating Authority was wrong in de-reserving the matter on 30.08.2024 at the request of the Respondent No 1 and in the absence of Corporate Debtor. The Adjudicating Authority was further wrong in providing an opportunity to the Respondent No. 1 to file an Additional Affidavit and that too without providing due opportunity to the Corporate Debtor to rebut the contentions raised therein. The Adjudicating Authority did not take into consideration the fact that the date of default could not have been 08.05.2021, as the Corporate Debtor has also made payment on 02.06.2021, a fact which ....
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....2.05.2022, 25.04.2022, 18.04.2022, 11.04.2022; (iii) Statutory Demand Notice dated 18.9.2023 without annexures. 22. Respondent No.1 has been supplying yarn as an agent to Appellant since November 2020. The total value of yarn supplied by Respondent No.1 is Rs.5,14,14,078/- as against 58 invoices in total. Appellant has always been well aware of the terms and conditions mentioned in the invoices. Whenever Appellant paid in advance, Respondent No.1 issued cash discount [Ex. C/Pg 16 of Reply] towards those invoices as an incentive for making advance payment. Likewise, if Appellant delayed in making payment, then as per unambiguous terms of invoice, Respondent No.1 levied interest which was paid by Appellant. 23. Appellant for the first time before the NCLT contended that there is no agreement towards interest. All the 18 invoices contain an interest clause which were accepted without demur. Appellant paid interest and deposited TDS in the past on the Debit Notes issued by Respondent No.1, which entries can be seen in Respondent No.1's ledger. All invoices are sent on the same day the yarn is supplied. 24. Appellant has also never raised any dispute with respect t....
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....before the Hon'ble NCLT. (v) Appellant has not replied to the statutory Demand Notice dated 18.09.2023. (vi) Appellant for the first time before the NCLT falsely contended that there is no agreement between the parties towards interest. (vii) After the Hon'ble NCLT heard both the parties, the matter was reserved for orders on 6.08.2024. Thereafter the matter was listed on 30.08.2024 before the Hon'ble NCLT for clarification on last date of default. Additional Affidavit dated 30.08.2024 specifying the last date of default 08.05.2021 for the last invoice, was served upon Appellant's Advocate on the same day. No grievance was raised by Appellant. The matter was then listed on 3.09.2024 for further consideration when the NCLT perused Addl. Affidavit and took the same on record and once again reserved CP for orders. On 5.09.2024, CP was listed for pronouncement of orders. There is no such practice that an Advocate who is on record and has filed vakalatnama should be informed about the listing of the matter by the Hon'ble NCLT or by R1/Orig. Petitioner. Once an Advocate has entered appearance, he/she has to keep a watch on the causelist. ....
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.... wanted some clarifications with respect to the date of default, which was done in the open Court and we don't find any infirmity in the procedure. The Respondent was informed about this hearing but he chose not to appear on those dates and there is no prejudice caused to the Appellant on this basis and therefore the claim of the Appellant that he has suffered from lack of natural justice cannot be accepted. 35. In these proceedings CIRP was based on the application filed under Section 9 of the IBC, which alleges that the Corporate Debtor has defaulted on a payment of Rs.1,29,08,449/-. The Appellant disputes this amount and claims it is inflated by unsubstantiated interest charges, including the principal amount of Rs.88,16,301/- and an interest of Rs.40,92,148. Briefly speaking, The Appellant claims that the impugned order was based on a frivolous application filed by Respondent No.1. According to the Appellant, there is no agreement between the parties for the levy of interest, and the claim of interest is unjustified. Additionally, the principal amount falls below the threshold of Rs.1 crore, which is required for initiating CIRP under Section 4 of the IBC. The Appellant cont....
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....n the other hand, the definition of the operational debt doesn't include interest in it, which is extracted as below: "5(21) "Operational debt" means a claim in respect of the provision of goods a services including employment or a debt in respect of [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;" We note that the Code defines the term operational debt under Section 5 (21), wherein 'interest' has not been specifically mentioned as a part of the debt, unlike in the definition of financial debt provided under Section 5 (8) of Code, wherein the legislation has expressly included the term 'interest' to be a part of the debt, that can form a part of the claim against the Corporate Debtor. This deliberate difference in the language used for both terms by the legislation, clearly provides that interest could not have been accepted by the Adjudicating Authority as a part of the default amount as claimed by the Respondent No 1. We note that there is an explicit mention of interest in financial debt but such a provision does not exist for operational debt. According....
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..../-, which falls below the Rs 1 crore threshold as required under Section 4 of the IBC, rendering the Application non-maintainable. 41. The Adjudicating Authority has relied on payment of interest paid in February 2021 and June 2021. However, no document has been produced by the Respondent No.1 substantiating the days in which payment was to be made. The Adjudicating Authority has not delved into the issue of the payment of interest with respect to the operational debt as defined in the code and has relied on the invoices which contains an interest clause of 18% on account of delayed payment. We find that the Respondent No 1 is relying upon the unilaterally formulated condition regarding charging of interest, when no such agreement exists between the parties. Furthermore, the delayed interest clause being relied upon by the Respondent No1 is non-specific and vague as the same does not state the period for the rate of interest as alleged in the invoice. We also agree with the contention of the Appellant that the Code does not provide the Adjudicating Authority with the power to interpret a document as in the instant case the Adjudicating Authority has gone ahead to interpret the a....
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.... written contract signed by both the parties and the invoices can be the basis for a party to charge interest. But the matter in hand relates to Insolvency and Bankruptcy Code, which differentiates between the operational debt and financial debt, as has been discussed in the earlier part of the judgment. The definition of operational debt does not include the interest. On the other hand, the financial debt includes interest, if any. The judgment quoted by the Respondent No.1 is not relevant in the facts and circumstances of the present case as in this case the claim of the interest is being disputed as the clause relating to payment of interest is non-specific, vague and subject to multiple interpretations and cannot be relied upon without explicit contract or understanding between the parties. 44. It is argued by the Respondent No.1 that interest has been paid by the Appellant for delayed payments. Not only that but also TDS on interest in terms of the Section 194A of IT Act 1961 was paid by the Appellant. Per contra, it is the contention of the Appellant that Respondent No.1 supplied material to the Corporate Debtor, which went through thorough quality check and the Respondent....
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.... and on the basis of judgment of Hon'ble Supreme Court in Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd cited as 2018 (1) SCC 353 and also in S. S. Engineers v Hindustan Petroleum Corporation Ltd. & Ors., Civil Appeal No. 4583 of 2022 and Tottempudi Salalith vs State Bank of India & Ors. Civil Appeal No.2348 of 2021, the Impugned Order cannot be sustained. 46. The Respondent has also relied upon the judgment of this Tribunal in Prashant Agarwal Vs Vikash Parasrampuria & Anr. in Company Appeal (AT) (Ins) No. 690 of 2022 decided on 15.07.2022, wherein this Tribunal has held that the total amount which includes both principal debt and interest on delayed payment as was stipulated in the invoices itself will become the total debt outstanding as per the requirements of Section 4 IBC in a Section 9 Application. The facts of each case are different. We note contrasting judgments relied upon by the Respondent. The Appellant has relied upon the judgment of this Tribunal in Rishabh Infra Through Hari Mohan Gupta Vs. Sadbhav Engineering Ltd in Company Appeal (AT) (Insolvency) No. 1881 of 2024 decided on 04.11.2024, wherein this Tribunal has held that in the view that invoi....
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....in terms of any agreement interest is payable to the Operational or Financial Creditor then debt will include interest, otherwise, the principle amount is to be treated as the debt which is the liability in respect of the claim which can be made from the Corporate Debtor." [ emphasis supplied ] 49. It is also contended that the Respondent is attempting to misuse the provisions of the code to initiate CIRP against the Appellant, which is a healthy and insolvent company and is regularly meeting all its obligation. In its support the Appellant has relied on various judgments wherein it has been held that the primary objective of the code is resolution and not recovery. Some of these are extracted as below : 49.1 Binani Industries Limited vs Bank of Baroda (supra) wherein it was held that the first order objective of the Code is resolution. The second order objective is maximisation of value of assets of the firm and the third order objective is to promote entrepreneurship, availability of credit and to balance the interests of the stakeholders. The relevant extracts of the judgment are reproduced below: " 2. The objective of the 'I & B Code' is Resolution. ....
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....nalize solvent companies for non-payment of disputed dues claimed by an operational creditor. " [ emphasis supplied ] 49.4 Transmission Corporation of Andhra Pradesh Limited vs Equipment Conductors and Cables Limited, and Mobilox Innovations (supra): Hon'ble Supreme Court has held that the Code is not intended to be a substitute to a recovery forum and the object of the Code is efficient resolution of corporate debtor and to bring the company out of distress. 50. Further we are also inclined to agree with the submission of the Appellant that IBC aims at resolution and not recovery and cannot be used to push a healthy and solvent company into CIRP. The appeal of the Respondent No 1 clearly runs contrary to the object and purpose of the Code, which mandates reorganisation of the Corporate Debtor and maximisation of its assets. We are inclined to agree with the submissions of the Appellant in the light of the fact that the Appellant is a solvent company and discharging its debt obligation and also willing to pay the principal amount to the Respondent No.1. 51. In the above background, we find that the claim of the Operational Creditor with respect to the interest is ....