Application for initiation of CIRP cannot be accepted with pre-existing dispute : NCLAT

NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI Company Appeal(Insolvency) No. 14619 Arising out of Order dated 14th November 2019 passed by the Adjudicating Authority National Company Law Tribunal Cuttack in Company PetitionNo. 62 CTB 2019] IN THE MATTER OF: Prakash Kalash Shareholder & Member of suspended Board of M s Gurusukh Vintrade Service Pvt Ltd R o Gurusukh Villa Opposite Shagun Farm VIP Road Raipur Chattisgarh 492006 Mobile: 9993333332 Email: prakashkalash@yahoo.in 1. M s Apeejay Surrendra Park Hotels Ltd 17 Park Street Kolkata West Bengal Kolkata 700016 2. Ms Teena Saraswat Pandey Resolution Professional of M s Gurusukh Vintrade Service Private IBBI IPA P00652 2017 2018 11126 387 F 114 Scheme Part 1 Behind Diksha Boys Hostel Sant Nagar Indore Madhya Pradesh 452010 Respondent No.1 Respondent No.2 For Appellant Mr Krishna Mohan K Menon Advocate For Respondent Mr Vijay Kandel Advocate for R1. Mr Divyanshu Srivastava Advocate for R2. Company Appeal(Insolvency) No. 14619 J U D G M E N T Per V.P. Singh MemberThis Appeal emanates from the order dated 14th November 2019 passed by the Adjudicating Authority National Company Law Tribunal Cuttack in CP No. 62 CTB 2019 whereby the Adjudicating Authority has admitted the Application filed under Section 9 of the Insolvency & Bankruptcy Code 2016filed the present Appeal against the Respondent No.1 Apeejay Surrendra Park Hotels Ltd. and Respondent No. 2 Umesh Chandra Sahoo under Section 61(1) of the I&B Code. The Appellant is a company incorporated under the Companies Act 1956 having its registered office at Maharshi Valmiki Ward No.28 Telibandha Raipur and Chhattisgarh. The Appellant has opened Hotel at Great Eastern VIP Road Chowk Avanti Vihar Raipur Chhattisgarh. The Respondent No.1 had approached to the Appellant for providing technical services and pre operation advice for launching Hotel and further for the operation and management services after the launch of the Hotel. The Appellant entered into the „Management and Technical Service Agreement‟ from now on will be referred to as „MTSA‟ with Respondent No. 1. As per the Agreement the Respondent No.1 was responsible for the training of the staff. However they failed to provide Company Appeal(Insolvency) No. 14619 proper training to the hotel staff. They were posting wrong revenue on barter ledger to hide their under performance since the Hotel started its commercial operations. As per terms of the Agreement no payment was supposed to be made to any person without prior information of the Appellant. But the Respondent No.1 Operational Creditor in violation the terms of MTSA issued post dated cheques of Rs. Seventy three lakhs to itself even without informing the Appellant about the same. The Appellant Corporate Debtor further contends that as per the Agreement all the money received as revenue from the operations of the Hotel was supposed to be deposited in the bank account of the Hotel which was to be operated by the authorized representative appointed by Respondent No.1 Operational Creditor. Further all the operating expenses including taxes were to be discharged by Respondent No.1. However Respondent No.1 has miserably failed to deposit statutory dues and applicable taxes such as TDS EPF ESI GST VAT Service Tax and Luxury Tax since the beginning of the Hotel. The Appellant through an internal enquiry found that a non recoverable revenue of Rupees Seventy Lakh has been shown as revenue earned in financial records of the Hotel by the Respondent No.1. The Appellant contends that Respondent No.1 was responsible for the operation of the Hotel however there was no visit by the Respondent No.1 to the Hotel of the Appellant since August 2018. Thus effectively Respondent No.1 has not provided any service to the Appellant since August 2018. Company Appeal(Insolvency) No. 14619 6. Consequent upon the default made by the Respondent No.1 about the provision of services the Appellant disputed the amount payable to the Respondent and stopped making payment to Respondent No.1 Operational Respondent No. 1 had initiated the proceedings under Section 9 of the I&B Code for alleged unpaid dues arising out of the services performed under the „MTSA‟ between the Appellant and the Respondent. As per the operational creditor Respondent No.1‟s claim in the Section 9 Application a total of Rs.1 45 99 236 Principal Rs.1 25 63 786 and Rs.20 35 450 calculated @ 24% p.a.] was due from the Corporate Debtor for services performed by the Operational Creditor for a period from 01st January 2018 to 20th May 2019. It is contented by the Appellant that there were various email communication and telephonic conversations held between the Appellant and the Respondent No.1 even after filing of the Application by the Respondent No.1 before the Adjudicating Authority. However Respondent No.1 Operational Creditor never communicated Appellant about the filing of the petition U S 9 of the Code. It is submitted on behalf of the Appellant that there was a plausible pre existing dispute between the parties which was not brought to the notice of the Adjudicating Authority. Since the Appellant was not aware of the proceedings they could not appear before the Adjudicating Authority Company Appeal(Insolvency) No. 14619 and an ex parte impugned order has been passed. The corporate insolvency proceeding started against the Appellant corporate Debtor. 10. The Respondent in his reply submitted that the Company Appeal filed by the Appellant is devoid of any merit and as such liable to be dismissed. It is submitted that the Appeal is liable to be dismissed on the ground that the same is filed beyond 30 days from the date of passing of the impugned order which is beyond the statutory period as prescribed under Section 61(2) of the I&B Code. 12. The Respondent No.1 further submits that the Appellant had the sufficient knowledge of initiation of proceedings under Section 9 of the I&B Code against him by admitting the receiving of Demand notice sent to him and further when the Respondent No.1 sent a copy of Application in Form 5 filed under Section 9 of the I&B Code. The service on the corporate office of the Appellant has been proved by the Affidavit of Service containing tracking report of successful delivery of the same. 13. The Respondent No.1 Operational Creditor further submits that the Adjudicating Authority based on the affidavit of service and other documents filed with the petition regarding service of notice passed an order to proceed ex parte against the Appellant as there was no representation from the Corporate Debtor despite substituted service of notice through the publication of notice in newspapers. Company Appeal(Insolvency) No. 14619 14. Respondent No.1 contends that from a bare perusal of the contents of Appeal and the material placed on record it is sufficiently established that till date the Appellant has not disputed even a single invoice or the amounts therein amongst the total invoices raised by Respondent No.1 operational creditor. 15. Further Respondent no.1 denies that at the time of entering into the contract the Appellant was assured by Respondent No. 1 that there would be 40% of sales contribution from their side. 16. The Respondent No.1 submits that it was pointed out by the Respondent to the Appellant that due to Appellants failure to provide the working capital as agreed under the Agreement salaries of the employees could not be paid on time and resultantly a lot of competent people resigned from the organization. 17. Further Respondent No.1 Operational Creditor denies of posting wrong revenue on barter ledger since the Hotel started its commercial operations to inflate the income to increase their fee share and to hide its under performance and violation of the conditions of the Agreement. Regarding the allegation of issuance of post dated cheques of Rs. Seventy three Lakhs to itself without informing the Appellant it is contended that the Appellant is hiding the fact from this Tribunal. Respondent No.1 argued that the Appellant was informed of the post dated cheques and further shared cheque sheet showing details of the cheques issued by the Respondent No.1. Company Appeal(Insolvency) No. 14619 18. The Respondent No.1 Operational Creditor submitted and denied that as per the Agreement all the operating expenses including taxes were to be discharged by the Respondent No.1. It has never been agreed between the parties that the Respondent No.1 shall discharge the liabilities of payment of taxes. It is pleaded that even the word “tax” find no mentioned in the said perused the record. 19. Heard the arguments of the Learned Counsel for the parties and 20. The Respondent contends that the Appeal is liable to be dismissed on the ground that the same is filed beyond 30 days from the date of passing of the impugned order which is beyond the statutory period as prescribed under section 61(2) of the I&B Code. The impugned order dated 14th November 2019 and Appeal is filed on 05.12.2019 which within 30 days from the date of order. Thus Appeal is filed within the statutory period of Limitation as prescribed under Section 61(2) of the Code. 21. The Learned Counsel for the Appellant submits that the impugned order is liable to be set aside on the sole premise of the failure of compliance with the service procedure prescribed under Rule 5 of the Insolvency and Bankruptcy Rules 2016. It is submitted that the prescribed mode of service as per Rule 6(2) is a registered post or speed post. The publication of notice is not a prescribed mode of service and hence impugned order is liable to be set aside on this ground. It is further submitted that registered notice issued against the Company Appeal(Insolvency) No. 14619 Corporate Debtor was returned with the postal remarks „want of sufficient address‟. In such a situation Respondent No.1 was not stopped from serving the Corporate Debtor via email. Learned Counsel for the Operational Creditors submits that as per Clause of sub rule of Rule 5 of the Insolvency and Bankruptcy Application to Adjudication Authority) Rules 2016 the demand notice or the copy of an invoice demanding payment may be delivered to the Corporate Debtor at the registered office by hand registered post or speed post with acknowledgement due or by electronic mail service to a Whole Time Director of the Corporate Debtor. It is submitted that a demand notice dated 21st May 2019 was sent to the Appellants registered office as well as the Corporate Office. However the demand notice dated 21st May 2019 was returned with endorsement “insufficient address”. Further a copy of the demand notice was also sent to the corporate address of the Appellant and the same has been successfully delivered. Lastly in compliance with clause b) of sub rule of Rule 5 of the above Rules copy of the demand notice dated 21st May 2019 was also sent to the Appellant vide email dated 22nd May 2019. The Operational Creditor has annexed the xerox copy of an email dated 22nd May 2019 which shows that demand notice was sent to Corporate Debtor through an email dated 22nd May 2019 at 2:49 pm. In the circumstances it is clear that the Appellant was having sufficient knowledge of the demand notice issued under Section 8 of the I&B Code. 23. The Learned Counsel for the Appellant has filed the copy of the order sheets of the Adjudicating Authority dated 09th July 2019 and dated 01st Company Appeal(Insolvency) No. 14619 August 2019. It appears that on 09th July 2019 after filing of the petition under Section 9 of the Code the Adjudicating Authority passed an order for issuance of notice against the Corporate Debtor. After that on 01st August 2019 the Adjudicating Authority passed an order “Ld. Counsel for the Operational Creditor appear. Corporate Debtor could not be served with notice for reason of insufficient address. Operational Creditor to publish notice an newspaper one English and one vernacular having wide circulation in the area where the Registered Office of the Corporate Debtor situated and file affidavit in reply service of notice. Matter to appear for further consideration on 20.08.2019.” verbatim copy) 24. Thus it is clear that the Court notice issued against the Corporate Debtor could not be served on account of insufficient address after that the Adjudicating Authority passed an order of publication of notice in the newspaper. Based on the publication of notice in the newspaper service was held sufficient and the Court passed an order to proceed the case ex parte against the Corporate Debtor. Thus it is clear that before the publication of notice in the newspaper no effort was not made for serving the notice through email. 25. The Hon‟ble Supreme Court in case of Neerja Realtors Ltd. Vs. Janglu2018 SCC 649 has held that „for ordering substituted service the Court is required to be satisfied that there is reason to be read that Defendant is keeping out of the way for the purpose of avoiding service or for any other Company Appeal(Insolvency) No. 14619 reason the summons cannot be served in an ordinary way. Thus while making that Order Court must apply its mind to requirements under Order 5 Rule 20 of CPC and indicate in its order and due consideration of provisions contained in Order 5 of Rule 20.‟ In the present case the notice issued against the Corporate Debtor returned unserved because of „insufficient address‟. After that without exploring the possibility of service by other modes like email the Adjudicating Authority passed the order for substituted service by publication of notice in the newspaper. In such circumstances passing of an order for an ex parte hearing against the Corporate Debtor based on substituted service cannot be held proper in the light of the law laid down by Hon‟ble Supreme Court in the Neerja RealtorsLtd(Insolvency) No. 14619 1 Company Appeal(Insolvency) No. 14619 1 Company Appeal(Insolvency) No. 14619 1 Company Appeal(Insolvency) No. 14619 1 28. Admittedly in this case the demand notice dated 22nd March 2019 in Form 3 was issued against the Corporate Debtor by registered post which could not be served on account of insufficient address. After that the demand notice dated 21st May 2019 in Form 3 was again sent through Company Appeal(Insolvency) No. 14619 1 speed post. On perusal of the email dated 14th July 2018 it appears that the Corporate Debtor objected to „the posting of wrong revenue on barter ledgers‟. It also appears from a perusal of email correspondence dated 17th October 2018 that the Corporate Debtor objected to releasing post dated cheque of Rs.73 lakhs without keeping it informed to the Corporate Debtor. It is also stated in the email that management fees will be paid after the barter reconciliation issue is resolved. By perusal of email communication dated 17th January 2019 it appears that dispute was raised regarding the quality of services. On perusal of email dated 14th March 2019 it appears that the Corporate Debtor raised the issue regarding service rendered by the Operational Creditor. It also shows that the Corporate Debtor informed the operational Creditor of taking over the complete management in its own hands because of being dissatisfied with the services rendered by the Operational Creditor. All these correspondences are before issuance of demand notice. 29. Looking to such material above it is quite clear that there was a pre existing dispute regarding the operation of management and services provided by the Respondent No.1 before the issuance of the demand notice dated 21.05.2019 under Section 8 of the I&B Code. 30. The definition of the word dispute provided under the Code was well elaborated and explained by Hon‟ble Supreme in the case of 2018(1)SCC 353 Mobilox Innovation Pvt Ltd vs. Kirusa Software Pvt Ltd in the following words: Company Appeal(Insolvency) No. 14619 1 Para 40 “It is clear therefore that once the operational Creditor has filed an application which is otherwise complete the adjudicating authority must reject the Application under S.9(5)(2)(d) if notice of dispute has been received by the operational Creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational Creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain 9 Company Appeal AT)(Insolvency) No.542 2020 from the chaff and to reject a spurious defence which is mere bluster. However in doing so the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious hypothetical or illusory the adjudicating authority has to reject the Application.” The intent of Legislature is very vital for interpreting any law which can be well deduced from the words of Section 8(2)(a) of I&B Code „existence of a dispute if any‟. It can be easily inferred that dispute shall not be limited to instances specified in the definition as provided under Section 5(6) as it has far arms apart from pending Suit or Arbitration as provided Under Section 5(6) of IBC. The IBC is not a substitute for a recovery forum. Section 9 of the IBC makes it very clear for the Adjudicating Authority to admit the application “if no notice of dispute is received by the Operational Creditor and there is no record of the dispute in the information utility.” Whereas on the other hand Section 9 also states that the Adjudicating Authority shall reject Company Appeal(Insolvency) No. 14619 1 the Application so filed “if the Operational Creditor has received a notice of a dispute from the Corporate Debtor. Thus it is clear that once an operational creditor has filed an application which is otherwise complete the Adjudicating Authority must reject the Application if notice of dispute has been received by the operational Creditor or there is a record of dispute in the information utility the Adjudicating Authority is to see whether there is a plausible contention which requires further investigation and the “dispute “is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster.” emphasis in bold supplied) In the present case it is crystal clear that there was a pre existing dispute even though the Adjudicating Authority admitted the Application for initiation of Corporate Insolvency Resolution Process by the impugned 32. Thus the Appeal is allowed and the impugned order dated 14th November 2019 passed by the Adjudicating Authority National Company Law Tribunal in CP No.62 CTB 2019 is set aside. In effect the order passed by the Adjudicating Authority appointing Interim Resolution Professional declaring moratorium and all other order(s) passed by the Adjudicating Authority pursuant to impugned order and actions taken by „the Resolution Professional „is declared illegal and are set aside. The application preferred by the respondent No.1 under Section 9 of the I&B Code is dismissed. The Adjudicating Authority will now close the proceeding. Company Appeal(Insolvency) No. 14619 1 33. The Adjudicating Authority will fix the fee of Interim Resolution Professional „for the period he has functioned. The Appeal is allowed with the observation above and direction there shall be no order as to cost. NEW DELHI 23rd SEPTEMBER 2020 Justice Jarat Kumar Jain] MemberBalvinder Singh] MemberV. P. Singh] MemberCompany Appeal(Insolvency) No. 14619 1 

Summary: Proceeding ex parte against the corporate debtor based on substituted service through the newspaper is permissible only when it is shown that the corporate debtor is purposefully avoiding service. The judgment passed by the NCLAT New Delhi (principle bench), in its decision in Prakash Kalash v. Apeejay Surrendra Park Hotels (Company Appeal (AT) (Insolvency) No. 1462 of 2019) by Hon’ble Shri Justice Jarat Kumar Jain. The facts of the case were such that – The Appellant, filed the Appeal against Apeejay Surrendra Park Hotels Ltd., and Umesh Chandra Sahoo, under Section 61(1) of the I&amp;B Code. The Appellant is a company incorporated under the Companies Act, 1956 having its registered office at Maharshi Valmiki, Ward No.28,Telibandha, Raipur, and Chhattisgarh. Apeejay Surrendra Park Hotels Ltd. (Respondent No. 1) had started the proceedings under Section 9 of the I&amp;B Code for supposed neglected duty emerging out of the administrations performed under the „MTSA‟ between the Appellant and the Respondent. It was contended by the respondent that the Appeal is at risk to be excused on the ground that the equivalent is documented past 30 days from the date of passing of the reprimanded request, which is past the legal period as endorsed under area 61(2) of the I&amp;B Code. The reproved request dated fourteenth November 2019 and Appeal is documented on 05.12.2019, which inside 30 days from the date of request. Consequently, Appeal is documented inside the legal time of Limitation as endorsed under Section 61(2) of the Code. The demand notice was given against the Corporate Debtor by enlisted post, which couldn’t be served by virtue of inadequate location. From that point onward, the demand notice was again sent through speed post. On scrutiny of the email dated fourteenth July 2018, apparently, the Corporate Debtor protested the posting of wrong income on bargain ledgers‟. It likewise shows up from scrutiny of email correspondence dated seventeenth October 2018 that the Corporate Debtor protested delivering a post-dated check of Rs.73 lakhs without keeping it educated to the Corporate Debtor. It is additionally expressed in the email that administration expenses will be paid after the bargain compromise issue is settled. On examination of the email dated fourteenth March 2019, apparently, the Corporate Debtor raised the issue in regards to support delivered by the Operational Creditor. It likewise shows that the Corporate Debtor educated the operational Creditor regarding assuming control over the total administration in its own hands as a result of being disappointed with the administrations delivered by the Operational Creditor. If notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility, the Adjudicating Authority is to see whether there is a plausible contention that requires further investigation and the “dispute “is not a patently feeble legal argument or an assertion of fact, unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defense which is mere bluster.