2020 (3) TMI 99 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its debt - existence of debt and default or not - HELD THAT - If the demand notice is sent in Form 3, then the Operational Creditor has to submit the document to prove the existence of operational debt and the amount in default along with the notice. The said document may either be invoice or any other document to prove the existence of the operational debt and the amount in default. This situation may arise when the operational debt, is of such nature where no invoice is generated. For example, if an operational debt is relating to the salary dues of an employee, then, in that case, the operational creditor will not have any invoice. It is clear that to prove the existence of the operational debt; the operational creditor has to file its claim along with an invoice demanding payment for the goods and services supplied to the Corporate Debtor . On perusal of the language of Section 8, it is clear that an Operational Creditor on the occurrence of default has been provided with the option of delivering a demand notice of the unpaid operational debt or raising an invoice demanding payment of the amount involved. The two options available for initiation of Corporate Insolvency Process are provided to deal with all the eventualities that may occur. It is clear that the choice of issuance of demand notice u/s 8(1) of the Insolvency and Bankruptcy Code 2016, either in Form 3 or Form 4, under the Insolvency and Bankruptcy Code Application to Adjudicating Authority Rules 2016, depends on the nature of Operational Debt. Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice either Form 3 or Form 4, as per its convenience. The applicability of Form 3 or Form 4 depends on whether the invoices were generated during the course of transaction or not. It is also made clear that the copy of the invoice is not mandatory if the demand notice is issued in Form 3 of the Insolvency and Bankruptcy Code Application to Adjudicating Authority Rules 2016 provided the documents to prove the existence of operational debt and the amount in default is attached with the application. For filing application u/s 9 of Insolvency and Bankruptcy Code 2016, in case the demand notice is delivered in Form 3 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016, then the submission of a copy of the invoice along with the application in Form 5 is not a mandatory requirement, provided the documents to prove the existence of operational debt and the amount in default is attached with the application. It is clear there was an existing dispute on 26th March 2018, i.e. before the initiation of CIRP. It is also apparent that the dispute between the parties was on account of not taking delivery of 21,808 TVs, which were imported by the Operational Creditor, based on the assurance by the Corporate Debtor. But the Corporate Debtor failed to pick up these goods. Therefore, the Operational Creditor sent the notice to the corporate debtor to make the payment within 30 days, failing which Operational Credit threatened to refer the dispute to Arbitral Tribunal - the Demand Notice issued under Section 8(1) of the Code against the Corporate Debtor in Form-3 was incomplete. It is also apparent that the Application filed in Form -5 under Rule 6(1) of the Adjudicating Authority Rules is also incomplete and the Operational Creditor has failed to produce invoices, purchase orders or any documents to prove its claim and has filed a defective Section 9 Application for initiation of Corporate Insolvency Resolution Process. The application filed under Section 9 by the Operational Creditor Cloudwalker Streaming Technologies Pvt Ltd., company petition is Rejected.

Issues Involved:
1. Discretion of the Operational Creditor in issuing notice under Form 3 or Form 4.
2. Mandatory requirement of submitting a copy of the invoice with the demand notice under Section 8(1) of the Insolvency and Bankruptcy Code 2016.
3. Mandatory requirement of submitting a copy of the invoice when filing an application under Section 9 of the Code in Form 5.
4. Existence of operational debt and default.
5. Pre-existing disputes between the parties.

Detailed Analysis:

1. Discretion of the Operational Creditor in issuing notice under Form 3 or Form 4:
The tribunal examined whether the Operational Creditor has the discretion to choose the form of the demand notice. It concluded that the choice of issuing a demand notice under Form 3 or Form 4 depends on the nature of the operational debt. If the transaction involves the generation of an invoice, the notice must be issued in Form 4 along with the invoice. Conversely, if no invoice is generated, Form 3 can be used with relevant documents proving the existence of the debt and the amount in default.

2. Mandatory requirement of submitting a copy of the invoice with the demand notice under Section 8(1) of the Insolvency and Bankruptcy Code 2016:
The tribunal clarified that the submission of an invoice is not mandatory if the demand notice is issued in Form 3, provided that documents proving the existence of the operational debt and the amount in default are attached. However, if the demand notice is issued in Form 4, the invoice must be included.

3. Mandatory requirement of submitting a copy of the invoice when filing an application under Section 9 of the Code in Form 5:
The tribunal determined that for filing an application under Section 9 in Form 5, the submission of a copy of the invoice is not mandatory if the demand notice is issued in Form 3, provided that documents proving the existence of the operational debt and the amount in default are attached with the application.

4. Existence of operational debt and default:
The tribunal found that the Operational Creditor failed to provide sufficient documentary evidence, such as purchase orders, invoices, or proof of sale, to substantiate its claim. The tribunal emphasized that the existence of the operational debt and default must be proven with relevant documents. The Operational Creditor's reliance on emails and projections was insufficient to establish the debt.

5. Pre-existing disputes between the parties:
The tribunal noted that there was a pre-existing dispute between the parties regarding the non-collection of LED TVs by the Corporate Debtor, which was communicated through a notice dated 26th March 2018. This notice indicated breaches of the agreement and threatened arbitration. The tribunal concluded that the existence of this dispute, even if the notice was later withdrawn, meant that the application under Section 9 could not be admitted.

Conclusion:
The tribunal set aside the order admitting the application for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. It found that the Operational Creditor had not met the requirements for issuing a proper demand notice, failed to provide sufficient evidence of the operational debt, and there was a pre-existing dispute. The Corporate Debtor was released from the CIRP, and the Interim Resolution Professional was directed to hand over the records and assets to the Promoter. The tribunal also directed the Adjudicating Authority to consider revising the format of the application in Form 5.

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