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TMI BlogREJECTION OF APPLICATION FOR INITIATING ‘CIRP’ BY OPERATIONAL CREDITORSX X X X Extracts X X X X X X X X Extracts X X X X ..... REJECTION OF APPLICATION FOR INITIATING ‘CIRP’ BY OPERATIONAL CREDITORS - By: - Mr. M. GOVINDARAJAN - Corporate Laws / IBC / SEBI - Dated:- 1-2-2021 - - Operational Debt Section 5(21) of the Insolvency and Bankruptcy Code, 2016 ( Code for short) defines an Operational Debt to mean a claim in respect of the provision of goods or services including employment or a debt in respect of the 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. Operational Creditor Section 5(2) of the Code defines the term Operational Creditor to be a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Classification as operational debt In M. RAVINDRANATH REDDY VERSUS G. KISHAN - 2020 (2) TMI 56 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI - Company Appeal (AT) (Insolvency) No.331/2019 dated 17.01.2020, the NCLAT has held that for an amount to be classified as an operational debt under the Code, the amount should fall within the definition of claim as defined under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(6) of the Code; such a claim should be within the confines of a debt as defined under section 3(11) ; such a debt should fall strictly within the scope of an Operational Debt as defined under section 5(21) of the Code , meaning thereby that the claim should arise in respect of Provision of goods or services including employment; or A debt in respect of repayment of dues arising under any law for the time being in force and payable either to the Central Government, any State Government or any local authority. Thus, only if the claim falls within one of the three categories as listed above, can it be classified as an operational debt. Initiation of CIRP by operational creditor Section 8 and 9 of the Code provides the procedure for initiation of corporate insolvency resolution process ( CIRP for short) by an operational creditor against a corporate debtor. An operational creditor may, on the occurrence of a default, deliver a demand notice in Form 3 or a copy of invoice attached with a notice in Form 4, of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor- existence of a dispute, if any, or and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute; the payment of unpaid operational debt- by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor. After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8 , if the operational creditor does not receive payment from the corporate debtor or notice of the dispute 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. The application shall be file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Form 5 and accompanied with a fee of ₹ 2,000/- and along with the following documents- a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor; an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt; a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and any other proof confirming that there is no payment of an unpaid operational debt by the corporate debtor or such other information, as may be prescribed. Rejection of application The Adjudicating Authority shall, within fourteen days of the receipt of the application by an order admit the application or rejecting the application. Before rejecting the application the Adjudicating Authority is to give reasonable op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portunity of hearing to the operational creditor. The Adjudicating Authority may reject the application on any of the following grounds- the application made is incomplete (in this case the rectification is to be made within 7 days from the receipt of notice to rectify the defect); there has been payment of the unpaid operational debt; the creditor has not delivered the invoice or notice for payment to the corporate debtor; notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or any disciplinary proceeding is pending against any proposed resolution professional. Many of the applications were rejected by the Adjudicating Authority on the applications filed by the operational creditors against corporate debtors in initiating CIRP against the corporate debtors. In this article some case laws are discussion on the rejection of the applications by Adjudicating Authority and the reasons for such rejection. Non delivery of demand notice In Pankaj Modani v. Big Vision Water Technology Private Limited NCLT, Mumbai Bench IV - CP (IB) No.2158/M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B.IV/2019, dated 23.09.2020, the applicant, the operational creditor filed the present application before the Adjudicating Authority on 07.06.2019 on the ground that the Corporate Debtor failed to make payment of a sum of ₹ 1,29,000/- as principal and ₹ 11,682/- as interest as on 05.11.2018, which is stated to be the date of default. The Operational Creditor raised invoices on the Corporate Debtor towards professional fees for providing professional compliance services for the month of October, 2018. The Corporate Debtor was granted a credit period of one month after raising the invoice on 05.10.2018. The Operational Creditor had served a Demand Notice in Form 3 dated 12.04.2019 to the Corporate Debtor in terms of section 8 of the Code . The Corporate Debtor did not reply to the demand made by the operational creditor. The Adjudicating Authority observed the following- There is no record of any contractual arrangement between the Operational Creditor and the Corporate Debtor. Copy of the invoice has not been attached. Only a calculation sheet mentioning the principal amount of the invoice, the interest calculation. There is no record of the invoic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e having been served on the Corporate Debtor. There is no record of what professional services have been rendered by the Operational Creditor. Proof of service of Demand Notice has not been attached to the Petition. However, proof of posting in the form of Speed Post receipt No.EM779732264IN dated 12.04.2019 has been attached as Exhibit D at p.59. The tracking receipt attached at p.51 only records that Item Dispatched. This is not enough to satisfy the requirement of section 9(5)(ii)(c) of the Code read with rule 5(2) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, both of which use the term delivered. The Adjudicating Authority held that the pre-requisites of section 9 of the IBC have not been satisfied. Therefore, the present petition fails and therefore, the same is rejected in terms of section 9(5)(ii)(c) of the Code , i.e., the creditor has not delivered the invoice or notice for payment to the corporate debtor. Application by Power of Attorney In Jenis Vora through duly constituted attorney, Viraj Vora v. HBS View Private Limited - NCLT, Mumbai Bench IV - CP (IB) No.3082/MB.IV/2019, deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on 23.09.2020, the Company Petition was filed under section 9 of Code by Ms Jenis Vora, an individual, through her duly constituted attorney, Mr Viraj Vora (Operational Creditor) , seeking to initiate CIRP against HBS View Private Limited on the ground that the Corporate Debtor failed to make payment of a sum of ₹ 2,16,00,000/- as principal and ₹ 67,42,750/- as interest as on 30.10.2017, which is stated to be the date of default. The petitioner had offered her flat, which she was entitled to in the premises in question on account of redevelopment of the existing building, to the respondent. The respondent had paid what has been called earnest money to the petitioner. The present petition is for the remainder of the purchase price of the flat. The MoU entered between the parties has been cancelled by the respondent vide its letter 26.07.2019. The Corporate debtor contended that every contractual debt would not be an operational debt as no goods or services have flowed from the petitioner to the respondent. In the present case, the payment has been made by the respondent to the petitioner and not vice versa. The Adjudicating Authority observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present petition seeks to enforce the sale agreement as an operational debt. There is no supply of goods or service from the respondent to the petitioner, as a result of which a debt could be said to have arisen. Rather, it is the petitioner who is required to supply the good in the form of the new flat, to the respondent. Such a transaction is not covered within the meaning of section 5(21) of the Code . It can be enforced in a civil court only. Further the Adjudicating Authority held that the present petition filed by a power of attorney holder on behalf of the petitioner is not maintainable. The Adjudicating Authority rejected the application filed by the operational creditor. Non existence of jural relationship In NOVEX COMMUNICATIONS PRIVATE LIMITED VERSUS FOUR PILLARS EVENT MANAGEMENT SERVICES PRIVATE LIMITED [2020 (9) TMI 747 - NATIONAL COMPANY LAW TRIBUNAL , MUMBAI BENCH], the application was filed before the Adjudicating Authority that the Corporate Debtor failed to make payment of a sum of ₹ 3,00,000/- as principal and ₹ 23,47/- as interest as on 20.03.2018, which is stated to be the date of default. The Operational Credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or is the assignee of copyrights over certain sound recordings, consisting of a large repertoire of songs in Hindi and other regional languages. The Operational Creditor has obtained these rights under Assignment Agreements signed with Zee Entertainment Enterprises Private Limited, Eros International Media Limited, Shemaroo Entertainment Limited and Tips Industries Limited. The Operational Creditor is also the Authorized Agent of Yash Raj Films Private Limited in terms of section 30 of the Copyright Act, 1957. The assignment agreements and the authorization by Yash Raj Films Private Limited cover on-Ground Performance Rights and usage of sound recordings and underlying works in any public venues with respect to the songs. The Corporate Debtor is an event management company. It approached the Operational Creditor for obtaining on-Ground Performance Rights for an event called Da Bangg The Tour Pune which was held on 24.03.2018 at the Shree Shiv Chhatrapati Sports Complex Stadium, Pune. The Operational Creditor raised a proforma invoice dated 20.03.2018 on the Corporate Debtor ₹ 3,00,000/- or non-exclusive public performance rights in sound records. The Corporate Debtor i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued a cheque for ₹ 3,00,000/- which was dishonored. The Operational Creditor had served a Demand Notice in Form 3 dated 31.07.2018 to the Corporate Debtor in terms of section 8 of the Code . The Corporate Debtor did not file reply to the demand notice. The Corporate Debtor has also not filed any reply to the application before the Adjudicating Authority. The Adjudicating Authority observed that this is a case where the existence of a jural relationship between the Operational Creditor and the Corporate Debtor has not been established. There is no claim in respect of any provision of goods or services. The respondent was expected to purchase a licence for public performance and broadcast of songs, in respect of which the petitioner is an assignee of copyright. This does not satisfy the definition of Operational Debt within the meaning of section 5(21) of the Code . Consequently, the petitioner cannot be treated as an Operational Creditor, and the petition itself cannot be maintained under section 9 of the Code. The Adjudicating Authority rejected the application filed by the operational debtor. Pre-existing dispute In Mayoor Rolling Shutters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Works v. P.V.R. Projects Private Limited NCLT, Hyderabad Bench CP (IB) No. 748/9/HDB 2019, dated 21.09.2020, the petitioner, an operational creditor had received orders from the corporate debtor for supplying of mild steel pressed door frames for the value of ₹ 19,29,417/-. Subsequently the work was enhanced to ₹ 37,00,361/-. The operational creditor completed the supply of materials, raised invoices and received the payment up to ₹ 25,67,523/- and a balance of ₹ 11,32,839/- is payable to the operational creditor. There is no dispute from the corporate debtor after the receipt of materials from the operational creditor. The operational creditor issued demand notice on 23.08.2019. The same was delivered on 30.08.2019 to the Corporate Debtor. The Corporate Debtor called the operational creditor for settlement on 04.10.2019 and 24.10.2019. On 24.10.2019 the corporate debtor committed to pay ₹ 6,80,976/- in addition to C for payments of ₹ 1,56,510/-. But later the corporate debtor is ready to pay only ₹ 1,56,510/-. The Corporate debtor alleged that the operational creditor has not adopted the timeline in supplies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The corporate debtor sent mails on 28.04.2015 to the operational creditor to complete the work. Since the operational creditor did not turn up, the corporate debtor hired a third party contract to complete the work and the operational creditor was requested to supervise the said work. The Corporate Debtor alleged that since the operational creditor did not reported till 05.01.2019, the same is barred by limitation. On 05.01.2019 the operational creditor sent a mail to the corporate debtor and claimed to the tune of ₹ 39.90 lakhs and after payment a sum of ₹ 7,23,048/- is to be payable. The Corporate debtor pointed out that the operational creditor did not seek any repayment for the sole reason that they have committed a breach of contract and they have failed to execute the contract as agreed upon. The Corporate debtor alleged that the claim of the operational creditor as above is ₹ 7,23,048/- but in the application for initiation of CIRP the claim is for ₹ 11,32,839/- and thus the amount is disputed. The Adjudicating Authority was of the view that the claim is time barred and also existed a pre dispute between the parties which was much raised ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en before the issue of demand notice under section 8. Therefore the Adjudicating Authority rejected the application. - - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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