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TMI Blog2024 (8) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... o raised by the Corporate Debtor on 29.06.2018. Besides attributing a grave charge against Respondent No. 2 for bankrupting SPIN, the Corporate Debtor had effectuated revision of the role, responsibilities and salary compensation of Respondent No. 2. More significantly, the disputes raised in these letters are central to the payments claimed by Respondent No. 2 and had a bearing on the computation of outstanding dues arising out of the hand written agreement of 18.09.2013 which has been the bone of contention between the two parties. These disputes, raised prior to demand notice, were germane to deciding whether there was a debt and if the debt was disputed by the Corporate Debtor. The present is therefore not a case where there is an undisputed debt for which Corporate Debtor can be brought under the rigors of CIRP. Triggering the drastic consequences of CIRP on the Corporate Debtor on the basis of debt and default which is mired in pre-existing disputes, in our considered view, is not acceptable. 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 Mobil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal 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 month along with perks/welfare benefits. In terms of the EA, the salary was to be negotiated annually and if not renegotiated, then a fixed 20% escalation was admissible for the first five years and 7% escalation thereafter. The term of EA was for a period of five years up to 31.03.2017 effective from 01.04.2012. It was further submitted that the EA was not formally renewed after five years. Submitting that the Corporate Debtor started facing a severe financial crunch due to mismanagement by Responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leged 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 outstanding amount towards Provident Fund (PF) as debt and default by the Corporate Debtor. It was contended that neither the sum of Rs.4.18 lakhs nor Rs. 24.44 lakhs were due and payable. It was pointed out that the Adjudicating Authority while holding that Rs. 4.18 lakhs was payable as salary dues as per the balance sheet, it failed to take into account the other entries in the balance sheet which showed advances already made to Respondent No. 2 running into more than Rs. 6 cr. Assailing this one-sided anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was no requirement to establish crystallised dues before issue of demand notice. In any case the Corporate Debtor in their email dated 07.06.2018 have themselves admitted that monies were payable to Respondent No. 2 and no dispute was raised at that point. It has also been asserted that prior to issue of demand notice, there was not a single dispute raised by the Corporate Debtor on Respondent No. 2. Only after the receipt of demand notice, three frivolous criminal complaints have been filed against Respondent No. 2 besides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced 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 the outstanding Operational Debt. Section 8(2) lays down that the Corporate Debtor within a period of 10 days of the receipt of the Demand Notice would have to bring to the notice of the Operational Creditor, the existence of dispute, if any. 16. Section 8 of the IBC is as follows: 8. Insolvency resolution by operational creditor- (1) An Operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in the default to the Corporate de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 date of receipt of such notice from the Adjudicating Authority. 18. Equally pertinent to note are two seminal judgements of the Hon ble Apex Court which have propounded guiding principles that have to borne in mind while considering Section 9 applications. The Hon ble Supreme Court in its decision in M/s. Innoventive Industries Ltd. Vs. ICICI Bank Ltd. (2018) 1 SCC 407 while distinguishing the scheme of insolvency resolution by the Financial Creditor (Section 7) and insolvency resolution by the Operational Creditor (Section 9) of IBC observed as follows:- 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 (iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration Proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute? If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act. ***** ***** ****** 51. 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 Section 9(5)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) 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 existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational Debt in relation to such dispute? 21. This now brings us to analyse how the Adjudicating Authority has applied the above tests to the facts of the present case. To begin with, we shall see how the Adjudicating Authority has dealt with the issue of existence of debt above the statutory threshold and the default, if any. The findings of the Adjudicating Authority in the impugned order are as extracted hereunder : 22. Further, as regards the contention of the Corporate Debtor that there are no admitted, crystallised Operational Debts due and payable as the Corporate Debtor does not owe any sums to the Applicant rather, the Applicant owes significant sums to the Corporate Debtor, this Adjudicating Authority finds that the Corporate Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 the exact quantum of the Operational Debt is of the considered view that there exists an operational debt above the threshold limit of Rs.1 Lakh and the same is 'due and payable' by the Corporate Debtor. Hence, the first two mandatory conditions regarding the existence of 'Debt' above the pecuniary threshold limit and its 'default' are answered in the affirmative. (Emphasis supplied) 22. To summarise the findings contained in the above paras of the impugned order as reproduced above, we notice that the Adjudicating Authority has held that the Corporate Debtor had admitted a liability of over Rs 28 lakhs towards salary and PF dues. It also held that the Corporate Debtor has not adduced any evidence to show that the said amount has been paid off but tried to take the defence of set off by way of counter-claims which is not a sustainable ground. It has gone on further to hold that the first two mandatory conditions of existence of debt a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds, 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 the Corporate Debtor had asked Respondent No. 2 to contact HR for settlement of their dues while also disagreeing with the claims raised by Respondent No. 2. Though the intent behind the emails was to indicate willingness to settle the claim amounts, if any, nonetheless it does not tantamount to admission of debt. As regards the plea taken by Respondent No. 2 that the Corporate Debtor had only given a summary response to the claim raised by them in their resignation letter, we are inclined to agree with the Corporate Debtor that when the Respondent No. 2 had himself made summary and unsubstantiated block-claim without any break-up in their resignation email, the Corporate Debtor cannot be faulted for having summarily denied the dues claimed in the resignation letter. To our minds, the bottom-line is clear that the claims of dues raised by the Operational Creditor was not admitted or accepted by the Corporate Debtor. 27. This brings us to next strand of argument of Respondent No. 2 that when the Corporate Debtor in its Audited Balance She ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Adjudicating Authority and erroneously treated as claims and counter claims. 29. When we look into the issue of default having been committed by the Corporate Debtor, we find that Respondent No. 2 had received salary advance of Rs.1.31 cr in 2017. This advance payment is reflected in their Financial Statement ending 31.03.3017 as placed at page 101 of Appeal Paper Book ( APB in short). The Respondent No. 2 has neither denied the receipt of the said amount nor assailed this amount appearing in the books of account and has instead submitted that the salary advance of Rs.1.31 cr was for meeting arrears of salary entitlement flowing from a hand written paper agreement of 18.09.2013, which agreement has been hotly contested by the Corporate Debtor. We find that the Adjudicating Authority has not considered the salary advance of Rs.1.31 cr received and retained by Respondent No. 2 even though it finds place in the balance sheet of the Corporate Debtor. Even an amount of Rs. 6.79 cr reflected in the financial statement for 31.12.2018 and 31.12.2019 as recoverable from the Respondent No. 2 has not been taken into cognisance. It clearly appears that the Adjudicating Authority has returned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y etc other than salary. It is the case of the Corporate Debtor that these amounts which fall in the category of welfare claims and service benefits could not have been claimed in the Section 9 application as these items do not qualify to be operational debt and cannot be the basis for determining default. Reliance was placed on the judgment of this Tribunal Kishore K. Lonkar Vs. Hindustan Antibiotics Ltd. in CA (AT) (Ins) No. 934 of 2021 wherein it is held that initiation of CIRP on claims which fall within the ambit of service benefits/welfare benefits cannot be said to be the intent and objective of the IBC. The Learned Sr Counsel of the Respondent No. 2 however, contended that Lonkar judgment supra has been misapplied by the Corporate Debtor and that this judgement had created a distinction between amounts being payable during and those payable after cessation of employment. We are afraid that we are not in a position to subscribe to this interpretation since in the Lonkar judgement supra it has been held that claims like LTC and EL encashment , even though they arise during the period of employment, cannot be made a ground for seeking CIRP of a Corporate Debtor. 32. We also fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the erroneous conclusion that default had been committed by the Corporate Debtor. We are satisfied that the balance amount claimed as operational debt has been disputed by the Corporate Debtor and no default has been admitted on this count. We are of the view that IBC should not be used as a recovery mechanism. The claims asserted by the Respondent No.2 are in the nature of contractual claims which require to be adjudicated in an appropriate civil court. 34. This brings us to the next pertinent issue on how the Adjudicating Authority has dealt with the issue of pre-existing dispute. The impugned order at para 32 shows that the Adjudicating Authority that no valid disputes were raised prior to receipt of the statutory demand notice. For convenience, we proceed to extract the relevant para which reads to the effect: 32. Be that as it may, this does not detract from the fact that the criminal complaints, EoW Complaints and the alleged sett-off/ counter claims by the Corporate Debtor against the Applicant s claim are only raised after the issue of the Statutory Demand Notice dated 20.06.2018. Accordingly, we are not inclined to agree that a valid dispute has been pointed out by the Cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, during the course of employment with our Client, it appears that the performance of your Client gradually deteriorated and the same unequivocally affected the growth of our Client. During the years of your Client s management, our client was suffering a financial crisis and was unable to pay either its employee or contracting parties or banks etc. It also came to the knowledge of our Clients during the course of 2018 that various monies had been and were being siphoned off and diverted by your Client to himself or entities, which were directly or indirectly owned and controlled by your Client. 6. Your Client was at all times aware of the extreme severity of the financial crisis of SPIN. Our Clients also demanded answers and directed your Client to come up with an immediate plan to revive the business of SPIN. It appears that instead of comprehending the Situation and making efforts towards SPIN as its CEO, your Client started raising frivolous and false disputes pertaining to his employment and remuneration in SPIN. It may be noted that apart from his professional attitude, your Client also became rude and arrogant to his seniors and other stakeholders. 7. Further, when a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d SPIN to unnecessary financial liability. The acts of your Client are prejudicial not only to the interest of SPIN but also all others stakeholders directly/indirectly involved with the affairs of SPIN. 10. When such acts of your Client came to the knowledge or our Clients, it suggested for an investigation and thorough forensic audit of the finances of SPIN. Surprisingly, your Clients resignation comes at a time, when our Clients were in the process to order investigation in the nefarious activities of your Client. You may note here that a prima facie investigation and forensic audit reveals that the financial transactions of your Client reflect siphoning off of the funds of SPIN. In fact, it also appears that your Client has taken more from SPIN than what was admitted/acknowledged under the Employment Agreement. Our Clients are in the process of finalising the forensic audit of the Company. Once the correct financial position is brought forward, our Client reserves their right to file appropriate claim against your Client for recovery of the excess money taken from SPIN. Our Clients also reserve their right to initiate appropriate criminal action against your Client for criminal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll parties involved. 1. Today, it seems that SPIN can pay neither employees nor suppliers nor landlord nor owners nor the state/ central government nor banks, mostly already for quite some time. SPIN cannot even deliver the contractual obligations to our customers. This starkly contradicts the way you reported about SPIN. Mr. Kuhnreich is working on establishing the facts. 2. The very basis of any agreement between you and me has always been that payments to you were to come from SPIN out of its operative profits and cash flows. No money from the owners was ever intended to flow to you. I also disagree with some of your below claims but this is clearly not an issue right now. 3. You had bankrupted SPIN some more years ago. Mrs. Carstensen saved SPIN and I gave you a second chance. There is no third chance if SPIN fails now. A bankrupt SPIN cannot pay anything. 4. Averting bankruptcy is our all TOP PRIORITY. Supporting Mr. Kuhnreich towards this goal must be given your absolute utmost immediate efforts. I strongly believe that SPIN can succeed in this, but it will only possible by a joint effort of EVERYONE. Do your part in saving SPIN. All our love and compassion from Jeanne and me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: - Valuation for transfer of business from my past company: Rs 1042.87 Lacs approximate - Salary pending of Rs 103 Lacs approximate which has been unpaid since several months. It was also accepted by you that my offer of 24.9% equity in SPIN shall be made available from April 1st, 2018. This was agreed during our joint meeting in Mainz, Germany along with Dr Proessl, the current CEO and Mr Kleinschmidt, the then CFO of Schneider International Holding GmbH last year. The machinery owned by me and given to SPIN on rent by me is being assumed to be continued on the current rental management fees of Rs 10,76,023 + applicable taxes. I write for confirmation that the settlement of the dues shall be responsibility of Mr Juergen Kuenreich on behalf of the companies and that he has been appraised of this and which has been accepted by him as his responsibility. Thanking you, PAVAN GAUR 40. Such glaring disputes cannot be brushed aside as mere managementrelated disputes as has been asserted by Respondent No. 2. We find that besides attributing a grave charge against Respondent No. 2 for bankrupting SPIN, the Corporate Debtor had effectuated revision of the role, responsibilities and s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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