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Alcon Laboratories (India) Private Limited v. Vasan Health Care Private Limited
Factual and Procedural Background
The application under adjudication was filed by M/s. Alcon Laboratories (India) Private Limited (Operational Creditor) against M/s. Vasan Health Care Private Limited (Corporate Debtor) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC 2016). The Operational Creditor supplied diagnostic equipment, eye care pharma, and vision care products to the Corporate Debtor on credit basis pursuant to agreements entered since 2008. Despite receiving the goods without objection, the Corporate Debtor defaulted on payments for several invoices. After multiple reminders, including a letter dated 7.12.2015 demanding payment of Rs. 86,65,75,855/-, the Corporate Debtor admitted the outstanding amount and assured partial payment. A milestone agreement dated 7.4.2016 acknowledged the total outstanding of Rs. 94,74,46,921/- with an installment payment schedule, failure of which would trigger immediate payment of the entire amount. The Corporate Debtor failed to pay even the first installment. Consequently, the Operational Creditor issued a statutory notice under Section 8 of IBC 2016 on 2.1.2017, received on 6.1.2017, allowing 10 days for payment. The Corporate Debtor neither paid nor replied to the notice.
The Corporate Debtor raised objections to the maintainability of the application, including alleged non-compliance with prescribed forms for the statutory notice and application, ownership claims over supplied goods under a hypothecation agreement, existence of an arbitration clause for dispute resolution, and pendency of a winding up petition before the Madras High Court.
After hearing on 17.04.2017 and considering submissions, the application was allowed, the corporate insolvency resolution process was ordered to commence, and an interim insolvency professional was appointed. A moratorium was declared prohibiting suits, asset transfer, enforcement actions, and recovery proceedings against the Corporate Debtor during the process, with certain exceptions for supply of essential goods.
Legal Issues Presented
- Whether the statutory notice and the application under Section 9 of IBC 2016 comply with the prescribed forms and procedural requirements.
- Whether the hypothecation agreement affects the Corporate Debtor's obligation to pay the outstanding operational debt.
- Whether the existence of an arbitration clause bars the Operational Creditor from initiating insolvency proceedings under IBC 2016.
- Whether the pendency of a winding up petition before the High Court precludes initiation of corporate insolvency resolution proceedings under the Code.
Arguments of the Parties
Corporate Debtor's Arguments
- The statutory notice was not sent directly by the Operational Creditor and did not comply with Form-3 under the IBC Rules.
- The application was not filed in accordance with Form-5 as prescribed under the IBC Rules.
- The goods supplied remain the property of the Operational Creditor under the hypothecation agreement, and any disputes should be resolved through consultation or arbitration as per the addendum to the milestone agreement.
- A winding up petition is pending before the Madras High Court, which should bar the insolvency proceedings.
- The Operational Creditor does not fall within the definition of operational debt under Section 5(21) of IBC 2016.
Operational Creditor's Arguments
- The statutory notice and application comply with the prescribed forms and procedural requirements; the notice can be sent by an authorized person on behalf of the Operational Creditor.
- The hypothecation agreement does not absolve the Corporate Debtor of the obligation to pay for goods received.
- The definition of "goods" under IBC 2016 includes machinery and consumables supplied, and the outstanding amount is not disputed.
- The existence of an arbitration clause does not bar initiation of insolvency proceedings under the Code.
- The pendency of the winding up petition does not prevent initiation of insolvency proceedings as no winding up order or Official Liquidator appointment has occurred.
- An interim insolvency professional has been proposed and consented to, fulfilling procedural requirements.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Pramod Prabhakar Kulkarni v. Balasaheb Desai Sahakari Sakhar Karkhana Ltd. (2001) III LLJ 741 Bom. | Procedure regarding statutory notice under IBC and the significance of prescribed Forms being directory rather than mandatory. | The Court relied on this precedent to hold that the statutory notice and application forms are procedural and directory; substance prevails over form, and no irregularity was found in the notice or application. |
Court's Reasoning and Analysis
The Court examined the objections raised by the Corporate Debtor sequentially. Regarding the statutory notice and application forms, the Court found both complied with the prescribed formats. It held that the notice could be sent by an authorized agent of the Operational Creditor, relying on the precedent from the Bombay High Court emphasizing the directory nature of the forms and the primacy of substance over form.
On the hypothecation agreement, the Court recognized it as a normal business practice granting the seller lien over goods until full payment but clarified this does not absolve the Corporate Debtor from its payment obligations. The Court rejected the argument that the Operational Creditor's claim did not constitute operational debt under the Code, interpreting the definition of "goods" broadly to include machinery and consumables.
The arbitration clause in the addendum was held not to bar the initiation of insolvency proceedings under the Code, as the Code does not envisage such a bar. Similarly, the pendency of a winding up petition before the High Court was not considered a bar since no winding up order or appointment of an Official Liquidator had occurred.
The Court noted the Corporate Debtor's failure to respond to the statutory notice and found the outstanding amount undisputed. It was satisfied that all legal requirements were met and proceeded to allow the application, initiating the corporate insolvency resolution process and appointing the proposed interim insolvency professional.
The Court declared a moratorium under Section 14 of the Code, prohibiting suits, asset transfers, enforcement actions, and recovery proceedings against the Corporate Debtor during the insolvency process, except for supply of essential goods or services.
Holding and Implications
The application filed by the Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 is allowed. The Court ordered the commencement of the corporate insolvency resolution process against the Corporate Debtor and appointed Shri. V. Mahesh as the interim insolvency professional.
A moratorium was declared prohibiting any suits, proceedings, or enforcement actions against the Corporate Debtor during the insolvency resolution process, which is to be completed within 180 days from the date of the order. Supply of essential goods or services to the Corporate Debtor is exempt from the moratorium.
This decision directly affects the parties by enabling the Operational Creditor to initiate insolvency resolution proceedings and imposing a moratorium on the Corporate Debtor’s assets and legal actions against it. The Court did not set any new legal precedent beyond its application of existing principles and statutory provisions.
Mohd. Sharief Tariq, Judicial Member (Oral):— Under adjudication is an application which came to be filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC 2016) and numbered as C.A/1/(IB)/2017. The application has been filed by M/s. Alcon Laboratories (India) Private Limited (hereinafter referred to as “Operational Creditor”), having its registered office at Third floor, Crescent-4, Prestige Shantiniketan, Whitefield. Bengaluru-560048, against M/s. Vasan Health Care Private Limited (hereinafter referred to as “Corporate Debtor”) having its registered office at No. 70, Dr. Radhakrishnan Salai, Westminister Complex. Mylapore, Chennai-4.
2. It has been stated in the application that the Operational Creditor is engaged in supply of certain diagnostic equipments, eye care pharma and vision care products for which the corporate debtor approached the operational creditor in the year 2008 for supply of such products for which the operational creditior and the corporate debtor entered into various agreements/memorandum of understanding. The operational creditor through its consignment agent M/s. Parekh Integrated Services Private Ltd. (Parekh) supplied various products to the Corporate debtor on credit basis and invoices were issued periodically on behalf of the operational creditor. The products supplied by the operational creditor were received by the Corporate debtor without any demur. The corporate debtor used the products without any complaints, but had defaulted in payments towards amount of some of the products supplied, for which the corporate debtor already received invoices. Thereafter, the operational creditor has given several reminders to corporate debtor calling upon to pay the outstanding amount. But the corporate debtor failed to make payment despite having received serveral reminders for payment which resulted in huge amount of outstanding payable to the operational creditor by the corporate debtor. The operational creditor addressed a letter dated 7.12.2015 to the corporate debtor reminding to make payment of the outsanding sum of Rs. 86,65,75,855/- (Rupees eighty six crores sixty five lakhs seventy five thousand eight hundred and fifty five only) payable to the operational creditor as on 30.11.2015 The Corporate debtor vide reply dated 22.12.2015 admitted the outstanding clues as claimed by the operational creditor in its letter dated 7.12.2015 and assured that 80% of the outstanding would be paid in the period between 15.1.2016 and 10.2.2016 Subsequently, an agreement of milestone dated 7.4.2016 was executed between the operational creditor and the corporate debtor wherein it has been expressely admitted and acknowledged by the latter that a total outstanding amount of Rs. 94,74,46,921/- is payable to the former, which the corporate debtor undertook to pay in instalments. A hyphothecation agreement was also entered into between the parties which formed the part of milstone agreement (available at Annexure P10). As per clause II of milestone agreement, it was also agreed by the Corporate Debtor that failure to pay any one instalment would give rise to serious default for which the Corporate debtor would be liable to pay the entire outstanding amount for all supplies made by the operational creditor till that date immediately. However, the corporate debtor failed to pay even the first instalment as per the schedule of payment agreed between the parties in the milestone agreement. Ultimately, the Operational creditor sent a statutory notice under Section 8 of IBC 2016 on 2.1.2017 to the corporate debtor to its office in Chennai, that was received by the Corporate debtor on 6.1.2017 In the statutory notice, 10 clays' time reckoning from 6.1.2017 to 15.1.2017 was provided for payment of dues. However, the corporate debtor did neither bother to pay the outstanding amount nor reply to the statutory notice.
3. It is on record that the claim was admitted by the corporate debtor and agreed to make the payment as per schedule which is as follows:
Sl. No Date Amount 1 On or before 31st Aug 2016 30% of the total due 2 On or before 30th Sep 2016 15% of the total due 3 On or before 31st Oct 2016 20% of the total due 4 On or before 30th Nov. 2016 15% of the total due 5 On or before 31st Dec 2016 20% of the total due
4. But the corporate debtor did not adhere to the schedule of payment to be made to the operational creditor.
5. The matter came up for hearing on 10.4.2017 Both the counsels appearing for the operational creditor and the corporate debtor sought time to submit their arguments and the matter has finally been heard on 17.04.2017 The counsel representing the corporate debtor has raised objections with regard to the maintainability of the application, inter alia, on the following grounds:—
I) The statutory notice issued under clause(a) of sub-rule(1) of Rule 5 of the IBC (Application to Adjudicating Authority) Rules, 2016 under section 8 of IBC 2016 is not in accordance with Form-3 as provided and was not sent by Operational creditor itself;
II) The application is not in accordance with Form-5 as provided under Sub-rule(1) of Rule 6 of the IBC (Application to adjudicating Authority) Rules. 2016
III) The item supplied by the operational creditor are still under the ownership of operational creditor as per the Hypothecation Agreement dated 7.4.2016 and dispute if any was to be resolved through consultation and ultimately by arbitration as per the addendum to agreement of milestone dated 7.4.2016, which was entered into between the parties on 18.4.2016
IV) That a winding up petition is sub judice before the Hon'ble High Court of Madras.
6. We take the objections I and II together. In relation to the issue of statutory notice and the application, we have noted that both of them are in accordance with the Forms prescribed. The objection of the corporate debtor is that the statutory notice was to be sent directly by the operational creditor but this objection is not sustainable for the reason that Form-3 itself provides for the signature of the persons authorised to act on behalf of the operational creditor. Therefore, the operational creditor can authorise any person to send the statutory notice on its behalf. As to the objection raised with regard to the application not being in the Form prescribed, it is seen that all the information required are contained in the application filed under section 9 of IBC 2016. Therefore, this objection is also not sustainable. In this connection, we may make a reference to the ruling given by the Hon'ble High Court of Bombay in Pramod Prabhakar Kulkarni v. Balasaheb Desai Sahakari Sakhar Karkhana Ltd. reported in (2001) III LLJ 741 Bom., wherein similar question came for consideration before their Lordships and it was opined that though the requirement of making a notice is mandatory and the ‘Form’ in which it is to be given is a matter of procedure, and hence directory. It could be expressed in other words that the ‘Forms’ for notice and application as prescribed under the Rules are for providing/incorporating necessary informations, which are required under the law. Thus, the substance is more important than the ‘Form’ and moreover there is no irregularity in the statutory notice sent and the application filed.
7. The next issue raised is with regard to the hypothecation agreement. In this regard, it is a normal business practice being followed that unless the entire payment/consideration is paid by the buyer, the sellers will have lien over the goods supplied, but that does not mean that the corporate debtor is not under obligation to make the payment for the supply of the goods to the supplier. The counsel for the corporate debtor also stated that the ‘operational creditor’ does not fall within the definition of the ‘operational debt’ as defined under sub-section 21 of Section 5 of IBC 2016. The argument of the counsel for corporate debtor is misleading because the word “goods” used in the definition is of wider import and includes the machinery/equipment. Further it is on record that more than half of the outstanding amount is pertaining to the consumables supplied by the operational creditor. The objection raised by the counsel for corporate debtor is not tenable in the eye of law and therefore, stands rejected.
8. The next objection taken by the counsel for corporate debtor is that the addendum to milestone agreement provides for resolving the disputes through negotiations, failing which by arbitration. This does not bar the operational creditor to file the application under section 9 of IBC 2016 against the corporate debtor as the Code does not envisage such a kind of bar for initiating the corporate insolvency resolution process by the operational creditor.
9. The last objection that has been raised by the counsel for corporate debtor is that winding up petition is sub judice before the Hon'ble High Court of Madras, where the Court permitted Andhra Bank to appoint suitable person to conduct forensic audit of the corporate debtor. The pendency of the winding up petition cannot be a bar under the Code for initiating the corporate insolvency resolution process, because the Hon'ble High Court has not passed any order for winding up of the corporate debtor and no Official Liquidator has been appointed. Therefore, this objection is also rejected.
10. It is admitted fact that no reply has been given by the corporate debtor. A specific query has been raised across the Bench that as to why the reply to the notice has not been given by the corporate debtor, the counsel for corporate debtor at the first instance attempted to give some explanation but turned to admit that the reply to the notice has not intentionally been given. The counsel for operational creditor also submitted that he has filed an affidavit proposing Shri. V. Mahesh as an interim insolvency professional, who is a registered practitioner having registration No. IBBI/IPA/002.IP-00215/2016-17/1930. whose consent has also been sought and his name is available on the web site of the Board and no prosecution pending against him. It is also an admitted fact that the outstanding amount payable by the corporate debtor to the operational creditor is not under ‘dispute’.
11. We have perused the contents of the application along with the supporting documents placed on record the reply filed by the corporate debtor and considered the submissions of both of the counsels. After having satisfied that all the requirements under law have been fulfilled, we hereby allow the application of the operational creditor and order the commencement of the corporate insolvency resolution process which ordinarily shall get completed within 180 days, reckoning from the day this order is passed. We also appoint Shri. V. Mahesh as interim insolvency professional who has been proposed by the operational creditor. He is directed to take charge of the corporate debtor immediately. He is also directed to cause public announcement as prescribed under Section 15 of the Code within three days from the date the copy of this order is received, and call for submissions of claim under section 15 of IBC 2016 in the manner as prescribed.
12. We declare the moratorium which shall have effect from the date of this order till the completion of corporate insolvency resolution process, for the purposes referred to in Section 14 of the IBC 2016. We order to prohibit all of the following, namely:
(a) The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respet of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) The recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor.
13. However, the supply of essential goods or services to the corporate debtor as specified shall not be terminated or suspended or interrupted during moratorium period. It is further made clear that the provisions of sub-section(1) of Section 14 of the Code shall not apply to such transactions as notified by the Central Government in consultation with any financial sector regulator.
14. Accordingly, the application of the operational creditor is allowed.
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