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  • Section 8(1) of the Code. Under Section 8(2),
  • 5 Adjudicating Authority) Rules, 2016. Under Rule 4,
  • Section 9 of the Code." 3
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  • Section 8(1) of the Code. Under Section 8(2),
  • 5 Adjudicating Authority) Rules, 2016. Under Rule 4,
  • Section 9 of the Code." 3
Smart Summary

Summary: National Company Law Appellate Tribunal (New Delhi)

Factual and Procedural Background

This appeal arises from an application filed by the Appellant, M/s. Good Luck Traders, under Section 9 of the Insolvency and Bankruptcy Code, 2016 seeking initiation of the corporate insolvency resolution process against the Corporate Debtor, M/s. Valley Iron & Steel Co. Ltd. The Adjudicating Authority (National Company Law Tribunal, New Delhi Bench) by order dated 17 December 2018 rejected the Section 9 application on the ground that the claim was barred by limitation.

The Adjudicating Authority's order noted that while some sums (principal and amounts by demand drafts and RTGS) had been paid by the Respondent after issuance of the Section 8 demand notice, the petitioner had not satisfactorily explained delay for claims pertaining to the year 2012 and thus held the application to be beyond the three-year limitation period. The Appellant challenged that rejection before the NCLAT.

Legal Issues Presented

  1. Whether the Section 9 application was time-barred by limitation given the payments made by the Respondent after issuance of the demand notice and payments recorded in February and May 2018.
  2. Whether the Adjudicating Authority's reasoning was internally inconsistent (observing both that the principal was paid and that the claim was time-barred) and whether that contradiction affects the validity of the rejection.
  3. Whether the existence of a dispute in relation to the claim (i.e., whether the claim is disputed) affects the maintainability of the Section 9 application under the Code.

Arguments of the Parties

Appellant's Arguments

  • After issuance of the demand notice under Section 8(1), the Respondent paid a sum of Rs. 39,46,440.26 by RTGS dated 31 May 2018 (in addition to other payments by demand drafts in February 2018), and therefore the application cannot be held to be beyond limitation.

Respondent's Arguments

  • Learned counsel for the Respondent submitted that the total amount due to the Appellant had already been paid and that the Respondent had not raised the question of limitation before the Adjudicating Authority.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 Exposition of the scheme of the Insolvency and Bankruptcy Code: meaning of "default", "debt" and "claim"; the circumstances in which insolvency proceedings are triggered; distinction between Sections 7 and 8 procedures; and treatment of disputed claims and the requirement for the adjudicating authority to ascertain default. The NCLAT relied on the Supreme Court's description of how default is determined under the Code and on the principles governing the triggering of insolvency proceedings to evaluate whether payments made in 2018 (after issuance of demand notice) affected the limitation determination and to assess the role of a disputed claim in the Section 9 context.

Court's Reasoning and Analysis

The Tribunal proceeded through the following steps in its analysis:

  1. It first identified an internal contradiction in the Adjudicating Authority's order: the Adjudicating Authority observed on one hand that the entire principal amount had been paid (including by RTGS within 10 days of the demand notice) and on the other hand concluded that the application was barred by limitation because the claim pertained to the year 2012.
  2. The Tribunal noted factual payments made by the Respondent: certain amounts were paid by demand drafts in February 2018 and by RTGS on 31 May 2018 (Rs. 39,46,440.26). Given that the last payment occurred in 2018, the Tribunal held that the application could not be considered barred by limitation on the basis of dates going back to 2012.
  3. The Tribunal relied on the Supreme Court's decision in Innoventive Industries Ltd. v. ICICI Bank to frame the legal approach—particularly the scheme in the Code about what constitutes a default, how a claim may be disputed, and how delivery of a demand notice under Section 8 operates.
  4. The Tribunal found that the claim was disputed (the Respondent contended amounts had been paid) and observed that the Adjudicating Authority had wrongly placed reliance on delay as a ground for rejecting the application. The Tribunal also noted that issues of disputed payments could not be finally determined by the Appellate Tribunal and should be addressed by the Adjudicating Authority after notice and hearing.
  5. On that basis, the Tribunal concluded that the impugned rejection order could not stand and that the matter should be remitted to the Adjudicating Authority for fresh consideration, with directions to issue notice and hear the parties.

Holding and Implications

Final Ruling: The appeal is allowed; the order dated 17th December 2018 of the Adjudicating Authority is set aside and the matter is remitted to the Adjudicating Authority (National Company Law Tribunal), New Delhi (in IB 870(ND)/2018) to decide after issuing notice and hearing the parties.

Implications:

  • The direct effect is that the Adjudicating Authority's rejection of the Section 9 application on the ground of limitation is vacated and the application must be reconsidered afresh with notice to the parties and opportunity for hearing.
  • The Tribunal recorded that the question of disputed payments and whether the claim is an operational debt involves factual determination that should be addressed by the Adjudicating Authority; the Appellate Tribunal did not make a final factual determination on those matters.
  • No order as to costs was made by the Tribunal ("No cost").
  • The decision remits the matter for fresh adjudication rather than establishing a new, broad precedent beyond applying the cited Supreme Court exposition from Innoventive to the facts before it.

Disposition recorded in the opinion: Appeal allowed; order set aside and matter remitted for fresh consideration after notice and hearing. (Bench: Justice S.J. Mukhopadhaya; Chairperson and Kanthi Narahari, Member (Technical)).

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    Good Luck Traders v. Valley Iron & Steel Co. Ltd. And Another

    NATIONAL COMPANY LAW APPELLATE TRIBUNAL

    NEW DELHI

    Company Appeal (AT) (Insolvency) No. 81 of 2019

    IN THE MATTER OF:

    M/s. Good Luck Traders …Appellant Versus

    M/s. Valley Iron & Steel Co. Ltd. & Anr. …Respondents Present:

    For Appellant : Mr. Anshuj Dhingra and Mr. Shubhangda Singh, Advocates

    For Respondents: Mr. Arun Saxena and Mr. Saral Sharma, Advocates

    O R D E R

    19.07.2019 The Appellant - 'M/s. Good Luck Traders' filed an application u/s 9 of the 'Insolvency and Bankruptcy Code, 2016 (for short, the I&B Code') for 'initiation of corporate insolvency resolution process' against 'Valley Iron & Steel Co. Ltd.' (Corporate Debtor), the Adjudicating Authority (National Company Law Tribunal), New Delhi Bench by impugned order dated 17thDecember, 2018 rejected the application on the ground that the claim is barred by limitation with the following observations :

    "11. It is not disputed that Rs. 39,46,440.26 has already been paid by the Respondent to the applicant after issuance of demand notice under Section 8. It is seen that Rs. 54,46,440.26 was the actual amount of unpaid amount due to be paid by the Respondent. Rs.15,00,000/- was paid by the Respondent through

    1

    2

    3 demand drafts in the month of Feb 2018. It is admitted by the petitioner in its petition that out of claim of Rs.1,06,39,290.26/-, Rs. 39464440.26/- is principal amount remained to be paid by the Respondent and remaining 66,92,850.26/- is the amount towards interest calculated by Petitioner @ 24% per annum.

    12. The entire principal amount was also paid through RTGS within 10 days of receipt of demand notice u/s 8 of the Code. Accordingly, it can be concluded that Respondent has already paid Rs. 54,46,440.26/- which was the principal amount due towards unpaid invoices and no amount towards invoices remained to be paid by the respondent to the applicant within 10 days of issue of demand notice u/s 8 of the Code.

    13. In the present application, the applicant has failed to explain the delay as their claim pertains of the year 2012, which is beyond the limitation period of 3 years. The same should not be entertained for triggering Corporate Insolvency Resolution Process under Section 9 of the Code."

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    Having found that the observations made by the Adjudicating Authority is contradictory as at one stage, it is stated that the entire principal amount has been paid and at another stage it observed that the application is beyond the period of limitation. Learned counsel appearing on behalf of the Respondent submits that the total amount has been paid and the respondent has not raised the question of limitation. However, such submission cannot be accepted as the Adjudicating Authority has observed that the Appellant failed to explain the delay which pertains to the year 2012.

    We have noticed that by Demand Drafts of February, 2018, Respondent paid certain amount. In such case, we are of the view that the amount having last paid in February, 2018 the application is not barred by limitation. Learned counsel appearing on behalf of the Appellant submits that after issuance of Demand Notice u/s 8(1), the Respondent also paid a sum of Rs. 39,46,440.26 through RTGS dated 31stMay, 2018, therefore, it cannot be said to be a delay or held to be beyond limitation as held by the decision of Hon'ble Supreme Court in "Innoventive Industries Ltd. v. ICICI Bank [ Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407] :

    27. The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of "debt", we have to go to Section 3(11), which in turn tells us that a debt

    4

    means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5(21) means a claim in respect of provision of goods or services.

    28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor — it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub- section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to

    5

    Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to

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    the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.

    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 notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre- existing—i.e. before such notice or invoice was received by the corporate debtor. The moment there is existence of such a dispute, the operational creditor gets out of the clutches of the Code."

    From the aforesaid finding, it is evident that the claim is disputed, we find that the ground of delay wrongly shown by the Adjudicating Authority. Further no ground has to be given as to why the claim of the Appellant has not 'Operational Debt'.

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    Learned counsel for the Respondent submits that the total amount as was due to the Appellant has already been paid but we have noticed that it is disputed. However, such issue cannot be determined by us so it would have been brought to the notice of the Adjudicating Authority. For the reasons aforesaid, we set aside the order dated 17thDecember, 2018 and remit the case to the Adjudicating Authority (National Company law Tribunal), New Delhi passed in (IB) 870(ND)/2018 and to pass order issue after notice and hearing the parties.

    The appeal is allowed with aforesaid observations. No cost. [Justice S.J. Mukhopadhaya]

    Chairperson

    [ Kanthi Narahari ]

    Member (Technical)

    /ns/gc

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    Good Luck Traders v. Valley Iron & Steel Co. Ltd. And Another
    (Jul 19, 2019)