Ashutosh Gupta and Gaurav Rana

Moot Question II, Whether Loss Or Damages Or Interest Is Operational Debt as Defined Under IBC

National Company Law Appellate Tribunal (“NCLAT”), in its recent order dated 24.02.2020 (“Order”) has removed the sword of Corporate Insolvency Resolution Period (“CIRP”) looming on Flipkart India Private Limited (“Flipkart”) in matter titled as Neeraj Jain Versus Cloudwalker Streaming Technologies Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 1354 of 2019. In the Order NCLAT discussed and held various intrinsic facet of order of admission or rejection under Section 9 of Insolvency Bankruptcy Code, 2016 (“IBC” or “Code”) for instance, a. Whether claim in respect of losses and/or damages and /or interest be treated as part of Operational Debt under IBC; b. Whether format provided under Adjudicating Authority Rules, 2016 (“Rules”) like FORM 3 and 4 are mandatory or directory in nature and their usage depends on the nature of transaction or discretion of the Operational Creditor; c. Whether invoice is integral part of Demand Notice and of the petition under Section 9 of the Code, d. Whether Bank Statement is a crucial document for admission or rejection of a Petition under Section 9 of the IBC and e. Is it mandatory to issue notice of dispute to demand notice to raise dispute under Section 9 of the IBC. This Article will focus on the said facets and NCLAT’s rationale behind the same. In this article we will deal with first question i.e.. Whether claim in respect of losses and/or damages and /or interest be treated as part of Operational Debt under (“Moot Question”).

Before adverting to finding and rationale of the NCLAT on the Moot Question, it is relevant to discuss the facts leading to the Order.

Facts of the case:

M/s. Cloudwalker Streaming Technologies Pvt Ltd. (“Operational Creditor”) filed Petition under Section 9 of the Code against the Flipkart claiming default of an amount of INR 26,95,00,000/- towards supply of LED TVs. The Operational Creditor has been importing and supplying LED TVs to the Corporate Debtor. Dealing between parties was crystallised into a Supply Agreement dated 29.12.2016 (“Supply Agreement”). As per Supply Agreement mechanism of order placement and invoice clearance was fixed between parties whereby Flipkart was required to place order or Purchase Order (“PO”) by email, thereafter Operational Creditor used to import LED TVs as required and deliver the same to the Flipkart at its desired location.

As per Operational Creditor, Flipkart took delivery first few batches of LED TVs and later on refused to take delivery on the ground of lack of warehouse space. In good gesture Operational Creditor warehoused the LED TVs for a temporary period. For said period Operational Creditor had paid excess custom duties. Flipkart had failed to collect more than 70% of the stock as ordered by them till March, 2018.

On account of the dispute mentioned above and differences between the parties, Operational Creditor invoked Clause 18 of the Supply Agreement and thereby gave notice dated 26.03.2018 to the Corporate Debtor to settle the matter within 30 days, failing which the Operational Creditor would have proceeded for appointment of an Arbitrator. However later on Operational Creditor withdraw its notice dated 26.03.2018 and proposed to settle the issue amicably. But said issued did not settled.

On 08.06.2019 Operational Creditor had issued demand notice under FORM 3 under Section 8 of the Code. No reply was made by the Flipkart to the notice of demand of the Operational Creditor. Later on said Demand Notice culminated into petition under Section 9 of Code. In reply to the Petition, Flipkart stated that it has made all payment in respect PO issued by them from January, 2017 to April, 2018 and nothing is due, payable and defaulted. Further Flipkart contended no invoice or PO is attached with petition in respect to claim amount. Flipkart also stated that it is not liable to indemnify Operational Creditor against any losses, risks or costs incurred by the Operational Creditor in terms of Supply Agreement including custom duty paid. Flipkart also contended that there was deficiency in service of the Operational Creditor therefore INR 42,96,665/- was withheld by the Flipkart.

Adjudicating Authority rejected the contention of the Flipkart as no pre-existing or post existing dispute was produced before Adjudicating Authority. Further Adjudicating Authority relied on catena of order of NCLAT, wherein NCLAT categorically held that dispute should have been raised prior to issuance demand notice and not before the Adjudicating Authority directly. Further Adjudicating Authority relied on various emails shared between parties wherein Flipkart admitted that they have space constraint therefore they can not take delivery of stocks. Further no email conversation was placed on record by Flipkart stating dispute qua goods, or their quality, in the light of the same Adjudicating Authority post giving ample opportunity to parties to settle the matter, admitted the petition field by the Operational Creditor.

Submission of the parties:

Flipkart while addressing its argument emphasised that instead of producing relevant documents the Operational Creditor has solely placed reliance on few emails to allege that suffered losses on accounts of the projections for the demands raised by the Flipkart. The figures provided by the Flipkart are only projections or demand assumptions and does not constitute a binding purchase order under the Supply Agreement. Flipkart further contended that there can be no sale and supply of goods without PO. Flipkart also vehemently emphasised on the format of Section 9 Application, which is filed in the prescribed Form 5, under the Insolvency & Bankruptcy Code (Application to Adjudicating Authority Rules, 2016) (from now on referred to as Rules). The said Part – V of Form 5 mandates that relevant document under which the debt has become due must be annexed.

Flipkart further contended that the Operational Creditor’s claim does not qualify as an Operational debt. An operational debt can only arise against the provisions of goods and services. In the present case, the Operational Creditor has failed to substantiate the provision of goods or services, for which payment has remained outstanding instead Operational Creditor solely relying on presumptive order of Flipkart and losses/damages caused to the Operational Creditor due to the ‘presumption orders’. Thus, in the absence of any supply or without supply or sale and any document to substantiate the same, the Operational Creditor could not be treated as an Operational Creditor. Hence an Application under Section 9 of the Code would not be maintainable.

It is further said that there is no crystallization of claim there is no debt due or owed and default, which is the sine qua non for admission of under Section 9 of the Code.

Operational Creditor contended that to admit a petition under Section 9 the Code, the Adjudicating Authority had to ascertain existence of Operational Debt exceeding Rs.1,00,000/- (Rupees one lacs only); the debt is due and payable and has not been paid; in the absence of any dispute between the parties; the record of pendency of a suit or arbitration proceeding, before the receipt of demand notice, the petition has to be admitted. It is further said, in this case, there is no email or any other communication about the quality or quantity of the goods. The onus to show the existence of a dispute is wholly on the Corporate Debtor, which it has failed to discharge.

Operational Creditor has further contended that NCLT is not a forum for adjudication of the monetary claim as between the Operational Creditor and the Corporate Debtor, so it was not necessary that the exact due from the Corporate Debtor should have been finalised.

Rationale and Findings:

NCLAT while adjudicating the Moot Question noted that Operational Creditor gave the Demand Notice to Flipkart on account of breach on the part of Flipkart by not taking delivery of the LED TVs imported by the Operational Creditor for Flipkart. Due to failure of the Flipkart, Operational Creditor was forced to unload the uncollected LED TVs at heavy discount. NCLAT noted that, Operational Creditor had filed the petition based on the loss suffered by him on account of not taking the delivery of goods which were imported and shipped based on the assurance given by the Corporate Debtor. NCLAT also stated in its order that due to not taking the delivery of goods ordered, the Operational Creditor suffered a huge loss on account of this.

NCLAT also noted that the claim under Section 9 was not raised qua any supply of goods, as goods were never transferred to the Flipkart. Further for claim under Section 9 of the IBC, supply of goods or services is essential however in the instant case admittedly claim amount did not include any supply of goods.

ORDER:

NCLAT after analysing above held that Operational Creditor is seeking damages on account of Custom Charges; interest charges; interest amount; and loss on account non-taking of delivery of items imported based on the order and assurance of the Corporate Debtor which are not been crystallized, and the Adjudicating Authority under summary jurisdiction cannot adjudicate and determine the claim amount payable to the Operational Creditor. Therefore, claim towards losses and damages (umcrystallised) cannot form part of Operational Debt as the same require detailed trial and IBC being summary proceedings cannot entail such trial.

ANALYSIS OF THE JUDGEMENT:

Notably, in Swastika Enterprises. V Gammon India Ltd., (NCLT) (Mumbai Bench), 2018(146) SCL 744 it was held that “When the principal amount of Debt had admittedly been paid and duly accepted by the petitioner and the claim of Interest remained unsubstantiated in the absence of cogent evidence, the “Operational Debt” in question remained un-ascertainable. Resulting, the petition under section 9 of the code is not maintainable.”

Same was upheld in Wanbury Ltd. v Panacea Biotech Ktd. (2017) 141 Scl 578 wherein Adjudicating Authority Chandigarh held that “***Admittedly, the amount being paid by the appellant/petitioner from time to time was being regularly adjusted towards the principal only and the interest had accumulated for the amount claimed by the petitioner. Even the invoice filed along with winding up petition, did not contain any clause of payment of interest. The term of ‘interest’ is, thus, only a unilateral act of the petitioner/applicant. The petitioner’s counsel, however, vehemently contended that the interest can be determined by the Tribunal at the reasonable rate, as the petitioner was entitled can be interest in accordance to section 61 of the Sales of Goods Act and section 3 of the Interest Act. The Tribunal held that in view of the facts of the case the entire amount of the debt as per the intention of the legislature under the ‘code’ having been paid by way of cheques, the petition is to be rejected.”

That the present Flipkart judgment will bring losses and damages in same line as interest was, that is, if the said particulars are not quantified or crystallized in a transaction then same could not be part of or even considered as Operational Debt as defined under Sub-section 21 of Section 5 of the IBC.

It is interesting to note that the word “crystallized” do not find its mention in the Code but the same has been used by the NCLAT as test, to adjudicate operational creditor’s petition containing losses or damages or interest as operational debt. Though said word “crystallized” or word of similar import, find its mention under winding up provisions under erstwhile Companies Act, 1956 but said provisions do not find its places under new regime i.e. IBC.

Be that is may after this judgment losses, damages and interest can not be claimed under Section 9 of the Code Petition unless same is crystallized.

Authors are advocate at New Delhi and Managing Partner and Partner respectively at Indo Legal Services a boutique law firm in New Delhi.

Author Bio

Qualification: LL.B / Advocate
Company: Indo Legal Services LLP
Location: New Delhi, New Delhi, IN
Member Since: 18 Feb 2020 | Total Posts: 9
MR. GAURAV RANA(Advocate, CS) Mr. Rana, Advocate is a member of Bar Council Association of Delhi High Court, India and an Associate member of Institute of Company Secretaries of India. He has extensive experience in commercial litigation, arbitration and regularly argues at various fora. He advises View Full Profile

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One Comment

  1. NARESH SHAH says:

    Appreciate for precise analysis of judgment . The important findings of “The said Part – V of Form 5 mandates that relevant document under which the debt has become due must be annexed.” .Keep it up 👍🌹 NARESH SHAH : MUMBAI

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