Shyamsunder Biyani v. ETC Agro Processing (India) Pvt. Ltd.
In the National Company Law Tribunal
CP (IB)/357/MB/2020
Before Mrs Anuradha Sanjay Bhatia, Technical Member and Mr Kuldip Kumar Kareer, Judicial Member
Decided on October 20, 2023

Relevancy of the case:  Validity of corporate insolvency resolution process while there is a pre-existing product quality dispute and allegations of criminal conspiracy for hacking and data theft

Statutes and Provisions Involved

• The Information Technology Act, 2000 (Section 43(d), 66)
• The Indian Penal Code, 1860 (Section 34, 406, 408, 420)
• The Code of Criminal Procedure, 1973 (Section 457)
• The Insolvency and Bankruptcy Code, 2016 (Section 5(21), 8, 9)
• The Insolvency and Bankruptcy Rules, 2016 (Rule 6)

Relevant Facts of the Case

• The operational creditor supplied raw materials, including Tur Dal, to the corporate debtor under a contract dated December 25, 2018.
• There were two invoices that the corporate debtor did not pay, as of April and May 2019, totalling ₹8.09 lakhs. Despite no quality dispute, the corporate debtor neglected to settle the invoices, leading to repeated reminders from the operational creditor.
• The corporate debtor terminated the contract on June 1, 2019. Clause 19 of the contract restricted the operational creditor from taking other orders during the contract period, resulting in substantial losses post-termination.
• The operational creditor claimed damages of ₹94.53 lakhs due to the termination of the contract. The operational creditor issued a Formal Demand Notice (Form 3) on December 11, 2019, seeking the total outstanding amount between March 22, 2019, and June 29, 2019. The corporate debtor responded on December 18, 2019, but did not make the necessary payments.
• Subsequently, the operational creditor initiated the Corporate Insolvency Resolution Process (CIRP) due to non-compliance by the corporate debtor. The operational creditor filed the present petition claiming a total outstanding amount of ₹2.30 crores, including processing revenue losses, pre-termination compensation, storage charges, GST, and associated interest and penalties.

Prominent Arguments by the Advocates

The operational creditor’s counsel:

• He submitted that his client issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016. Due to the corporate debtor’s non-compliance, the operational debtor has filed the present petition under Section 9, read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, to initiate the Corporate Insolvency Resolution Process against the Corporate Debtor.

The corporate debtor’s counsel:

• He argued that the operational debtor’s claims do not meet the definition of operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). These claims are in the nature of consequential damages and cannot be considered without adjudication.
• The dispute concerning two outstanding invoices, amounting to ₹9.09 lakhs, attributed to a quality issue, particularly the non-fulfilment of the yield rate clause. The operational creditor failed to deliver finished goods as per the yield rate, causing a total deficiency in processed pulses and substantial financial loss.
• In collusion with one of its employees, the corporate debtor accused the operational creditor of criminal conspiracy against the corporate debtor. Subsequently, the corporate debtor filed an FIR against the operational creditor and this employee for the offence punishable under Sections 34, 406, 408 and 420 of the Indian Penal Code, 1860 and Sections 43(d) and 66 of the Information Technology Act, 2000.

Opinion of the Bench

• There is a pre-existing dispute between the parties based on the differences in yield rate fulfilment.
• Further, the claims made by the operational creditor require adjudication by a competent court. As no court has done it, the corporate debtor cannot be subjected to CIRP.

Final Decision

• The bench dismissed the application.