Enochian Designs vs M/s CMS Associates Private Limited

This is an application filed by the Applicant M/s Enochian Designs through proprietor Shahbaz Khan seeking to initiate corporate insolvency

resolution process (""CIRP"") under Section 9 of the Insolvency and Bankruptcy Code 2016 (""the Code') of the Respondent M/s CMS Associates

Private Limited for the alleged default on the part of the Respondent in clearing the debt of Rs. 1,10,71,443/- (Rupees One Crore Ten Lakh Seventy-

One Thousand Four hundred and Forty-Three rupees only) i.e., Principal amount of Rs. 59,92,372/-and Interest of Rs. 50,79,069, calculated till

February, 2020 as per MSME Regulations as alleged by the applicant, towards the material supplied and service provided by the Applicant. The details

of transactions leading to the filing of this application as averred by the Applicant are as follows:

i. The Applicant is engaged in the business of designing and manufacturing of clothing's, wearing apparels for various domestic and international

customers.

ii. That the Respondent sought the applicant to manufacture the goods for the orders of export received by the Respondent from various parties.

iii. The applicant submits that the quantity, rate per units were decided by the Respondent and were duly accepted. The applicant further submits that

the goods were manufactured and supplied to the Respondent after they were verified by the team of the Respondent.

iv. The Applicant submits that he raised bills upon the Respondent with respect to the goods supplied whereas, the Respondent delayed or defaulted in

making the payment of the outstanding amount. It was further submitted by the applicant that the Respondent is also liable to pay a sum of Rs.

26,60,000/- towards the goods manufactured against an order of 1,000 pieces lying ready for dispatch since, 23.07.2017.

v. That the applicant served a legal notice vide dated 16.08.2017 to the to the respondent to make the outstanding payment of Rs. 59,92,374/-.

vi. That in pursuant to the above legal notice the Respondent also served a legal notice dated 21.08.2017 raising a demand of Rs. 1,40,52,560/-. The

applicant alleges that the said notice is towards an unsubstantiated debt of Rs. 40,52,560/- and Rs. 1,00,00,000/- towards damage on account of loss of

business and other damages.

vii. The Applicant issued Demand Notice in the form of Form-3 under Section 8 of the Code read with Rule 5 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 dated 26.11.2019 calling upon the Respondent to clear the amount of default i.e., Rs. 87,59,230/-

(Including Interest of Rs. 27,58,856/-).

viii. The Respondent upon receipt of the Demand Notice replied to the applicant vide its reply dated 05.12.2019 stating that there is already a pre-

existing dispute with the applicant in respect to the quality of the goods supplied.

Consequent to the notice issued by this Tribunal, the Counsel for the Respondent filed its reply Affidavit on behalf of the Respondent stating that:

i. That the Respondent does not owe any amount as claimed by the applicant and alleges that it is the applicant who has supplied the defective goods

to the Respondent.

ii. The Respondent in its reply submits that in the year 2016-2017, the applicant supplied various defective goods to the respondent, which were further

rejected by the overseas buyer of the Respondent on account of bad quality and excessive delays leading to huge losses to the respondent.

iii. The Respondent further submits that the present application is not maintainable in terms of Notification being S.O., 1205(E) dated 24.03.2020

issued by Central Government under section 4 of Insolvency and Bankruptcy Code, 2016 whereby the Central Government has specified One Crore

Rupees as the minimum amount of default for the purpose of initiation of Corporate Insolvency Proceedings under section 7, 9, and 10 of IBC, 2016.

The Respondent submits that the Applicant fabricated various documents to bring the petition within the jurisdiction of this Hon'ble Tribunal.

iv. That the applicant sent demand notice dated 26.11.2019 claiming Rs. 87,59,230/- as amount in default which included a claim of Rs. 27,58,856/-

towards interest under MSME Act. The Respondent submits that the applicant was not an MSME on the dates of alleged transaction and there was

no contract of interest between the parties and the applicant calculated the interest at three times the bank rate announced by RBI in terms of section

15 of MSME Act. However, the Respondent further alleges that at the time of the filing of the present application the applicant removed/concealed

the said calculation sheet from the annexures to demand notice and filed a new calculation sheet whereby, the claim of interest was raised to Rs.

50,79,069/- from Rs. 27,58,856/- originally demanded in the demand notice so as to overcome the bar of jurisdiction.

v. The Respondent in his reply further alleges that the applicant has dishonestly concealed the pre-existing dispute in respect of various supplies and

the application is liable to be dismissed on the grounds of bar of limitation in respect of various claims pertaining to invoices of 2016 and early 2017.

The Counsel for the Applicant has filed its written submissions relying upon the following judgements in respect to the submissions made in the

application:

• That in M/s Thakran Web Innovations Pvt. Ltd. Vs Cyriac Njavally, IA No. 175/KOB/2020 in the Hon'ble NCLT, Kochi Bench has held that the

shelter under the Notification No. 1205 (E) applies to only those defaults arising on or after 25.03.2020. further the Applicant relies on the Judgement

of the Madhusudhan Tantia Vs Amit Choraria and another in company appeal (AT) (Insolvency) No. 557 of 2020 the Hon'ble NCLAT held that ""the

Notification dated 24.03.2020 of the Ministry of Corporate Affairs, Government of India, shall be considered as prospective and not retrospective and

the finding that there was no payment on the side of ""Corporate Debtor"" after receipt of Demand Notice, no pre-existing dispute also allege or proved

and ultimately admitting the application filed by the 2nd Respondent operational Creditor are free from legal infirmities.

• In another submission the applicant relied upon the judgement of M/s Ramky Infrastructure Private Limited Vs Micro and Small Enterprises

Facilitation Council and Anr. W.P.(c) 5004/2017 & CM No.21615/2017 the Hon'ble Delhi High Court has held that the protection provided under the

provision Micro, Small and Medium Enterprises Development Act, 2006 would be available to eligible enterprise even if not registered under the Act.

The applicant also relied upon the GE T&D India Ltd. Vs Reliable Engineering Projects and Marketing (2017 SCC Online Del 6978).

The counsel for the Respondent has filed its written submissions relying upon the following judgements in respect to the submissions made in the

reply:

• That the Hon'ble NCLAT in Madhusudhan Tantia Vs Anil Choraria While deciding the prospective/retrospective operation of the notification

dated 24.03.2020 has categorically held in para 57 of the judgement that ""57 Further, the said notification will not apply to the pending

applications filed before the concerned Adjudicating Authorities (Authorities), under IBC (waiting for admission) prior to the issuance of

the aforesaid notification, as applied by this Tribunal..."". The Respondent further states that the present application has not been filed before the

adjudicating authority prior to the issuance of notification dated 24.03.2020.

• The Respondent in respect to its submission regarding notice of dispute has relied upon the para 51 of Mobi lox Innovatins (P) Ltd. Vs. Kirusa

Software (P) Ltd. (2018) 1 SCC 353 that a""t the stage of admission of petition under section 9 of the IBC, 2016, all the adjudicating authority

is required to see is whether notice of dispute has been given to the operational creditor and whether there is a plausible contention which

requires further investigation and the dispute is not a patently feasible argument or assertion off act unsupported by evidence"".

We have heard the Ld. Counsels for the Operational Creditor and Corporate debtor and perused the averments made in the application as well as

the documents enclosed with the application.

Mere plain reading of the section 9 of IBC, 2016 shows that before initiating a proceeding under Section 9, a demand notice is required to be

delivered upon the Corporate Debtor and the Corporate Debtor after receipt of the demand notice is required to send the reply within 10 days from

the date of receipt of the demand notice. Now in the light of that provision, when we have considered the case in hand then we find, that a demand

notice was served by the Operational Creditor upon the Corporate Debtor vide dated 26.11.2019 and the reply to the same was sent by the Corporate

debtor vide dated 05.12.2019.

In the said reply to the demand notice the corporate debtor duly raised the issues regarding the quality of the goods supplied and the delayed

delivery of goods by the operational creditor, which was raised earlier as well through E-mails dated 06.07.2017, 14.02.2017, 20.07.2017, 25.07.2017,

27.07.2017, wherein the delay caused and inferior quality of goods were duly raised by the Corporate Debtor.

On perusal of Application as well as the documents enclosed, the E-mail communications between the operational creditor and the Corporate

Debtor clearly establish the fact that there was pre- existing dispute between both the parties. The E-mail communications trail starting from date

06.07.2017 between the Operational creditor and corporate debtor substantiate the fact that the goods supplied to the corporate debtor were of inferior

quality. That a legal notice dated 16.08.2017 was duly served by the Operational creditor to the corporate debtor for recovery of outstanding dues and

on perusal of reply to the same by the corporate debtor it can be seen that before filing the present application under section 9 of the IBC, 2016, there

was a pre-existing dispute between both the parties in respect to the quality and delayed delivery of the goods.

Here, in the case in hand, as it is seen that there is an existence of disputes raised by the Corporate Debtor prior to the issuance of the demand

notice, of course, by filing section 9 (3) (b), the Operational Creditor claimed that no notice of disputes has been raised by the Corporate Debtor but

for the reasons discussed above, we find that the affidavit shown by the Operational Creditor under Section 9 (3) (b) is not in consonance with the

averment made in the application filed by the Operational Creditor in which he claimed that the Corporate Debtor by filing the reply raised fresh

disputes with respect to the unpaid operational debts has already been sent to the Operational Creditor by Corporate Debtor prior to the issuance of

the demand notice.

Therefore, we held that the affidavit shown by the deponent under Section 9 (3) (b) is not correct, rather it is untrue statement given by the

Operational Creditor.

For the reasons discussed above, since there is a pre-existing dispute between the parties, we have therefore, no option but to reject the prayer of

the Operational Creditor to initiate proceedings under Section 9 of IBC, 2016.

Accordingly, we hereby dismiss the present application.