Prime Assetsource Pvt. Ltd vs Bodysculpt Healthclub Pvt. Ltd

Rajeswara Rao Vittanala, J

C.P (IB) No. 380/BB/2019 is filed by M/s. Prime Assetsource Pvt. Ltd., (hereinafter referred to as 'Petitioner/Operational Creditor) U/s 9 of the IBC, 2016, R/w Rule 6 of the I&B (Application to Adjudicating Authority) Rules, 2016, by inter alia seeking to initiate Corporate Insolvency Resolution Process (CIRP) in respect of M/s. Body sculpt Health club Pvt. Ltd., on the ground, that it has committed default for total amount of Rs. 63,15,924.24/- (Rupees Sixty Three Lakhs Fifteen Thousand Nine Hundred and Twenty Four and Twenty Four Paisa Only) along with interest at 21% p.a. till August 2019.

Brief facts of the case, as mentioned in the Company Petition, which are relevant to the issue in question, are as follows:

(1) M/s. Prime Assetsource Pvt. Ltd., (herein after referred to as Petitioner/Operational Creditor) bearing the CIN: U72200KA 2009PTC050135 and having its Registered Office situated at Level 1 to 4, 58/1, 13th Cross, Margosa Road, Malleshwaram, Bengaluru 560003. It is engaged in the business of renting out computer hardware, peripherals, furniture, Air Conditioners and other equipment's and products.

(2) M/s. Bodysculpt Healthclub Pvt. Ltd., (herein after referred to as Respondent/Corporate Debtor) was incorporated on 9.11.2011 having CIN: U74999KA2011PTC061108 and having its registered Office situated at No. 40/1 Century Corbel Commercial 2nd Floor, Shakaranagar Main Road, Sahakaranagar Bengaluru 560092. Its Nominal Share Capital is Rs. 1,00,00,000/- and that of Paid-up Share Capital is Rs. 1,00,00,000/-. It is engaged in the business of health club and fitness industry.

(3) Both the Parties have entered into three Master Equipment Rental Agreements from the year 2015 to 2016 for renting out various equipment to the Respondent Company based on the requirements of the Respondent. The Equipment's were duly rented out by the Applicant and the total values of invoices raised amounts to Rs. 2,27,68,068/-. Against the invoices raised, a sum of Rs. 1,79,55,128/- was received by the Applicant from the Respondent towards part payment of principal alone. A sum of Rs. 48,12,940/- is still outstanding as on date, from 06.06.2015, towards principal. The Respondent is also due to pay interest of Rs. 15,02,984.24 from 06.06.2015 till 31.08.2019, at the rate of 21% interest per annum. Subsequently, the Parties entered into negotiations regarding the Respondent's Liability to the Petitioner and arrived at a sum of Rs. 65,54,614/-, which the Respondent has agreed to pay to the Petitioner towards the principal and interest that would be payable till 30.11.2019 vide its letter dated 11.01.2019. However, the Respondent, till date, has not cleared the aforesaid amount due to the Petitioner. The Respondent has also not denied or disputed the services that were rendered by the Petitioner to them, which shows that the Respondent was completely satisfied with the services rendered to them by the Petitioner. Accordingly, the Respondent issued post-dated cheques payable from the month of January 2019 to August 2019 and those were dishonoured by the Respondent. Aggrieved by the same, appropriate legal proceedings have been initiated against the Respondents before the Hon'ble Chief Metropolitan Magistrate Court at Bengaluru and the same are pending adjudication.

(4) The Applicant has issued Demand Notice (Form 3) dated 03.06.2019 to the Respondent demanding to repay the outstanding amount due within 10 days from the date of receipt of the said notice, but there has been no reply from the Respondent, despite receipt of the Notice. Hence, the instant Application /Application.

The Respondent has filed its Statement of Objection dated 30.01.2020 and Memo of Factual Matrix dated 17.02.2020 by inter alia contending as follows:

(1) The Respondent had been put to multiple hardships by the claims made by the Applicant/Petitioner herein. The amount that was agreed to be paid was about Rs. 65 Lakhs (including Principal and interest) and part amount was already paid by the Respondent to the Applicant/Petitioner. And the aforesaid amount was agreed by both the Parties in January, 2019. The Application was filed in the month of May 2019 and during the said gestation period, multiple cheques were issued by the Respondent in favour of the Applicant to make the payment. Further the Respondent had already issued cheques for the remaining balance amount. The following is the table establishing the fact of repayment and the balance payment to be made:

Particulars

Amount Paid (In Rs. )

CC 21775/19

5,00,000

CC 22388/19

5,00,000

PCR 15573/19

20,70,845

CC 18199/2019

14,83,769

Total Repayment Made

45,54,614 (including principal and interest

Balance Amount Payable

20,00,000 (including principal and interest)

The Petitioner has already initiated to recover such balance amount through the cases filed under Section 138 of the Negotiable Instruments Act, 1881 and the issue is sub- judice. The aforesaid payments are done with respect to the claim of the Applicant, which is the subject matter of the Application. The following are the details of the cheques by virtue of which the Applicant is making the recovery from the Corporate Debtor through the aforesaid legal forum:

Particulars

Amount paid (In Rs. )

Status of the Case

Annexure

Axis Bank Cheque No. 689258 dated 30.04.2019

5,00,000

Withdrawn vide memo

Copies of order and

dated 29.01.2020

withdrawal memos enclosed

Axis Bank Cheque No. 689257 dated 31.03.2019

5,00,000

Withdrawn vide memo dated 29.01.2020

Copies of order and withdrawal memos enclosed

Axis Bank Cheques bearing a. Cheque No. 689259 b. Cheque No. 638334 c. Cheque No. 589260 d. Cheque No. 689261 dated 31.02.2019,04.06.2019, 30.06.2019 and 31.07.2019 respectively

20,70,845

Withdrawn vide memo dated 29.01.2020

Copies of order and withdrawal memos enclosed

Axis Bank Cheque No. 689255 dated 31.01.2019

14,83,769

Withdrawn vide memo dated 17.12.2019

Copies of order and withdrawal memos enclosed

(2) It is stated that the Applicant had not disclosed all the series of transactions and suppressed conveniently. The Applicant also had withdrawn the cases filed under Section 138 of the Negotiable instruments Act, 1881 upon the issuance of such cheques/Demand Drafts, the details of the said withdrawals of the cases are furnished below. Further, the Respondent is also willing to pay the aforesaid balance amount as follows:

SI. No.

Amount in Rs.

Date of Payment

1

Rs. 5,00,000

15th March, 2020

2

Rs. 5,00,000

30th March, 2020

3

Rs. 5,00,000

15th April, 2020

4

Rs. 5,00,000

30th April, 2020

(3) It is submitted that the Respondent made payments on behalf of two entities i.e. the Respondent Company and M/s. Aria Brew and Dine Private Limited(subject matter of another C.P. No. 399/BB/2019) owing to the fact the both the entities are controlled by same individual and have a common management. Upon observing the entity Digital waves International Private Limited, which had filed an Application against M/s. Aria Brew and Dine Private Limited is also in common management with the Applicant in the said case, the Applicant had issued cheques only in the favour of Digital waves International Private Limited corresponding to the outstanding amount in the present subject matter.

(4) It is alleged that the Applicant is charging exorbitant interest of about 21% which is not all specified in any of the terms and conditions appended to the services provided by the Applicant to the Respondent. The Applicant is only trying to make an unjust enrichment by claiming more amount and there is no proper rationale behind imposing such interest rate. The Corporate Debtor is adversely affected by the inflated interest rate charged by the Operational Creditor. It is alleged that the Applicant is trying to put up pressure on the Corporate Debtor by invoking the provisions of Code. The Corporate Debtor is a going concern and not an Insolvent Company. The provisions of the Code cannot be invoked as a recovery forum. The Respondent is a Solvent Company with about 50 employees and is continuously carrying out its business activities.

(5) Therefore, the instant Petition is not maintainable and liable to be dismissed.

Heard Shri Kanni Selvakarsan, learned Counsel for the Petitioner, and Shri Hari Babu Thota, learned PCS for the Respondent, through Video Conference. We have carefully perused the pleadings of both the Parties, and the extant provisions of the Code, the Rules made there under, and the law on the issue.

Shri Kanni Selvakarsan, learned Counsel for the Petitioner, while reiterating various contentions, as briefly stated supra, has further submitted that the Debt and Default in question are admittedly not in dispute, as part-payment of total invoice was also paid. The Respondent is mixing facts of two cases filed by the Petitioner against two entities being managed by the same management. The Respondent still liable to pay amount in question. Therefore, initiating CIRP is only remedy available for the Petitioner and thus urged the Adjudicating Authority to initiate CIRP as prayed for.

Shri Hari Babu Thota, learned PCS for the Respondent, on the other hand, by once again reiterating averments made in the statement of objections, as briefly stated supra, has further submitted that the Respondent has already paid part payment and for the remaining in question, they have issued cheques, and against dishonour of cheques, the Petitioner has already initiated proceedings U/s. 138 of N.I. Act, which is sub-judice. And the amount claimed by the Petitioner is same in both the said criminal proceedings and in the instant proceedings. Therefore, the Petitioner is resorting to multiple proceedings with an intention to recover for the same amount twice, which is nothing but abusing the provisions of Code. And this Adjudicating Authority cannot be used as recovery forum. He has also filed Addl. submissions dated 26.06.2020, by inter alia saying that the Respondent made payments on behalf of two entities viz., M/s. Bodysculpt Healthclub Pvt Ltd( the respondent herein & M/s. Aria Brew and Dine Private Limited (C.P.(IB) No. 399/BB/2019) owing to the fact that both the entitled are controlled by same individuals and have common management. And the Respondent also made payment to the associate Company of the Petitioner/Applicant owing to the fact that the management of Petitioners/Applicant Companies are also same. The present economic adverse situation prevailing in the Country due to outbreak of Novel Corona Virus may be also be taken into consideration as it has devastating financial effect on the Companies. Therefore, he has urged the Adjudicating Authority to dismiss the Petition in the interest of justice.

The Govt. of India by taking into consideration of present economic scenario due to epidemic has taken several mitigating steps to save the Companies from going into CIRP and then Liquidation. Accordingly, the Govt. of India, so far as provisions of Code is concerned, has increased threshold to initiate CIRP proceedings from the existing Rs. One lakhs to Rs. one Crores. Similarly, provisions of Sections 7, 9 and 10 of Code, are suspended temporarily. The Central Government has vide Notification No. S.O. 1205(E) : [F.N0.30/9/2020-INSOLVENCY], dated 24.3.2020, specified one crore rupees as the minimum amount of default. It is relevant to note that Section 4 refers to Part II of the the Insolvency and Bankruptcy Code, 2016which covers from Section 4 to Section 77. Therefore, Part II is not applicable in the instant case as the amount of default is less than one crore rupees. Moreover, Section 9(5) is under Part II which is not applicable as on this date, implying that the provision on admitting the application does not apply today. Further, Section 9(6) of the Code specifically provides that corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of Section 9. Though every amendment of Rule/Act, would normally will have prospective effect, nevertheless, the Adjudicating Authority is under legal responsibility to keep the above developments in mind, while deciding question of admission of a case. Since the issue involved in the instant is the question of admission and not dealing with admitted case, we have to keep in mind the above situation and changes made to the provisions of Code so as to balance the interest of all stake holders.

As detailed supra, the amount due on Invoices in question started from 06.06.2015, by clubbing all 60 Invoices, the Petitioner ultimately issued Demand Notice in Form-3, Under Rule 5 of the I&B (AAA) Rules, 2016, dated 03.06.2019, by inter alia demanding to pay the outstanding amount. As against the said invoices raised, admittedly part payment of Rs. 1,79,55,128/-, was received by the Petitioner from the Respondent. Accordingly, a sum of Rs. 48,12,940/- was stated to be outstanding amount as on 06.06.2015 from 05.12.2015, towards Principal amount. In the satisfaction of the amount, the Respondent also issued necessary post-dated cheques payable on a monthly basis, towards the same, and these post-dated cheques have been dishonoured by the Respondent, which resulted to initiating Criminal case, U/s. 138 of the Negotiable Instrument Act, 1881. The invoices arise out of three (3) Master Equipment Rental Agreement, and the claim is for the rental dues. The Petitioner also claimed 21% of interest per annum, without having any referred to either in the Agreements and Invoices in question. Even though notice was issued on 03.06.2019 demanding for the outstanding amount, which is due from June 2015 and the instant Company Petition was filed only on 23.09.2019 despite granting ten (10) days' time either to respond or to raise dispute. Therefore, the Petitioner has not explained the reasons for not initiating the CIRP, after ten (10) days of issuing of the Demand Notice, apart from the delay and laches for the claim made by the Petitioner in the instant Company Petition.

The Master Equipment Rental Agreements in question contains several terms and conditions, which includes refundable security deposits, Arbitration Clause under Clause 17.13, wherein, it is mentioned that any dispute or difference arising out of or in connection with this Agreement between the Parties, including any question regarding its existence, validity or termination (Dispute), the parties can settle the dispute by referring the matter to Arbitration in Bangalore, in accordance with the Arbitration Rules as laid down in the prevalent provisions of the Indian Arbitration Act, 1996, for the time being in force. Since cause of action and the dispute arise out of said Agreements, the Petitioner has not even made attempt to resolve their dispute either through mediation or Arbitration. Instead, it has resorted to initiating Criminal case for dishonouring the post-dated Cheques. By pursuing the criminal case for recovery of alleged due and receiving part payment, the Petitioner has, yet again resorted to invoking the provisions of Code in order to settle and recover the alleged dues. The facts and circumstances of the case clearly established that the Petitioner is using the provisions of Code with main object to recover the alleged due rather than to seek to initiate CIRP on. justified grounds. It is also relevant to point out here that role of Operational Creditor, who filed case U/s. 9 of the Code, will be nominal during the process of CIRP, and it is dominated by Financial Creditors. Therefore, the settled principle of law that provisions of Code cannot be invoked to recover alleged/disputed due, would be more applicable to the Operational Creditors rather than Financial Creditors, who filed cases U/s 7 of Code. Therefore, it is to be held that the Petitioner has invoked the provisions of Code with an intention to recover alleged due rather than to justify its case to initiate CIRP in terms of object of the Code. It is also relevant to point out here that legal principle of double jeopardy would also applicant to the instant case, as the Petitioner has admittedly invoked provisions of N.I Act for dishonour of cheques issued by the Respondent, which is sub-judice. Even the amount claimed is also not based on Invoices and in terms of the Agreements in question as the Petitioner is claiming an interest for Rs. 15,02,984.24/- apart from Principal amount of Rs. 48,12,940/-

The Adjudicating Authority cannot enter into above disputed issues, in summary proceedings as contemplated under provisions of Code.

It is settled position of law that the provisions of Code cannot be invoked for recovery of outstanding alleged amount(s). The Hon'ble Supreme Court in the case of Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited, (2018) 1 SCC 353 has inter alia, held that IBC, 2016 is not intended to be substitute to a recovery forum. In another latest judgment rendered in Transmission Corporation of A.P. Ltd. Vs. Equipment Conductors and Cables Ltd., (CA No. 9597 of 2018) dated 23rd October, 2018, (2018) 147 CLA 112 (SC) Supreme Court of India, it is inter alia held that existence of undisputed debt is sine qua non of initiating CIRP. As per para 34 of judgment, it is stated that Adjudicating Authority, while examining an application filed under Section 9 of the Code, will have to determine:

a) Whether there is an 'operational debt' as defined exceeding Rs. 1 Lakh?

b) Whether documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid?

c) Whether there is existence of dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before receipt of demand notice of the unpaid operational debt in relation to such dispute?

d) If any one of aforesaid conditions is lacking, the application would have to be rejected.

For the aforesaid reasons and circumstances of the case, we are of the considered opinion that the instant Company Petition is filed with an intention to recover the alleged outstanding amount rather than to seek initiation of CIRP in respect of the Corporate Debtor, which is against the object of the Code. The Petitioner cannot be permitted to bargain for settlement of alleged dues, in a case filed under Section 9 of Code.

In the result, C.P.(IB) No. 380/BB/2019 is hereby dismissed as not maintainable. However, this order will not come in the way of Parties to settle their disputes, and the Petitioner is also at liberty to invoke any other remedy available under any other law, which includes to prosecute the case filed under N.I Act. No order as to costs.