Whether or not, copy of the invoice is a mandatory requirement for issuance of demand notice u/s 8(1) of the Code, in Form 3 of the Adjudicating to Authority Rules 2016? -Neeraj Jain Director of M/s Flipkart India Private Limited Vs. Cloudwalker Streaming Technologies Private Limited -NCLAT

Case Reference

Case Citation : 132(IBC)98/2020
Case Name : Neeraj Jain Director of M/s Flipkart India Private Limited Vs. Cloudwalker Streaming Technologies Private Limited
Company Appeal : Company Appeal (AT) (Insolvency) No. 1354 of 2019
Company Appeal Ref. : Arising out of Impugned Order dated 24th October 2019 passed by the Hon‘ble National Company Law Tribunal, Bengaluru Bench, Bengaluru in C.P. (IB) No.260/BB/2019
Appellant : Neeraj Jain Director of M/s Flipkart India Private Limited
Respondent : Cloudwalker Streaming Technologies Private Limited
Respondent-II : Flipkart India Private Limited
Order Date : 24-Feb-20
Court/Bench : NCLAT New Delhi
Present for Appellant : Mr Kapil Sibal, Senior Advocate Mr Arun Kathpalia, Senior Advocate along with Ms Misha, Mr VaijayantPaliwal, Mr Nikhil Mathur, Mr Kauser Hussain, Ms Diksha Gupta and Ms Bani Brar, Advocates
Present for Respondents  : Mr Rajinder Kumar, Senior Advocate Mr Rajiv K. Garg, Mr Ajit, Mr Ashish Garg, Mr Govind Singh, Mr Hari Khurana and Mr Arjun Singh, Advocates for (R-1) Ms Anannya Ghosh, Mr Dushyant Manocha and Mr Brian Henry Moses, Advocates for Respondent (R-2)
Member (Judicial) : Justice Venugopal M.
Member (Technical) : Kanthi Narahari
Member (Technical) : V. P. Singh

 

Brief about the decision

NCLAT held that the choice of issuance of demand notice u/s 8(1) of the Code, either in Form 3 or Form 4, under the Application to Adjudicating Authority Rules 2016, depends on the nature of Operational Debt. Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice either Form 3 or Form 4, as per its convenience. The applicability of Form 3 or Form 4 depends on whether the invoices were generated during the course of transaction or not. It is also made clear that the copy of the invoice is not mandatory if the demand notice is issued in Form 3 of the Application to Adjudicating Authority Rules 2016 provided the documents to prove the existence of operational debt and the amount in default is attached with the application.

 

Facts of the case

This Appeal emanates from the Order passed by the Adjudicating Authority/NCLT Bengaluru Bench in C.P. (IB) No.260/BB/2019, whereby the Adjudicating Authority has admitted the Application for initiation of CIRP against the Corporate Debtor, filed under Section 9 of the Insolvency and Bankruptcy Code (in short Code) on 24.10.2019.

Operational Creditor

M/s Cloudwalker Streaming Technologies Pvt. Ltd

Corporate Debtor

M/s Flipkart India Private Limited

Director of Corporate Debtor

Neeraj Jain

 

The Company Petition No. CP (IB) No. 260/BB/2019 is filed by M/s Cloudwalker Streaming Technologies Pvt. Ltd., under Section 9 of the Code against the Corporate Debtor M/s Flipkart India Private Limited on the ground that it has committed default for an amount of Rs.26,95,00,000/-.

The Operational Creditor M/s Cloudwalker Streaming Technologies Private Limited contends that the Corporate Debtor Flipkart India Private Limited contacted the Operational Creditor and showed interest in selling its product of LED TVs. The Operational Creditor and Corporate Debtor subsequently entered into a Supply Agreement dated 29.12.2016. The Operational Creditor had been importing and supplying LED TVs to the Corporate Debtor from time to time, under purchase orders as per Clause 2(a) of the Supply Agreement placed by the Corporate Debtor, which provides for the manner of order placement. The Corporate Debtor used to place purchase orders through e-mails which were duly acknowledged by the Operational Creditor. After receiving the said purchase order, Operational Creditor used to import and procure the required quantities of LED TVs and deliver the same to the Corporate Debtor at its desired location.

The Corporate Debtor received delivery of the first few batches of LED TVs under the purchase orders dated 07.01.2017 and 16.01.2017 and made prompt delivery of the same. After that, the Corporate Debtor avoided taking delivery of the LED TVs on the ground of lack of warehouse space. The Operational Creditor, in good faith, warehoused the said LED TVs for a temporary period on behalf of the Corporate Debtor. There was no delay in the delivery of the said material. On the other hand, the Corporate Debtor delayed collecting the LED TVs, and in some instances did not collect them at all. In an attempt to gain more profit out of the goods ordered, the Corporate Debtor was putting pressure on the Operational Creditor to offer the already imported and warehoused LED TVs, at a discounted price. The Operation Creditor, facing huge losses and a liquidity crunch, agreed to offer the said discount, on the condition that the Corporate Debtor forthwith will take the delivery of the remaining LED TVs, purchased by it and will make payment for the same. The Operational Creditor had paid excess custom duties because LED TVs were still in the customs warehouse, as the Corporate Debtor had delayed in providing a delivery schedule. The Operational Creditor demanded the payment of the LED TVs procured and imported for the Corporate Debtor, from 11.10.2017 to 01.12.2017, based on the import and the purchase order issued by the Corporate Debtor. The Corporate Debtor had failed to collect more than 70% of the stock as ordered by them till March 2018.

The Operational Creditor has issued a demand notice under Form 3 dated 08.06.2019, under Section 8 of the Code which was received by the Corporate Debtor on 13.06.2019. However, there has been no reply to the same. The Corporate Debtor has not raised any dispute about the amount outstanding to the Operational Creditor at any point of time.

 

Adjudicating Authority decision

The Adjudicating the Authority has rejected the contention of the Corporate Debtor and held that there was no pre-existing or post existing dispute, and the petition is complete, as per the second proviso to Section 9 of the Code. It is further noted that despite service of demand notice, neither any payment was made by the Corporate Debtor, nor any notice of dispute was raised. Hence petition got admitted by the Impugned Order.

 

Grounds of Appeal before NCLAT

The instant Appeal is filed mainly on the following grounds:

  • that the Impugned Order has been passed without appreciating the fact that the Operational Creditor has not produced any documentary evidence, including but not limited to purchase orders, acceptance letters, invoices and proof of any intimation of sale to the end customers or any post-delivery services with specific reference to the amounts sought to be claimed by the Respondent;
  • that the Learned Adjudicating Authority has ignored the settled position of law that a claim for damages cannot amount to an operational debt;
  • that the Learned Adjudicating Authority has failed to appreciate that a mere claim for damages, does not even amount to “operational debt” within the meaning of the debt and so the Corporate Debtor cant be treated to have committed default;
  • that the Adjudicating Authority has failed to determine, whether such an amount claimed, was due and payable, under the terms of the Supply Agreement.

 

Question before the Appellate Tribunal

  1. Whether it is the discretion of the Operational Creditor, or the nature of the Operational Debt, that determines the issuance of notice in Form 3 or Form 4 under Sec 8 (1) of the Code?
  2. Whether or not, copy of the invoice is a mandatory requirement for issuance of demand notice u/s 8(1) of the Code, in Form 3 of the Insolvency and Bankruptcy (Adjudicating to Authority) Rules 2016?
  3. Whether or not for filing an application, u/s 9 of the Code in Form 5 under [sub-rule (1) of Rule 6] Insolvency and Bankruptcy (Adjudicating to Authority )Rules 2016, the submission of a copy of the invoice is a mandatory requirement, although the demand notice is served in Form 3?

 

Contention of the parties

1. The Corporate Debtor contention: The Appellants/Corporate Debtor contends:

  • that Operational Creditor had failed to provide any documentary evidence including but limited to purchase orders, invoices, proof of any intimation of sale to the end customers or any post-delivery services to substantiate its alleged claim, as is required before issuing a demand notice under Section 8(1) of the Code.
  • 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 M/s Flipkart India Private Limited. The figures provided by the Flipkart are only projections or “demand assumptions and does not constitute a binding purchase order under the Supply Agreement.
  • that 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) The said Part–V of Form 5 mandates that “relevant document under which the debt has become due must be annexed. To satisfy this requirement, the Operational Creditor has chosen only to produce the Supply Agreement and the projections emails, which by themselves can by no stretch of imagination constitute proof of debt.
  • that Part-V, Column 7 of Form 5 also mandates that a statement of the bank account where deposit or credit is normally received must be attached. The Operational Creditor has not attached even this bank statement. Though bank statement is a crucial document to establish, which amounts have been received, and lack thereof, merits rejection of Section 9 Application.
  • that the Respondents claim does not qualify as an Operational debt. It is contended that an operational debt can only arise against the provisions of goods and services. In the present case, the Respondent No.1 has failed to substantiate the provision of goods or services, for which payment has remained outstanding. In the absence of any supply or without supply or sale and any document to substantiate the same, the Respondent No.1 could not be treated as an Operational Creditor. Hence an Application under Section 9 of the Code would not be maintainable.

 

2. The Operational Creditor contention: Learned Sr. Counsel for the Respondent No.1 (Operational Creditor) contends:

  • that it is the discretion of the Operational Creditor, to either send the demand notice under Form 3 or send an invoice demanding payment of the amount due as per Form 4 of the Adjudicating Authority Rules, 2016. In case, the operational creditor prefers for the first option; then in that situation, it is not required to send a copy of the invoice along with the Demand Notice. It is further contended by him that if notice is sent in Form 3, then it is also not necessary to submit the invoice along with the Application in Form 5. It is further stated that if the demand notice is given in Form 3, then the invoice is not a mandatory requirement. But if the notice is given in Form 4, then only, copy of the invoice demanding payment is to be delivered to the corporate debtor.
  • if the demand notice is sent in Form 3, then the Operational Creditor has to submit the document to prove the existence of operational debt and the amount in default along with the notice. The said document may either be invoice or any other document to prove the existence of the operational debt and the amount in default. This situation may arise when the operational debt, is of such nature where no invoice is generated. For example, if an operational debt is relating to the salary dues of an employee, then, in that case, the operational creditor will not have any invoice
  • that copy of invoice/demand notice as noted in Form 3, is to be attached along with the application under Section 9 of the Code. Here the expression, “copy of invoice/demand notice” means that invoice raising the demand or demand notice is to be submitted as per the nature of the operational debt.

 

Appellate Tribunal(NCLAT) decision

1. Decision on question of law of the case:

  • The proforma of Form 3, mandates to mention the amount of debt; details of transactions on account of which debt fell due; and the date from which such debt fell due. In column 7 of the said proforma, the phrase, “List of documents attached to this application in order to prove the existence of operational debt and the amount in default” is provided. If the demand notice is sent in Form 3, then the Operational Creditor has to submit the document to prove the existence of operational debt and the amount in default along with the notice. The said document may either be invoice or any other document to prove the existence of the operational debt and the amount in default. This situation may arise when the operational debt, is of such nature where no invoice is generated. For example, if an operational debt is relating to the salary dues of an employee, then, in that case, the operational creditor will not have any invoice.
  • It is pertinent to mention that CIRP Regulation 7 provides a list of documents which are to be submitted by the operational creditors before the Resolution Professional, prove the existence of the operational debt; the operational creditor has to file its claim along with an invoice demanding payment for the goods and services supplied to the Corporate Debtor.
  • Annexure I of the Form 5 contains the phrase, “Copy of the invoice/demand notice” as in Form 3 of the Application to Adjudicating Authority Rules, 2016 served on the corporate debtor. Thus, it is clear that copy of invoice/demand notice as noted in Form 3, is to be attached along with the application under Section 9 of the Code. Here the expression, “copy of invoice/demand notice” means that invoice raising the demand or demand notice is to be submitted as per the nature of the operational debt. For example, in cases where the operational debt is like salary dues, there can be no invoice. In such a scenario, the demand notice delivered in Form 3 can be submitted along with the application. If the operational debt is of nature where the invoice is generated as part of the transaction, then in such cases the invoice becomes an essential document to prove the existence of the debt, and thus it has to be submitted. In case of operational debt where the transaction does not involve the generation of the invoice, then as per column 7 of Form 3, documents to prove the existence of operational debt and the amount in default are to be submitted along with the notice in Form 3. It cannot be the discretion of the Operational Creditor to deliver the Demand Notice in Form 3 even if the operational debt involves transactions where corresponding invoices are generated but are not filed in court on the pretext that the Operational Creditor has chosen to send the Notice in Form 3. The use of the phrase, deliver a demand notice of unpaid operational debt or copy of an invoice demanding payment of the amount involved in Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice in Form 3 or Form 4 as per its convenience. Rather, it depends directly on the nature of the operational debt and applicability of Form 3 or Form 4 as per the nature of the transaction.
  • It is important to mention that legislative provisions are made with a larger perspective to deal with all the eventualities that may arise in the implementation of the said provisions. Therefore, the use of the word “OR in Section 8 cannot be interpreted as such, that the Insolvency and Bankruptcy Code has provided a choice or a discretion to an Operational Creditor, to provide an escape route from submission of the invoice, which can be treated as the most relevant document to prove the debt and amount in default.
  • the choice of issuance of demand notice u/s 8(1) of the Code, either in Form 3 or Form 4, under the Application to Adjudicating Authority Rules 2016, depends on the nature of Operational Debt. Section 8(1) does not provide the Operational Creditor, with the discretion to send the demand notice either Form 3 or Form 4, as per its convenience. The applicability of Form 3 or Form 4 depends on whether the invoices were generated during the course of transaction or not. It is also made clear that the copy of the invoice is not mandatory if the demand notice is issued in Form 3 of the Application to Adjudicating Authority Rules 2016 provided the documents to prove the existence of operational debt and the amount in default is attached with the application.
  • It is also made clear that for filing application u/s 9 of the Code, in case the demand notice is delivered in Form 3 of Application to Adjudicating Authority Rules 2016, then the submission of a copy of the invoice along with the application in Form 5 is not a mandatory requirement, provided the documents to prove the existence of operational debt and the amount in default is attached with the application.

 

2. Decision on facts of the case:

  • It appears that in Form-3 Operational Creditor has only mentioned the total amount of debt without giving any detail of the debt. The list of documents which are attached to the Form-III Demand Notice contains only Supply Agreement dated 29th December 2016, Purchase Order/E-mail and computation of amount in tabular form. As per Proforma of Form-III, then Operational Creditor had to attach the documents with the Notice to prove the existence of Operational Debt and the amount in default. In this case, Operational Creditor has annexed Supply Agreement, Purchase Order E-mail and Computation of amount in a tabular form. These documents are not sufficient to prove the existence of Operation Debt and the amount in default.
  • To satisfy the requirement of Form-5, the Operational Creditor has chosen only to produce the Supply Agreement and the projection e-mails, which by themselves can by no stretch of the imagination, constitute proof of debt. In Part V, Row -7 of the Form-5 under the Rules also mandates that statement of Bank Account where the deposit is normally received, must be attached. Even this Bank Statement has not been attached by Operational Creditor. Keeping in mind the summary nature of the proceeding, the Bank Statement is a crucial document to help establish which amounts have been received and lack thereof merits rejection of Section 9 Application.
  • The Operational Creditor, instead of producing the relevant document, has solely placed reliance on a few e-mails to allege that it had suffered losses on account of projections for the demand provided by the corporate debtor. The figures provided by corporate debtor are only projections for the demands or demand assumptions and does not constitute a binding Purchase Order under the Supply Agreement. It is, for this reason, the Operational Creditor time and again requested the Corporate Debtor for issuing Purchase Orders to undertake the supply of goods.
  • it is clear that the Demand Notice issued under Section 8(1) of the Code against the Corporate Debtor in Form-3 was incomplete. It is also apparent that the Application filed in Form -5 under Rule 6(1) of the Adjudicating Authority Rules is also incomplete and the Operational Creditor has failed to produce invoices, purchase orders or any documents to prove its claim and has filed a defective Section 9 Application for initiation of CIRP.
  • It is also apparent from the record that Operational Debt can only arise against provisions of Goods or Services. In the present case, the Operational Creditor has failed to substantiate the provision of a single good or service for which payment has remained outstanding. In the facts of the present case, there can be no sale or supply of goods without a Purchase Order against which an Invoice has been raised. In the absence of any supply or sale and any document to substantiate the same, Respondent No. 1 cannot be the Operational Creditor. It appears from the record that the Respondent No. 1-Operational Creditor has filed this 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. It also appears that due to not taking the delivery of goods ordered, the Operational Creditor suffered a huge loss on account of this. Thus Operational Creditor issued notice as per Clause 18 of the Supply Agreement for making the payment within 30 days, failing which he threatened to refer the matter to the Arbitral Tribunal. The Operational Creditor has admitted this fact in its e-mail that the Corporate Debtor has failed to take delivery of about 21,808 LED TVs by which the Operational Creditor was forced to unload the uncollected goods at heavily marked down price.
  • It is pertinent to mention that before issuance of Demand Notice under Section 8(1) of the Code, the Operational Creditor issued a notice against the Corporate Debtor for making the payment within 30 days, failing which the Operational Creditor threatened to refer the dispute to Arbitral Tribunal. On perusal of the records, it appears that there is a pre-existing dispute, but the Operational Creditor withdrew the Notice issued by it on the pretext that the corporate debtor would try to settle the dispute amicably. After that, the Operational Creditor issued Notice under Section 8(1) of the Code and initiated action against the Corporate Debtor under Section 9 of the Code. Withdrawal of the said Notice does not mean that the dispute ceased to exist. The entire claim of the Operational Creditor is based on the loss caused to it on account of not taking delivery of 21,808 LED TVs which were imported and shipped on the assurance of the Corporate Debtor. Resultantly, Operational creditor suffered a huge loss and had to pay customs charges in addition to the normal customs duty and also suffered losses due to clearance of stock of uncollected LED TVs at heavily marked down prices. The loss to the Operational Creditor is not crystallized. The Adjudicating Authority exercising summary jurisdiction cannot determine the claim amount and initiate the CIRP, as per law laid down by the Honble Supreme Court in the case of “Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.“.

 

We set aside the impugned order dated 24.10.2019 passed by the Adjudicating Authority and the application filed under Section 9 by the Operational Creditor Cloudwalker Streaming Technologies Pvt Ltd., company petition –CP (IB)260/BB/2019 is Rejected. The Flipkart India Pvt Ltd (Corporate Debtor) is released from the CIRP. Interim Resolution Professional will handover the records and assets of the Corporate Debtor to the Promoter immediately, who will manage the Corporate Debtor. The Appeal is allowed with the aforesaid observations and directions. The Adjudicating Authority is directed to pass an order for payment of CIRP cost. The copy of the order may also be communicated to IBBI and Secretary, Ministry of Corporate Affairs for reconsideration of the format of Application in Form 5, under sub-rule (1) of Rule 6 of the Application to Adjudicating Authority Rules 2016.

 

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