The National Company Law Appellate Tribunal (NCLAT), New Delhi, Three-member bench comprising Justice Venugopal M., Judicial Member and Kanthi Narahari & V.P. Singh, Technical Members was hearing an Appeal where the Bech held that "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."
The instant Appeal was filed mainly on the following grounds (1) that the Impugned Order had been passed without appreciating the fact that the Operational Creditor had 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; (2) that the Adjudicating Authority had ignored the settled position of law that a claim for damages cannot amount to an operational debt; (3) that the Adjudicating Authority had 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 can‘t be treated to have committed default; (4) that the Adjudicating Authority had failed to determine, whether such an amount claimed, was due and payable, under the terms of the Supply Agreement.
The Appellant contended that the Respondent‘s claim did not qualify as an Operational debt. It was contended that an operational debt can only arise against the provisions of goods and services. In the present case, the Respondent No.1 had failed to substantiate the provision of goods or services, for which payment had 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.
The Appellant further raised the argument that the Operational Creditor – Respondent No.1 had failed to produce invoices, purchase orders or any documents to prove its claim and has filed a defective Application under Section 9. The figures provided by the Flipkart are only projections or demand assumptions and does not constitute a binding purchase order under the Supply Agreement. There exist a formal mechanism, under the Supply Agreement wherein a Corporate Debtor would issue a purchase order, against which the Operational Creditor was to issue an invoice and at the time of supply of goods, against which the amounts would become payable.
The Appellant further contended that there can be no sale and supply of goods without a purchase order. The Senior Counsel for the Appellant had 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. 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 had chosen only to produce the Supply Agreement and the projections emails, which by themselves can by no stretch of imagination constitute proof of debt.
The Counsel representing the Respondent No.1/ Operational Creditor vehemently argued that the statutory requirement is only to give demand notice of the unpaid operational debt. The submission of the invoice may be needed if the demand is made by way of an invoice demanding payment. It was 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.
Counsel for the Operational Creditor submitted 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 the present case, the operational creditor preferred for the first option; then in that situation, it is not required to send a copy of the invoice along with the Demand Notice.
The Appellate Authority observed that 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. The Regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides a list of documents which are to be submitted by the operational creditors before the Resolution Professional, for filing its claim.
On perusal of the above Regulation, it was clear that to 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. 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.
However, 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.
Thus, it is clear that the choice of issuance of demand notice u/s 8(1) of the Insolvency and Bankruptcy Code 2016, either in Form 3 or Form 4, under the Insolvency and Bankruptcy Code 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 Insolvency and Bankruptcy Code 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.
The Appellate Authority also made clear that for filing application u/s 9 of Insolvency and Bankruptcy Code 2016, in case the demand notice is delivered in Form 3 of Insolvency and Bankruptcy (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.
The Operational Creditor/Respondent No.1 placed reliance on the definition of 'claim‘ under the I&B Code and argued that since the term 'claim‘ has been used in the definition of the 'operational debt‘, thus, even if the claims are disputed, the Respondent No.1 would be an Operational Creditor. As per provision of Section 8(1) of the Code, an Operational Creditor can deliver a demand notice only upon the occurrence of a 'Default‘, which happens on non-payment of 'Debt‘. The word 'Debt‘ has been defined to mean a liability or obligation in respect of the claim, which is due from any person and includes a financial debt and operational debt. Even otherwise, mere failure to reply to the demand notice does not extinguish the rights of the Operational Creditor to show the existence of a pre-existing dispute. If there is no crystallization of the claim, there is no debt due or owed or default which the sine qua non for admission of an application under Section 9 of the Insolvency & Bankruptcy Code, 2016.
It was further stated in the notice that since the Corporate Debtor failed to pick up the balance quantity of the product exclusively imported for the Corporate Debtor based on the orders and assurances, therefore they have breached the terms of the agreement between the parties and have caused losses to the Operational Creditor. It also appeared that on account of the dispute mentioned above and differences between the parties, Operational Creditor invoked Clause 18 of the Supply Agreement, dated 29th December 2016 and thereby gave notice to the Corporate Debtor to settle the matter within 30 days, failing which the operational creditor would have proceeded for appointment of an Arbitrator.
On perusal of the above document, it was clear there was an existing dispute on 26th March 2018, i.e. before the initiation of CIRP. It was also apparent that the dispute between the parties was on account of not taking delivery of 21,808 TVs, which were imported by the Operational Creditor, based on the assurance by the Corporate Debtor. But the Corporate Debtor failed to pick up these goods. Therefore, the Operational Creditor sent the notice to the corporate debtor to make the payment within 30 days, failing which Operational Credit threatened to refer the dispute to Arbitral Tribunal.
The Appellate Authority observed that the Demand Notice issued under Section 8(1) of the Code against the Corporate Debtor in Form-3 was incomplete. It was also apparent that the Application filed in Form -5 under Rule 6(1) of the Adjudicating Authority Rules was also incomplete and the Operational Creditor had failed to produce invoices, purchase orders or any documents to prove its claim and had filed a defective Section 9 Application for initiation of Corporate Insolvency Resolution Process.
The Appellate tribunal further noted that It was also apparent from the record that Operational Debt can only arise against provisions of Goods or Services. In the present case, the Operational Creditor had failed to substantiate the provision of a single good or service for which payment had 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 had 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 was 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 corporate insolvency resolution process, as per law laid down by the Hon‘ble Supreme Court in the case of Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., REED 2017 SC 09545.
The Appellate Authority found that demand notice delivered under Section 8(1) of the Code was not proper and was also incomplete. The Operational Creditor failed to submit any documents to prove in existence of the Operational debt and the amount in default. The Operational Creditor also failed to submit the copy of invoices and copies of all the documents referred in the application to be submitted in Form 5, under Section 9 of the Code. The Operational Creditor has failed to submit the relevant documents under which the debt has become due. The Operational Creditor has only filed the copy of the Supply Agreement, and the projections email, which by themselves can by no stretch of the imagination constitute proof of debt. The Operational Creditor had not filed a copy of the bank statement. Instead of filing the relevant document, the Operational Creditor had solely placed reliance on a few emails to allege that he had suffered losses on account of projections for the demand provided by Flipkart. The figures provided by Flipkart were only projections that do not constitute the binding purchase order under the Supply Agreement. It is also clear that before issuance of demand notice, Operational Creditor had itself issued a notice against the Corporate Debtor with a request of making the payment within 30 days, failing which the dispute was said to be referred to the Arbitrator. This notice was withdrawn before issuance of demand notice under Section 8(1) of the Code. But by withdrawing the said notice, the dispute does not cease to exist. The entire claim of the Corporate Debtor is an uncrystallised claim which cannot be adjudicated by the Adjudicating Authority under summary jurisdiction.
In the circumstances, the Appellate Authority allowed the Appeal and the order passed by the AA was set aside.