CIRP Against Solvent, MSME Company Providing Employment Not Justified : NCLAT Delhi

Background Facts

M/s Agarwal Veneers ("Appellant") had filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") before the NCLT Ahmedabad Bench ("Adjudicating Authority"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against Fundtonic Service Pvt. Ltd. ("Respondent"). The Adjudicating Authority vide an order dated 29.09.2020 had rejected the petition while observing as follows:

1. That the Demand Notice issued under Section 8 of the IBC was issued by an advocate to whom no authority was given to issue such notice and there was nothing on record to show that the advocate was associated to the Appellant.
2. That the Respondent is a going concern and at present giving employment to 20 employees. Hence, it would defeat the very purpose of the IBC, if a going concern generating revenue, the employees and stakeholders are subject to the rigors of the CIRP.
3. That the Appellant had filed the petition as a tool of recovery mechanism which is not the objective of the IBC.
4. That the Respondent falls within the category of Micro, Small and Medium Enterprise (MSME) and CIRP proceedings against a going concern jeopardizing livelihood of several families is against the objectives of IBC.
5. That the Appellant had not produced on record documents like copy of the purchase order, delivery challan and a copy of bank statement showing that no payment is received from the corporate debtor towards the invoices raised to substantiate its claim.

Contentions Of Appellant

The Appellant contended that the Adjudicating Authority had overlooked the Principle laid down by the Supreme Court in Macquarie Bank Ltd. vs. Shilpi Cable Technologies Ltd., (2018) 2 SCC 674, wherein it was held that an advocate can issue the demand notice on behalf of its client. The MSME status of the Respondent could not have been a ground for dismissal of the petition, as Section 20 of the IBC clarifies that the objective of the IBC is not to put the Operational Creditor through rigours of the CIRP, but to maximize the value of assets of such persons, to promote entrepreneurship and balance the interest of all stakeholders.

It was argued that the Respondent had not disputed the supply of products or the invoices raised by the Appellant either before issuing the demand notice, or after receiving the same; and part payments were also made towards the invoices so raised. A copy of the certificate from the 'financial institutions' confirming that no payment of an unpaid operational debt has been received by a corporate debtor is not a condition precedent for triggering the CIRP. Section 9(3)(c) of the IBC was amended and the words 'by the Corporate Debtor, if available' was substituted, therefore these requirements were not mandatory.

Contentions Of The Respondent

The Respondent argued that the Appellant had not placed on record any purchase order, delivery challan or bank statements in support of its petition before the Adjudicating Authority. There can be no sale or supply of goods without a purchase order.

Further, the demand notices issued by the Appellant were never served on the Respondent and the same was pointed out in their 'Affidavit in Reply'. Further, the Respondent is a 'going concern' and an MSME with a sales turnover of Rs. 1,61,74,968/- and the petition preferred by the Appellant is only an attempt to recover the dues.

Decision Of The NCLAT

The Bench observed that a Demand Notice under Section 8 could be issued by an advocate. However, the Adjudicating Authority is empowered to reject an incomplete petition under Section 9 if a copy of the invoices, the bank statements and the financial accounts are not furnished alongwith it.

The Preamble of IBC describes its spirit and objective to be 'Reorganisation' and 'Insolvency Resolution', specifically omitting the word 'Recovery'. If IBC is purely used for the purpose of Debt Recovery, particularly when the amounts due are small, and the Company is a solvent entity and is a going concern, the question of 'Reorganising' or 'Resolution of the Company' does not arise.

Reliance was placed on the Supreme Court judgment in Vidarbha Industries Power Ltd. vs. Axis Bank Ltd., 2022 SCC Online SC 841, wherein was held that if there is a 'debt' and 'default', the Adjudicating Authority should use its discretion in admitting/ rejecting an Application.

The Bench upheld the order dated 29.09.2020 of the Adjudicating Authority and dismissed the appeal.

Case Title: M/s Agarwal Veneers v Fundtonic Service Pvt. Ltd., Company Appeal (AT) (Ins) No. 968 of 2020

Counsel For Appellant: Ms. Shweta Busar, Advocate.

Counsel For Respondents: Mr. Shivam C.S. Ganeshan, Advocate.

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