Insolvency & Bankruptcy Code no replacement for a recovery forum

IBC no replacement for a recovery forum

The NCLAT concluded in the matter against Cosmic Export Solutions (India) Private Limited that since there was a dispute existing prior to the issuance of Section 8 notice, insolvency provisions could not be invoked

The National Company Law Appellate Tribunal (NCLAT) has set aside the Corporate Insolvency initiated against the Corporate Debtor - Cosmic Export Solutions (India) Private Limited.

Herein, the Appellant (Anuj Khanna) who was an Ex-Director had preferred this Appeal under section 61 of the Insolvency and Bankruptcy Code (I&B Code) challenging the impugned order passed by the National Company Law Tribunal/NCLT, Mumbai Bench (Adjudicating Authority). The Adjudicating Authority had initiated the CIRP of the Corporate Debtor by admitting the Operational Debt. Hence the present Appeal was preferred by the Appellant.

The Corporate Debtor had engaged the Respondent No. 1/Operational Creditor for its custom clearance services. The Corporate Debtor availed the services of the Operational Creditor from 2015 to 2019. The Operational Creditor filed a petition before the Adjudicating Authority, seeking to set in motion the Corporate Insolvency Resolution Process (CIRP) alleging that the Corporate Debtor committed a default in making a payment of Rs. 18,09,541 including interest at the rate of 24% p.a., by invoking the provisions of sections 8 and 9 of the I&B Code.

The Appellate Tribunal put forth that there was a dispute in existence prior to the issuance of the demand notice by the Operational Creditor. According to the NCLAT, the intent of the Legislature is very vital for interpreting any law, which can be well deduced from the words of section 8(2)(a) of the I&B Code 'existence of a dispute if any'. It can be inferred that the dispute shall not be limited to instances specified in the definition as provided under Section 5(6), as it has far arms, apart from pending suit or arbitration as provided under section 5(6) of the IBC.

Section 9 of the IBC makes it very clear for the Adjudicating Authority to admit the application, "if no notice of dispute is received by the Operational Creditor and there is no record of the dispute in the information utility." Whereas on the other hand, section 9 also directs the Adjudicating Authority to reject the application so filed "if the Operational Creditor has received a notice of a dispute from the Corporate Debtor."

The Appellate Tribunal further clarified that the Operational Creditor cannot take recourse that the payment if any made to the employees were in their personal capacity and not on account of the Operational Creditor. As it is a well settled principle under the Law of Agency that where an employee does some wrongful act within the course of his employment, then for that act, the employer's liability shall arise.

The employee would be liable for the wrongful act he has done, whereas the employer would be liable vicariously for the act due to the principal-agent relationship between the two. In that situation, the aggrieved person is at the choice whether to sue the principal or agent or both.

Therefore, a fraud committed by any of the employees of the Operational Creditor cannot be said to be done in their personal capacity.

As per the Appellate Tribunal, it was clear that the Operational Creditor had admitted before the Adjudicating Authority that the Corporate Debtor had made the payment of Rs. 14,17,000, saying that those payments were towards out-of-pocket expenses incurred during the process of custom clearing of the Corporate Debtor's goods. The onus to prove whether the payment was for out-of-pocket expenses or for main services lied on the Operational Creditor.

However, the Operational Creditor had considerably failed to prove whether such payment was received for out-of-pocket expenses or not as there was no written agreement stating such expenses to be paid by the Corporate Debtor.

It was concluded that since there was a dispute existing prior to the issuance of the Section 8 notice, the insolvency provisions could not be invoked. However, whether the amount of Rs. 14,17,000 was received by the Operational Creditor or not and whether the cheques which were returned dishonoured were issued by the Corporate Debtor as security or not and whether authority was given to the Corporate Debtor to make payments to the personal accounts of the employees of the Operational Debtor were disputed questions of law and facts and should be decided by the appropriate forum as the Adjudicating Authority cannot substitute the recovery forum.

The Appellate Tribunal disagreed with the observations made by the Adjudicating Authority and allowed the Appeal.