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Ministry eases deposit rules for Start-Ups- India

The Ministry of Corporate affairs (MCA) in consultation with the Reserve Bank of India (RBI) has issued a notification dated September 07, 2020, amending the Companies (Acceptance of Deposit) Rules, 2014 [1], in order to provide more flexibility to Start-Ups to raise funds, especially during the pandemic.

Also read Start-Up Funding in India

Key Highlights of Companies (Acceptance of Deposits) Amendment Rules, 2020

1).MCA amended the Companies (Acceptance of Deposits) Rules, 2014 to enable start-ups to raise funds through corporate bonds or other convertible instruments for “ten years”, as against the stipulated period of “five years” earlier;

2). Changes made in period of repayments: The period of repayment has also been changed from “five years” to “ten years”.

Rule 2(1) (c) (xvii) has been amended. Prior to amendment, Start-Ups could receive funding of up to INR 25 Lakh by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person. However, post the notified amendment, the period of repayment by Strat-Ups has been increased to “ten years” from the date of issue.

The amendment easing out deposit and repayment rules by Start-Ups is a welcome move. It comes as a sigh of relief for already distressed Start-Ups in India. The economic distress and slowdown caused by the COVID-19 outbreak have severely impaired the Start-Ups. To revive the economy, the Government has been announcing relief measures and the present move would certainly help in creating a conducive environment for Start-Ups and businesses to thrive in India.

Also read Impact of COVID-19 on Start-Ups

[1] http://www.mca.gov.in/Ministry/pdf/Rule_08092020.pdf.


The Ministry of Consumer Affairs released Draft Guidelines for Misleading Advertisements

Earlier, in the month of August 2020, the Ministry of Consumer Affairs (hereinafter referred to as ‘the Ministry’) announced that it will soon come up with draft guidelines aiming at regulating and keeping a check on misleading ads. Thereafter, the Ministry has released the draft guidelines taking its first step towards curbing misleading ads and with the aim of protecting the consumers, who may be exploited or affected by such advertisements.

The full regulation namely “Central Consumer Protection Authority (Prevention of the Misleading Advertisements and Necessary Due Diligence of Endorsement of Advertisements) Guidelines, 2020[1]” (hereinafter referred to as ‘Draft Guidelines’) has been released in the public domain for suggestions and comments. The Ministry has given a deadline September 18, 2020 for the public to send their suggestions, comments and objections to the Ministry.

About the Draft Guidelines

The aim of the Draft Guidelines is to check any misleading ads that may be harmful to the public interest. The Draft Guidelines established under the Consumer Protection Act, 2019 (hereinafter referred to as ‘Act 2019’) has set out the scope and applicability of the guidelines keeping in mind the aim of such a regulation. It states as follows:

3. Scope & Applicability. –

  • These guidelines cover all advertising/marketing communications regardless of form, format or medium.
  • These guidelines are applicable to the manufacturer/server providers whose products/services are subject of the advertising/marketing communications, as well as to advertisement agency and endorser (wherever applicable) of the product/service.”

Misleading Advertisements

A ‘misleading advertisement’ has been defined under the Act 2019 under Section 2(28 as:

“2. (28) “Misleading advertisement” in relation to any product or service, means an advertisement, which –

  1. falsely describes such product or service; or
  2. gives a false guarantee to, or is likely to mislead the consumers as to the nature, substance, quantity or quality of such product or service; or
  • conveys an express or implied representation which, if made by the manufacturer or seller or service provider thereof, would constitute an unfair trade practice; or
  1. deliberately conceals important information.”

The Draft Guidelines include that an advertisement should not be similar in terms of layout, slogans, music, visual presentation, etc., and should also be not similar to the previous advertisements that may have been published by another advertiser. Additionally, it mentions that the advertisement should not mislead the consumer about the product or service that is being advertised. Along with a list of elements for determining a valid advertisement[2], the Draft Guidelines also covers various types of advertising methods such as comparative advertising, bait advertising, and surrogate advertising, puffery in advertising. The Ministry has also made an effort at laying down duties and responsibilities of advertising players such as advertisers, advertising agencies and service providers. The guidelines not only focus on consumers in its general capacity but also focuses on consumers as children, in specific.

Provision for claiming a product to be free?

The Draft Guidelines has made an effort to focus on advertisements that may claim their product or service to be free. It clearly specifies that an advertisement may not claim its product or service to be free if the consumer has to pay any kind of amount other than the delivery cost of the product or a response to the advertisement. The guideline lays down certain circumstances that does not constitute for a product or service to be free. It states as follows;

“10. Free claims –

(3) An advertisement shall not describe a good or service as free if – :

  1. Consumers have to pay for packing, packaging, handling or administration of free good or service;
  2. The cost of response, including the price of a good or service that a consumer shall purchase to take advantage of the offer, has been increased, except where the increase results from factors that are unrelated to the cost of the promotion; or
  3. The quality or quantity of the good or service that a consumer shall purchase to take advantage of the offer has been reduced.”

In addition to this, the Ministry has also kept in mind the challenges pertaining to “your money is back” offers and has mentioned in the guidelines that advertisements shall not use terms such as “free trial” for offers that requires a non-refundable purchase.

Disclaimers[3]

The Ministry has taken due care of the disclaimers that may be attached with advertisements. As per the guidelines by the Ministry, any disclaimer that has a small font size in advertisements and comparative advertising and is not factual, will be considered to be misleading and may carry a penalty with it[4]. Moreover, disclaimers that are not easily noticeable or understandable to an ordinary consumer will also be referred to as misleading advertisements.

Endorsements

In addition to stating the essential components of a valid advertisements and defining types of advertisements, the Draft Guideline also includes provisions of endorsement of the content of the advertisement. It is stated that the honesty of statements and due diligence is to be made by an endorser in support of the advertisements[5]. This provision is more of a mandatory provision rather than directive. The Draft Guidelines has divided endorsements into three major provisions namely, honest statements by endorsers, personal use of products and consumer endorsement that also includes celebrity endorsement, and expert endorsements.

Connection between Draft Guidelines and Consumer Protection Act, 2019

The newly established Consumer Protection Act, 2019 (Act 2019) has highly emphasized upon ‘misleading advertisements’, so much so that the Act 2019 has particularly defined the term ‘misleading advertisement’. Keeping in mind the interest of the consumers, the legislation gives numerous powers to the Central Authority to investigate, search and seizes material subject to misleading ads. Therefore, to make such an offense even stricter, the Ministry has drafted the Draft Guidelines under the Act 2019 aiming to prevent unfair trade practices such as misleading claims by advertisers and that the related players such as the advertisers, endorsers, manufacturers, etc., do not exploit and violate the interests of the consumers.

The Ministry expects suggestions and objections from the public by September 18, 2020.

[1]https://consumeraffairs.nic.in/sites/default/files/file-uploads/latestnews/Draft%20guidelines%20for%20stakeholders%20consultation.pdf

[2] Guideline 4, Central Consumer Protection Authority (Prevention of the Misleading Advertisements and Necessary Due Diligence of Endorsement of Advertisements) Guidelines, 2020.

[3] Guideline 13, Central Consumer Protection Authority (Prevention of the Misleading Advertisements and Necessary Due Diligence of Endorsement of Advertisements) Guidelines, 2020.

[4] https://economictimes.indiatimes.com/industry/services/advertising/government-releases-draft-guidelines-on-advertising-to-treat-non-legible-disclaimers-as-misleading-ads/articleshow/77963604.cms?from=mdr

[5] Guideline 15, Central Consumer Protection Authority (Prevention of the Misleading Advertisements and Necessary Due Diligence of Endorsement of Advertisements) Guidelines, 2020.

Read more:

Consumer Protection Act, 2019 comes into force

Key Features of Consumer Protection Act, 2019

Rise in False and Misleading advertisements amidst Coronavirus Outbreak


Influencer Marketing Social Media- Misleading Advertisements Draft Guidelines

The Indian advertising market is growing by leaps and bounds and is projected to be one of the fastest growing ad markets in the world between 2018 to 2021[1]. The unparalleled reliance of consumers on advertising and the rise in digital advertising coupled with use of social media platforms has given way for influencer marketers or influencer marketing in India.

What is Influencer Marketing?

Influencer marketing is a tool used in digital or online marketing, wherein an Influencer through their content speak about the products or services of the advertiser on social media platforms, in such a way that the influencer can have an impact on the purchasing decisions of the customer.

Influencers are persons whose words have the capability of impacting the purchasing decisions of consumers and who have strong social media footprints. For instance, such Influencers would have several followers and a prominent presence on social media. At times the presence of such Influencers are targeted to specific products or services only. For instance, an influential interior designer may endorse products related to interior design on social media, a fashion model with strong social media presence may endorse products related to latest fashion and clothing on social media.

Considering the rampant use of social media by people of all ages, Influencer marketing has evolved as an indispensable tool of online marketing and advertising in India.

Influencer Marketing and Misleading Advertisements Draft Guidelines

The Ministry of Consumer Affairs has recently released the Central Consumer Protection Authority (Prevention of Misleading Advertisements and Necessary Due Diligence for Endorsement of Advertisements) (hereinafter referred to as “Draft Guidelines”).

Read more about the Draft Guidelines on Misleading Advertisements here.

The Guidelines have been drafted by the Ministry with the object to prevent false or misleading advertisements as well the due diligence to be carried out for endorsements. Thus, the Guidelines tightens the screw and suggest due diligence for endorsement of advertisements in India to mitigate instances of misleading advertisements.

Also read Rise in False and Misleading advertisements amidst Coronavirus outbreak

6 things Influencer Marketers need to know to avoid Legal Consequences

Guideline 15 of the Draft Guidelines enumerates the guidelines regarding Honesty of statements and due diligence to be made by an endorser in relation to advertisements. In order to avoid any legal implications and consequences pertaining to misleading advertisements, Influencer Marketers on social media platforms must confirm to the following Guidelines:

  1. That the endorser endorsing a product or service shall take due care to ensure that all descriptions, claims and comparisons that they endorse or that are made in advertisements they appear in are capable of being objectively ascertained and are capable of substantiation.
  2. That an advertising advice from an advertising agency or a legal opinion from an independent legal practitioners regarding honesty of advertisements will not be considered adequate if it is found that the endorser had knowledge that the endorsement would be false, misleading or deceptive.
  3. That where any endorsement of a product or service is made through a testimonial or representation of opinion or preference of the endorser, the endorsement shall reflect the genuine, reasonably current opinion of the endorser, and shall be based on either adequate information about or experience with the product or service being endorsed.
  4. That where any endorsement of a product or service represents that the endorser uses the endorsed product, the endorser shall have been a bona fide user of it at the time the endorsement was given
  5. That where an advertisement represents that the endorser is an expert with respect to the endorsement message, then the endorser’s qualifications shall in fact give the endorser the expertise that he is represented as possessing with respect to the endorsement.
  6. That an expert endorsement shall be supported by an actual exercise of that expertise in evaluating product features or characteristics with respect to which he is an expert and which are relevant to an ordinary consumer’s use of or experience with the product.

It cannot be denied that Digital Advertising and online marketing has catalyzed the incidences of misleading advertisements in India. The ease of accessibility of social media platforms on hand held devices and a wave of social media influencers is gradually rendering the conventional modes of advertisements redundant. Social media influencers are playing a major role in influencing minds of people and there have been several instances when people being influenced by influencer marketers on social media have been a victim of misleading advertisements. Hence, in such times the formulation of Guidelines which addresses the issue of misleading advertisements by endorsers is a welcome step as it exercises a strict check on the honesty of endorsements.

[1] https://www.statista.com/statistics/273288/advertising-spending-worldwide/


Appeals from NCDRC Orders in Execution Proceedings not Maintainable u/Consumer Protection Act

By Nihit Nagpal and Abhishek Butoliya

A right to appeal is not a natural or an inherent right rather it is a statutory right i.e. a right conferred by a Statute. Recently, the Hon’ble Supreme Court in M/s Ambience Infrastructure Private Limited (Now known as) Ambience Developers and Infrastructure Pvt Ltd and Another Vs. Ambience Island Apartment Owners and Others[1], while deciding an appeal filed by a real estate developer against the order passed by National Disputes Redressal Commission (NCDRC) in an execution proceeding has held that a civil appeal before the Supreme Court is not maintainable against the order of NCDRC passed in the course of Execution proceedings as the  right to appeal is not provided under The  Consumer Protection Act, 1986 ( referred as the ‘Act’).

Brief facts of the case

The controversy in this matter relates to a dispute between Real Estate company namely, Ambience Developers And Infrastructure Pvt. Ltd and the apartment owners association, namely, Ambience Island Apartment Owners. The apartment owners being aggrieved by the poor quality of elevators installed by the Appellants in their society had filed a consumer case before National Consumer Dispute Resolution Commission of New Delhi against deficiency in service provided by the Appellants. The NCDRC ruled in favor of the apartment owners and directed the Appellants to pay the Respondent 70% of the total maintenance charges from November 2002 with interest at 9 % per annum within 90 days or else at an enhanced rate of 12 % per annum.[2] Thereafter, to enforce the order of the Commission, execution proceedings were initiated before NCDRC. The NCDRC during execution proceedings passed an order dated November 03, 2015 wherein it arrived at a conclusion that as per the original order, the decretal amount would cover 66 persons and that the appellants are liable to pay 70 % of the total maintenance charges. Being aggrieved by the said order the Appellants filed a civil appeal before the Supreme Court challenging the impugned order passed by the NCDRC.

Appellant’s Submissions

The main grievance of the Appellants was that since the complaint before the NCDRC pertained only to the deficiency in service as regards the provision of elevators only, the order of the NCDRC directing the payment of 70% of the total maintenance amount (as opposed to 70 % of the maintenance charges collected for lifts) was contrary to the tenor of the complaint and the original order.

Respondent’s submissions

The Respondents took a preliminary objection with regards to the maintainability of the appeal filed by Appellants. The Respondent while referring to the provision of appeal as contained under Section 23[3] of The Consumer Protection Act, 1986 contended that an appeal under Section 23 lies against an order passed by the NCDRC in exercise of its jurisdiction under Section 21(a) (i)[4]. On a conjoint reading of both sections, it would emerge that an appeal under Section 23 would be maintainable against an order passed by NCDRC on a complaint where the value of the goods or services and compensation, if any, claimed, exceeds the prescribed threshold.

  • The Second objection taken by the Respondent was that that the Appellants had taken similar objections before the NCDRC during the execution proceedings. Further, the same objections were also taken by the Appellants in the review petition as well as in civil appeal, both of which were Hence, the Appellant was not entitled to agitate the same claims before the Supreme Court.

CONCLUSION

The Hon’ble Two- Judge Bench of the Supreme Court while dismissing the appeal made the following observations in the case:

  • The Apex Court noted that an appeal under Section 23 of the Consumer Protection Act would be maintainable against an order which has been passed by the NCDRC on a complaint where the value of the goods or services or compensation, if any, claimed, exceeds the threshold which is prescribed i.e. rupees one crore.
  • The Hon’ble Bench also made reference to the case of Karnataka Housing Board vs K.A. Nagamani[5], wherein the Hon’ble Court made a distinction between execution proceedings and original proceedings and held that the former was separate and independent.

Finally, the Hon’ble Court after examining the relevant statutory provisions i.e. Section 23 read with Section 21 of the Act held that a civil appeal against the order of NCDRC passed during execution proceedings shall not be maintainable as such a right is not conferred under The Consumer Protection Act, 1986.

Related Posts

Consumer Protection (E- Commerce) Rules, 2020 comes into force

Beneficiary is “consumer” under the Consumer Protection Act: SC

[1] Civil Appeal Nos 1213-1215 of 2017

[2] https://indiankanoon.org/doc/121914349/

[3] Section 23. Appeal.—Any person, aggrieved by an order made by the National Commission in exercise of its powers conferred by sub-clause (i) of clause (a) of Section 21, may prefer an appeal against such order to the Supreme Court within a period of thirty days from the date of the order:

Provided that the Supreme Court may entertain an appeal after the expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing it within that period:

[Provided further that no appeal by a person who is required to pay any amount in terms of an order of the National Commission shall be entertained by the Supreme Court unless that person has deposited in the prescribed manner fifty per cent. of that amount or rupees fifty thousand, whichever is less.]

[4]Section 21. Jurisdiction of the National Commission.—Subject to the other provisions of this Act, the National Commission shall have jurisdiction—

  • to entertain—
  • complaints where the value of the goods or services and compensation, if any, claimed exceeds 1[rupees one crore];

[5] (2019) 6 SCC 424


IBC THRESHOLD-WHETHER PROSPECTIVE IN NATURE?

By Vikrant Rana and Anuj Jhawar

Introduction

In the wake of COVID-19 pandemic, the Government of India vide Notification S.O. 1205(E) (“Notification”) dated March 24, 2020 raised the minimum threshold amount with respect to default in Corporate Insolvencies. Pursuant to Government’s notification, the threshold to initiate Corporate Insolvency Resolution Process (“CIRP”) has been raised to Rs. 1 Crore, from the earlier amount of Rs. 1 Lakh. However, one of the intrinsic issue that has arise post aforementioned notification is whether the notification effecting increase in threshold to trigger CIRP under the Insolvency and Bankruptcy Code, 2016 (IBC) is prospective or retrospective in nature.

Read Threshold Limit under IBC enhanced to INR 1 Crore

Corporate Insolvency Resolution Process (CIRP)- Meaning and Law

Corporate Insolvency Resolution Process (CIRP), as the term suggests is a procedure or mechanism under the Insolvency and Bankruptcy Code 2016, whereby financial creditor, operational creditor and the company itself can apply for initiation of insolvency proceedings conditional to minimum default amount i.e., 1 Crore.  Section 4 of the Code deals with the minimum threshold default amount and the same has been increased from Rs. 1 Lakh to Rs. 1 Crore as per the Notification released by the Government on March 24, 2020.

Interestingly, the above notification is a double edged sword for the apparent benefactors of the notification i.e., MSME’s, as on one hand it offers them protection and on other hand takes away their right to recover from big corporations. In view of rising concerns and speculations, the the Hon’ble National Company Law Tribunal (“NCLT”) in some of its recent judgments has rendered clarity on the issue- whether the modification in IBC threshold with respect to CIRP is prospective in nature?

Judicial pronouncements

M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited[1](NCLT Chennai- 2/6/20)

Facts:

Submissions by the Corporate Debtor/Applicant

The applicant contended that, as per the Notification vide S.O. 1205(E) dated March 24, 2020; the Government of India, raised the minimum threshold amount (under Section 4 of the Code) with respect to default in Corporate Insolvencies from Rs. 1 Lakh to Rs. 1 Crore. Corporate Debtor also asserted that, as the claim amount stated by Operational Creditor is less than the increased threshold i.e., Rs. 1 Crore, hence the order to commence CIRP under company petition IBA/1031/2019 should be quashed.

Submissions made by the Operational Creditor/ Respondent

The Operational Creditor in its counter, asserted that tribunal does not possess the power to recall or review the order passed on merits. Also, it was alleged by the Operational Creditor that, neither Section 420 of Companies Act, 2013 nor Rule 11 of NCLT Rules, 2016 confers power or authority upon NCLT to review or recall its orders.

Issues:

  1. Whether NCLT has the authority to recall the order passed on merits?
  2. Whether the notification dated March 24, 2020 is prospective or retrospective in nature?

In simple terms, whether the modified threshold to commence CIRP will be applicable to cases initiated prior to release of the Notification or not?

Judgment and Reasoning:

  • The Tribunal while adjudicating upon the issue of power of NCLT to recall the order passed, under Section 420 of Companies Act, 2013, relied upon various pronouncements such as, Peoples General Hospital vs. Alliance Industries[2], Dinesh Goyal v. DCB Bank Limited[3], Hero Exports v. K. Vasudevan[4]. The Tribunal observed that, the purported Section 420 of the Companies Act 2013 does not specifically confer power on any NCLT to recall or review any order(s) passed, but, at the same time permits and deals with rectification of records.
  • With respect to the prospective application and operation of the impugned notification, the Tribunal considered the verdict passed in the case of Bakul Cashew Co. vs. Sales Tax Officer Quilon,[5] wherein it was observed by the Supreme Court that only the Legislature has the power to make and amend laws and when any power is delegated by the legislature to any authority to notify any modification or alteration in a statute, the same power is limited and cannot be exercised retrospectively.
  • The Tribunal while shedding some light on the issue of prospective application of the Notification, relied upon Kirti Kapoor v. Union of India[6], in which issue relating to applicability (prospective or retrospective) of modification of the pecuniary limit under Section 1(4) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 from Rs. 10 Lakhs to Rs. 20 Lakhs, for filing an application for recovery of debts in the Debt Recovery Tribunal (DRT) by Banks and Financial Institutions had been discussed. The Division bench of Hon’ble Rajasthan High Court in Kirti Kapoor case[7] did not expressly hold the application of notification to be prospective in nature, but relied on the notion of ‘conditional legislation’ and sufficiently clarified the fact that, operation and application shall affect only future applicants, keeping in view the good belief of the respective applicants for recovery of debts.
  • The Tribunal also observed the nature of substantive and procedural laws and referred to the case of Hitendra Vishnu Thakur Ss ors. vs. State of Maharashtra & ors
  • Government exercising delegated legislative power and authority cannot act upon its discretion with respect to retrospective or prospective applicability– The Hon’ble Supreme Court in Indramaniyarelal Gupta v.W. R. Nath[9], Union of India v. Madan Gopal Kabra[10] and Allahabad High Court in the case of Modi Food Products Limited vs. Commissioner of Sales Tax, U. P[11] reiterated that legislature has the power to act retrospectively unless otherwise provided. But at the same time, Government exercising delegated legislative power and authority cannot act upon its discretion with respect to retrospective or prospective applicability. Power and authority of Parliament and delegated institutions, do not overlap. Legislature, being the maker of enactments and statutes, can confer retrospective effect while, Government exercising delegated powers, under such statutes, cannot lay its discretion or make laws retrospective unless mentioned expressly.
  • NCLT is a creation of legislature under a statute. It exercises delegated power, hence, the power to recall or review judicial enactments and statutes in not within the ambit of a Tribunal. In the present case, concerned Notification is issued by the Central Government and the provisions under which the same has been issued, does not confer power upon the Tribunal to act retrospectively.

CONCLUSION

In view of the recent observations made through judicial pronouncements and precedents it can be summed up that the Notification dated March 24, 2020 is prospective in nature. As far as the power to recall and review is concerned, the NCLT has been formed according to and under a statute and the same lacks the authority to act upon applicability and validity of enactments[12].

[1] MANU/NC/6868/2020

[2] Company Appeal 105/2018

[3] Company Appeal 702 of 2019

[4] CRP No. 499/2020

[5] MANU/SC/0410/1986

[6] Civil Writ Petition No. 21860/2018

[7] ibid

[8] MANU/SC/0526/1994

[9] MANU/SC/0066/1962

[10] MANU/SC/0053/1953

[11] MANU/UP/0171/1961

[12] Dr. Indramaniyarelal Gupta vs. W R Nath (1963 SC 274)


Unpaid Installments under Settlement Agreement Not Operational Debt under IBC

By Nihit Nagpal and Anuj Jhawar

In a recent case, the National Company Law Tribunal (“NCLT”), New Delhi in M/s Brand Reality Services Ltd. v. M/s Sir John Bakeries India Pvt. Ltd[1], has stated that an operational debt under Insolvency and Bankruptcy Code, 2016[2] (“the Code”) does not take account of unpaid installments under settlement agreement and that if the relationship between the parties to dispute is not of corporate debtor and operational creditor then, such other payment defaults would not come within the ambit of Insolvency and Bankruptcy Code, 2016 (Code).

Factual background

The Corporate Debtor approached the Operational Creditor for investing in a new retail opening and the Operational Creditor agreed to the same. On June 15, 2018, both the parties to dispute entered into an Account Settlement Agreement (“the Agreement”), wherein the Corporate Debtor agreed to pay Operational Creditor,  outstanding dues of over Rs. 33,940,00/ through postdated cheques-.

However, the Corporate Debtor failed to pay the agreed settled amount and continued to default on the payment. In 2019, the cheques issued by the Corporate Debtor were returned by the Bank to the Operational Creditor on the ground of ‘stop payment’.

The Operational Creditor subsequently sent a demand notice on April 30, 2019, but the Corporate Debtor replied to the notice after the expiration of prescribed time period under Section 8(2) of the Code i.e., 10 days from the date of receipt of notice.

Aggrieved by the breach of terms and conditions mentioned under the Agreement by the Corporate Debtor, the Operational Creditor filed the present application seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

Submissions made by the Corporate Debtor

The Corporate Debtor submitted that no debt was due or owed to the Operational Creditor in terms of the meaning of Operational Creditor, under Section 5(21) and Section 9 of the Code.  Furthermore, the Corporate Debtor contended that, payment had been settled on December 19, 2017 which the Operational Creditor did not divulge.

The Corporate Debtor also asserted that, in reply to the aforementioned demand notice, Corporate Debtor had raised and pointed out an objection on the subsistence of an issue/dispute. Subsequent to which the Operational Creditor was ordered to furnish all the important and significant documents. However, the Operational Creditor failed to  serve or furnish the same.

Judgment and analysis

  • The Tribunal observed that as per the terms and conditions of the settlement agreement, the concerned Corporate Debtor had paid the settlement sum of Rs. 21,66,511.00/- to the Operational Creditor. Hence, the present dispute was on further subsistence of liability or debt of Rs. 33,94,000.00/- as per the Agreement dated June 15, 2018; owed and payable to the concerned Operational Creditor.
  • The Hon’ble NCLT referred to the case of Delhi Control Devices(P) Ltd. vs. Fedders Electric and Engineering Ltd. (14.05.2019 – NCLT – Allahabad[3]) wherein it was ruled that unpaid installments under Settlement Agreement shall not be considered as debts within the meaning and ambit of Section 5(21) of the Code. Other relevant provisions such as Section 3(11) and Section 3(12) defining debt and default respectively were also adhered to, in order to ascertain if the said default in payment of installments could initiate CIRP. The Tribunal pointed out that in order to initiate CIRP under Section 9 of the Code, the Operational Creditor has to establish and demonstrate the default or non-payment of operational debt by the Corporate Debtor according to the definition of operational debt. As per Section 5(21) of the Code, operational debt means, a claim with regard to the supply and provision of products, goods or services. It also comprises employment or a debt, with regard to the payment of dues arising under any law for the time being in force and payable to the Central or any State Go
  • While referring to the facts and circumstances of the present case, the Tribunal was of the view that the application to commence CIRP under Section 9 of the Code was not based on the settlement agreement dated November 28, 2014 by which invoices/bills were raised by the Operational Creditor, but was based on the Settlement Agreement dated June 15, 2018, whose terms and conditions were contended to have been breached by the Corporate Debtor thereby leading to payment defaults and present petition. The NCLT thus observed that the concerned application was born out of breach of an agreement under which the parties to dispute do not share the relationship of corporate debtor and operational creditor. It was also held by the Tribunal thatthe failure to adhere to settlement agreement could not be a valid ground to commence CIRP under Section 9 of the Code.[4]
  • Additionally, the Tribunal also noted that NCLT was not a recovery Court/Tribunal and hence, the application made for recovery of dues owing to breach of the Settlement Agreement was liable to be dismissed.

In view of the Tribunal’s observations in the present case, it can be summed up that:

  • Unless the relationship between the parties to dispute is not of corporate debtor and operational creditor then, such other payment defaults would not come within the ambit of Insolvency and Bankruptcy Code.
  • An unpaid installment according to the settlement agreement cannot be termed as operational debt, as per the definition under Section 5(21) of the Code. Therefore, the contravention or breach of the Settlement Agreement cannot be considered as a valid ground to commence CIRP.

[1] MANU/NC/7776/2020

[2] https://www.indiacode.nic.in/bitstream/123456789/2154/1/A2016-31.pdf

[3] MANU/ND/7880/2019

[4] Delhi Control Devices(P) Ltd. vs. Fedders Electric and Engineering Ltd. (14.05.2019 – NCLT – Allahabad

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