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IBC Judgments: Flourish Paper Case

The document outlines three insolvency cases involving appeals against the initiation of Corporate Insolvency Resolution Processes (CIRP). In the first case, Deepak Gupta's appeal was dismissed as the NCLAT found no pre-existing disputes that would prevent the CIRP against RG Infra Build Pvt. Ltd. In the second case, Rakesh Kumar's appeal was also dismissed, with the NCLAT affirming the validity of the CIRP initiation against Suchi Paper Mills Ltd., while the third case resulted in the initiation of CIRP against Ado Additives MFG Private Limited, confirming the validity of the debt assignment.

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111 views5 pages

IBC Judgments: Flourish Paper Case

The document outlines three insolvency cases involving appeals against the initiation of Corporate Insolvency Resolution Processes (CIRP). In the first case, Deepak Gupta's appeal was dismissed as the NCLAT found no pre-existing disputes that would prevent the CIRP against RG Infra Build Pvt. Ltd. In the second case, Rakesh Kumar's appeal was also dismissed, with the NCLAT affirming the validity of the CIRP initiation against Suchi Paper Mills Ltd., while the third case resulted in the initiation of CIRP against Ado Additives MFG Private Limited, confirming the validity of the debt assignment.

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parichaya reddy
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© © All Rights Reserved
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CASE NOTES

2) Deepak Gupta Vs Ved Contracts Pvt. Ltd. & Ors. (Company Appeal (AT) (Insolvency)
Nos. 1262 of 2019)
Appellant: Deepak Gupta
Respondent: Ved Contracts Pvt. Ltd. (Operational Creditor) and others
In this case an appeal was filed by Deepak Gupta (Appellant) against Ved Contracts Pvt. [Link]
others before the National Company Law Appellate Tribunal (NCLAT) in New Delhi.
Facts:
Ved Contracts Pvt. Ltd., an Operational Creditor, filed an application under Section 9 of the
Insolvency and Bankruptcy Code, 2016 (I&B Code), seeking to initiate a Corporate Insolvency
Resolution Process (CIRP) against RG Infra Build Pvt. Ltd. (Corporate Debtor).The National
Company Law Tribunal (NCLT), New Delhi Bench, admitted the application by order dated
September 25, 2019.
Appellant's Arguments:
The Appellant argued that there were outstanding claims and counterclaims, with amounts
payable to the Corporate Debtor for three consecutive years. The Appellant suggested that these
issues should be adjudicated by the NCLT as part of the insolvency proceedings.
Tribunal's Decision
The NCLAT noted that the NCLT, while dealing with an application under Section 9 of the IBC,
is not required to adjudicate claims or counterclaims between the parties.
The tribunal referred to the Supreme Court's judgment in Innoventive Industries Ltd. v. ICICI
Bank and Anr. and pointed out that if an outstanding amount over ₹1,00,000 is found to be due,
the Section 9 application must be admitted, regardless of any pending claims or counterclaims.
The NCLAT found no evidence of a pre-existing dispute between the parties that would prevent
the initiation of CIRP. Thus, the appellant's arguments about disputed bills, joint inspections, or
other contract-related issues were deemed irrelevant
The NCLAT condoned the five-day delay in filing the appeal but ultimately dismissed it for lack
of merit. The tribunal upheld the NCLT’s decision and thus dismissed the appeal.

3) Rakesh Kumar vs. Flourish Paper & Chemicals Ltd. & Poorit Goyal (Company Appeal
(AT)(Insolvency) No. 1161 of 2022, I.A No. 4940 of 2022 & 2552, 2733 of 2023)
Facts of the Case
Appellant: Rakesh Kumar, the suspended director of (Suchi Paper Mills Ltd.)
Respondents: Flourish Paper & Chemicals Ltd. (Operational Creditor) and Poorit Goyal
(Interim Resolution Professional, or IRP, for Suchi Paper Mills Ltd.).
FACTS
Flourish Paper & Chemicals Ltd. (Respondent No. 1) supplied goods to Suchi Paper Mills Ltd.
(Corporate Debtor) from October to December 2016. The total debt allegedly outstanding was
Rs. 20,91,690, including interest. The Operational Creditor issued a demand notice under Section
8 of the Insolvency and Bankruptcy Code (IBC) on January 2, 2020, for the unpaid debt. In
response, the Corporate Debtor claimed damages of Rs. 25,00,000, alleging poor quality goods
supplied by the Operational Creditor. Flourish Paper & Chemicals Ltd. then filed a Section 9
application under the IBC to initiate the Corporate Insolvency Resolution Process (CIRP) for
Suchi Paper Mills Ltd., which was admitted by the National Company Law Tribunal (NCLT),
New Delhi, on September 12, 2022.
Appeal:
Rakesh Kumar, the suspended director, filed an appeal against the NCLT order, claiming a pre-
existing dispute regarding the quality of goods supplied.
Issues
1. Whether there was a pre-existing dispute between the Corporate Debtor and the
Operational Creditor over the quality of goods, which would impact the CIRP initiation.
2. Whether the NCLT order admitting the Corporate Debtor to CIRP was valid, given the
claims and counterclaims between the parties.
3. Whether the IRP should be allowed to proceed with CIRP and constitute a Committee of
Creditors (CoC).
4. Does Bank of Baroda, as a major lender, have the right to participate in the case because
of the money it has lent to the Corporate Debtor?
Contentions by the Parties
Appellant
The appellant argued that there was a pre-existing dispute over the poor quality of goods
supplied by the Operational Creditor and the Operational Creditor had issued credit notes
previously, which did not resolve the issue of defective goods supplied in [Link] appellant
asserted that the Corporate Debtor had even overpaid the Operational Creditor and that nothing
was due. They argued that the demand notice by the Operational Creditor was mala fide, and that
the addition of interest in the claim was never agreed upon.
Respondent No. 1 (Operational Creditor):
They argued that the pre-existing dispute was baseless and that the Corporate Debtor was using it
to avoid payment. They Claimed to have already credited the Corporate Debtor with Rs.
35,91,500 for poor-quality materials supplied in prior transactions. They contended that the
Corporate Debtor’s counterclaims were fabricated, with no genuine dispute to stop CIRP
proceedings.
Bank of Baroda (Intervenor):
The Bank of Baroda asserted that a significant financial interest in the Corporate Debtor, which
had been declared as a Non-Performing Asset (NPA) with an outstanding amount of over Rs. 37
crores and requested that CIRP proceeds to be furthered to protect creditor interests and prevent
preferential treatment to the Operational Creditor.
IRP
The IRP Submitted a need for cooperation from the Corporate Debtor’s management, which was
allegedly non-cooperative. They highlighted that claim amounting to Rs. 104 crores had been
received, and it was in the best interest of creditors to continue CIRP.
Judgment
NCLAT Decision:
The National Company Law Appellate Tribunal (NCLAT) considered the arguments and noted
the significant financial claims against the Corporate Debtor. NCLAT observed that the NCLT's
decision to admit the Section 9 application was valid given the evidence of unpaid operational
debt. The tribunal found no substantive grounds to support the claim of a pre-existing dispute
that would preclude the CIRP, especially as adjustments were made to the account based on prior
credits and debits, and the remaining sum was clearly unpaid. The appeal by the suspended
director was dismissed. The IRP was directed to proceed with the CIRP, allowing the constitution
of a Committee of Creditors (CoC) and further resolution steps as per IBC regulations.
3) Case Name: Korea Trade Insurance Corporation (Ksure) v. Ado Additives MFG Private
Limited (Company Petition (IB) No. 40/KB/2022)
Brief Facts
Korea Trade Insurance Corporation (Ksure), the Operational Creditor, filed an application under
Section 9 of the Insolvency and Bankruptcy Code, 2016, against Ado Additives MFG Private
Limited, the Corporate Debtor, seeking initiation of Corporate Insolvency Resolution Process
(CIRP). The claim arose when M/s Silk Road C&T, a Korean supplier, delivered goods to the
Corporate Debtor, issuing invoices worth USD 233,520. When the Corporate Debtor failed to
pay the outstanding amount, Silk Road assigned its claim to Ksure, which then sought payment
from Ado Additives but received only a partial payment. Ksure subsequently issued a demand
notice under Section 8, but Ado Additives failed to respond fully, leading to this application.
Issues
1. Whether there was a debt and default by the Corporate Debtor.
2. Whether the assignment of debt from M/s Silk Road C&T to Ksure was legally valid.
3. Whether any pre-existing dispute existed that would bar initiating CIRP.
Contentions by Both Parties
Operational Creditor (Ksure):
 Argued that the Corporate Debtor had acknowledged its debt and made a partial payment,
thereby confirming its liability.
 Claimed that the assignment from Silk Road C&T to Ksure was valid and legally
binding, giving Ksure the right to pursue the debt.
 Asserted that no pre-existing dispute existed, as Ado Additives had repeatedly
acknowledged its liability through emails.
Corporate Debtor (Ado Additives):
 Contended that the assignment was invalid, as there was no direct contract between Ksure
and Ado Additives, and that the power of attorney authorizing Ksure’s representative
lacked legal standing.
 Argued that there were pre-existing disputes concerning the quality and specifications of
goods supplied, disputing the validity of Ksure’s claim.
 Maintained that invoices named Silk Road C&T as the seller, questioning Ksure’s status
as the Operational Creditor.
Judgment
The Tribunal found:
 Debt and Default: The Corporate Debtor defaulted, as evidenced by unpaid invoices and
partial acknowledgment of liability through payment.
 Pre-existing Disputes: No pre-existing dispute was established, as the Corporate Debtor
failed to substantiate any quality or specification issues.
 Legality of Assignment: The Tribunal held that the assignment of debt from Silk Road
C&T to Ksure was valid. It referenced precedents where the validity of an assignment
could not be challenged in a summary insolvency proceeding, and the debtor’s liability
remains unchanged by the assignment.
Final Order: The Tribunal allowed the initiation of CIRP against Ado Additives MFG Private
Limited and rejected the Corporate Debtor’s objections on all counts.

Common questions

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In the cases presented, the claim of a pre-existing dispute plays a crucial role in determining the validity of initiating the Corporate Insolvency Resolution Process (CIRP). In Deepak Gupta Vs Ved Contracts Pvt. Ltd., the NCLAT found no evidence of a pre-existing dispute significant enough to derail the CIRP, dismissing arguments related to disputed bills . Similarly, in the case of Rakesh Kumar vs. Flourish Paper & Chemicals Ltd., despite the appellant's claim of a pre-existing dispute over poor-quality goods, NCLAT dismissed the appeal, noting adjustments accounted for previous credits and debits, and no substantive dispute prevented the CIRP . In Korea Trade Insurance Corporation v. Ado Additives, the tribunal did not find sufficient evidence of a pre-existing dispute regarding the quality and specifications of goods, allowing CIRP to proceed . Overall, unless a substantive ground of pre-existing dispute is established, CIRP initiation is generally upheld.

The NCLAT's decisions in the cases demonstrate its limited scope in insolvency matters by avoiding interruptions to CIRP initiation based on unsubstantiated disputes or undetermined counterclaims. In Deepak Gupta Vs Ved Contracts Pvt. Ltd., the NCLAT underscored that the NCLT need not adjudicate inter-party claims or counterclaims when outstanding debts exist above the threshold required by the IBC, reflecting the limited review scope . Similarly, in Rakesh Kumar vs. Flourish Paper & Chemicals, the NCLAT dismissed claims of pre-existing disputes due to lack of substantial evidence, directing a focus on ensuring the progression of the CIRP . These decisions illustrate that the NCLAT's role is primarily procedural, ensuring CIRP moves forward when statutory criteria are met, rather than delving into complex factual disputes.

Acknowledgment of outstanding debt significantly impacted the initiation of CIRP in the cases presented. In the Korea Trade Insurance Corporation v. Ado Additives case, the tribunal found that the Corporate Debtor's partial payments and acknowledgments of liability through emails confirmed the outstanding debt, bolstering the case for CIRP initiation . Similarly, in Rakesh Kumar vs. Flourish Paper & Chemicals, the tribunal noted significant financial claims and admitted the Section 9 application, indicating the acknowledgment of unpaid operational debts justified CIRP commencement . Across these cases, the acknowledgment of debt serves as a key determinant for initiating CIRP, despite any claims of disputes by the debtor.

Acceptance or failure to dispute a demand notice plays a crucial role in the CIRP process by solidifying the Operational Creditor's claim. In the Korea Trade Insurance Corporation v. Ado Additives case, the lack of a full response to the demand notice by Ado Additives served as a basis for establishing the absence of a pre-existing dispute, thereby facilitating CIRP initiation . In Rakesh Kumar vs. Flourish Paper & Chemicals Ltd., the tribunal accepted the demand notice's credibility despite arguments of malafide intent by the Operational Creditor, as adjustments had already accounted for prior issues, and no real dispute could forestall the CIRP . Thus, the acceptance or inadequate contest of demand notices solidified creditor claims, supporting CIRP commencement.

The validity of the assignment of debt played a crucial role in the Korea Trade Insurance Corporation v. Ado Additives case. Ksure, as the Operational Creditor, relied on the debt assignment from Silk Road C&T to initiate the CIRP. The Corporate Debtor contested this, arguing the assignment was invalid due to no direct contract and questioning the legal standing of Ksure's power of attorney . Despite these objections, the tribunal upheld the validity of the assignment, recognizing Ksure's right to pursue the debt. It reinforced its decision by referring to precedents that prevent challenging the validity of an assignment in summary insolvency proceedings, asserting that the debtor's liability remains unchanged by such assignments. Thus, the legality of the assignment was pivotal in allowing the CIRP to proceed .

In Deepak Gupta Vs Ved Contracts Pvt. Ltd., the NCLAT referred to the Supreme Court's judgment in the Innoventive Industries Ltd. v. ICICI Bank and Anr. case to guide its decision-making process. The NCLAT highlighted that when evaluating an application under Section 9 of the IBC, the existence of an outstanding operational debt over ₹1,00,000 mandates the initiation of CIRP, regardless of pending claims or counterclaims . This precedent helped the tribunal determine that they were not required to adjudicate ongoing claims or counterclaims, leading to a dismissal of the appellant's arguments, which were based on such grounds.

The NCLAT dismissed the appeal filed by Rakesh Kumar against Flourish Paper & Chemicals Ltd. because it found no substantive grounds to support the claim of a pre-existing dispute that would preclude the CIRP. Despite the appellant's assertions of poor-quality goods, the tribunal observed that adjustments were already made for prior credits and debits, indicating no unpaid debt remained. Furthermore, the evidence available did not substantiate the claim of a genuine dispute impacting the CIRP, leading to the dismissal and direction for the IRP to proceed with CIRP, including the formation of the Committee of Creditors .

The recognized financial interests of significant creditors like the Bank of Baroda had a noticeable impact on insolvency proceedings, as these interests needed consideration to protect broader creditor rights. In the Rakesh Kumar vs. Flourish Paper & Chemicals case, the NCLAT acknowledged the interests of the Bank of Baroda, a major lender with claims on the Corporate Debtor, thus impacting the tribunal's decision to continue the CIRP. The involvement of such prominent creditors highlights the necessity of including all stakeholders' interests in insolvency proceedings, often influencing the tribunal's direction towards a resolution that serves the collective creditor body .

The tribunal in Korea Trade Insurance Corporation v. Ado Additives justified the decision on the debt assignment's validity by stating that the assignment from Silk Road C&T to Ksure was legally valid and binding. It emphasized that the objections raised regarding the lack of a direct contract were insufficient in a summary insolvency proceeding. The tribunal referenced precedents that prevent challenging the legality of assignments in such contexts, reaffirming that the debtor's obligation remains unaffected by who holds the debt. This legal perspective was crucial in allowing the CIRP to proceed, demonstrating reliance on well-established legal principles governing debt assignments .

The significance of the Committee of Creditors (CoC) in the Rakesh Kumar vs. Flourish Paper & Chemicals Ltd. case lies in its role in managing and directing the Corporate Insolvency Resolution Process (CIRP). The NCLAT's decision to allow the interim resolution professional to proceed with forming the CoC underscored the tribunal's focus on enabling creditor-driven resolution frameworks that are central to the CIRP. The CoC is empowered to make critical decisions throughout the CIRP, reflecting its pivotal role in achieving an effective insolvency resolution .

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