Insolvency & BankruptcyNational Company Law Tribunal & NCLATForeign Entity can initiate Corporate Insolvency Resolution Process

August 21, 20200
National Company Law Tribunal, Mumbai
Forever Glory Trading Limited Vs. Global Power source (India) Limited
[C.P. (IB) 3735/NCLT/MB/2018] | Date: 03.06.2020
The Operation Creditor (“Petitioner”) is a company incorporated under laws of Angilla and is involved in supply of batteries, globally. The Petitioner had entered into an Agreement with the Corporate Debtor (“Respondent”), a company incorporated under the laws of India. Pursuant to the Agreement, the Petitioner had agreed to supply batteries to the Respondent.
Thereafter, a MoU dated 24.09.2015 was executed between the Respondent and  the Long Chang Battery Company Limited (“LCB”), the holding company of the Petitioner pertaining to warranty claims. As per the terms, warranty claims were to be raised on a monthly basis in the form of debit note in favour of LCB who would issue a credit note and the claim compensation would be set off from the outstanding amounts.
Thus, there were two separate concluded contracts, one dealing with the sale of batteries and other relating to warranty claims.
Disputes occurred when the Respondent failed to make payments towards orders. Even after numerous reminders via email, the Respondent continued to default in payment.
Consequently, the Parties entered into a Payment Agreement dated 15 June 2017 whereby the Respondent agreed to clear all the dues by September 2017 and settle invoices against warranty claim. Nonetheless, the Respondent failed to make payments as agreed under payment agreement also.
Further, on failure to honour the earlier Payment Agreement, they entered into a Secondary Payment Agreement on 11 October 2017 wherein the Respondent agreed to clear all the dues and settle invoices as against warranty claims.
The Respondent persistently failed to make payment and continued to commit defaults. Thus, the Petitioner filed an application under Section 9 of the Code to initiate Corporate Insolvency Resolution Process against the Respondent.
Whether an application filed by a foreign entity under section 9 of the Code to initiate Corporate Insolvency Resolution Process against the Corporate debtor is admissible?
The Tribunal perused the MoU, Purchase Agreement and Secondary Payment Agreement and established that there is a contractual liability of the Respondent towards the Petitioner, of being an unpaid seller.
The Tribunal opined that the claim of warranty is collateral to the main contract and is a separate contract between the Respondent and LCB. Warranty is defined under section 13(3) of Sale of Goods Act, 1930 as:
“A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.”
In the present case the warranty claim is covered under MOU and any dispute relating to warranty shall be considered separately by LCB. The Tribunal pointed that the Respondent submitted the dispute after the legal notice which clearly shows their malafide intention.
With regards to the competency of the Operational Creditor to file an application under Section 9 of the Code, the Tribunal held that such objection is not tenable in law. The Tribunal referred Section 3 (23) (g) and 3 (25) of the Code. Section 3 (23) defines a “person” to include a person resident outside India and Section 3 (25) defines “person resident outside India” as a person other than a person resident in India.
Accordingly, the Application filed under section 9 of the Insolvency and Bankruptcy Code for initiation of corporate insolvency resolution process against the corporate debtor was admitted.
The judgement of NCLT while continuing with its positive approach towards the code, has interpreted its provisions in a manner so as to make it more inclusive, accessible and far reaching.
The decision of the Tribunal is another step forward in increasing the accessibility and effectiveness of the Code for foreign creditors as well as was held by the Supreme Court in the case of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. The Supreme Court had held that the foreign creditor cannot be deprived of from the realm of the Code by virtue of its innate inability to abide by procedural requirements in the Code.
However, unlike the adjudication of the Apex Court, the Tribunal herein has rendered a restrictive finding with regards to the competency of foreign entity to initiate Corporate Insolvency Resolution Process and has not addressed the issue on substantial grounds.
The NCLT has merely settled that in view of Section 3(23) of the Code, even a foreign entity can file a petition for Initiation of Corporate Insolvency Resolution Process under Section 9 of the Code.
The Tribunal placed reliance on definition of warranty under Sale of Goods Act 1930 and held that contract of warranty constitutes a separate contract between a corporate debtor and an operational creditor and thus invocation of warranty claims cannot be set up as a pre-exiting dispute.
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