TMI Blog2019 (7) TMI 1669X X X X Extracts X X X X X X X X Extracts X X X X ..... t for claim by the Resolution Professional. The summum bonum is that whenever the issue of set off or cross- claims is to be settled the first step expected to be examined is the nexus between the two rival claims. As far the facts of the present case are concerned, the nexus between the goods supplied and expenditure directly incurred in respect of those very goods supplied can only be appropriate for adjustment against each other. Although the calculation is on record, as also referred supra, but both the sides are at liberty to verify the nexus and can revise the figures of cross-claims. Needless to mention again, to carry out the swapping of stock versus payment a direction is already incorporated in this Order. The main objection of the Resolution Professional is that the expenditure incurred for protection of goods whether to be borne by intervener or to be treated as a CIRP cost. At this juncture, it is also worth to place on record that none of the party has made out a case that the goods in question be declared as essential goods or services. Therefore, it cannot be held that the intervener should not stop or terminate or suspend the supply of raw material. Appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m period. 3. The admitted factual position as narrated in this application was that a Bailor and Bailee Agreement was executed on 01.05.2018 between Orbit Lifesciences Pvt. Ltd. (Intervener) on one hand and on the other hand, Parabolic Drugs Pvt. Ltd., (Corporate Debtor). Since the CIRP had commenced vide order dated 30.08.2018, therefore, this agreement was undisputedly executed before the commencement of CIRP. It was agreed upon between the parties that the Intervener would provide raw material to the Corporate Debtor to carry out manufacturing activity. Therefore, under the said bailment agreement, the Corporate Debtor was holding the stock received from the Intervener (Bailor) purely as a Bailee . Relevant portion of the Bailment Agreement for ready reference has been reproduced in the petition as under:- subject to the terms and conditions of this Agreement Bailor hereby entrusts the Manufacture of Product to Bailee. Until the conversion of the raw materials into Product and until the possession of the goods has been restored with Bailor, Bailee would hold the stocks received from Bailor under the terms of this agreement purely as a Bailee and would have no rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing chemical in nature. To protect the stock, the Intervener had made a request to the Resolution Professional for removal of the raw material on number of occasions, but was not allowed. No information was received giving reasons for declining the permission for removal of the raw material. 9. It has been brought to the notice of the Intervener that a stock auditor had been appointed to verify the position of the stock lying with the Corporate Debtor s plant. According to the applicant, the Resolution Professional as well as Committee of Creditors has erred in declining the lifting of the impugned raw material. The said stock is not an asset of the Corporate Debtor. It was agreed by the Corporate Debtor, which can be verified from the financial statements of the Corporate Debtor. 10. A legal argument has been raised that in a situation when the raw material does not constitute the property of the Corporate Debtor, therefore, the clauses of Moratorium has no role to play. The raw material is highly degradable, therefore, it is required to be released immediately. The Resolution Professional had even erred in rejecting the impugned difference amount. 11 . A reply has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f liability infested upon the Intervener/applicant, the stocks being in physical possession of the Corporate Debtor need not be disturbed, vehemently pleaded. 14. In the rejoinder-affidavit, the Intervener has mostly reiterated those very facts as already stated in the main petition. By referring to the provisions of Section 18 of the Code, it is pleaded that although the Interim Resolution Professional can take control and custody of the asset, but it was restricted over those assets on which the Corporate Debtor has ownership rights. It is also required that the ownership rights should also be recorded in the balance sheet of the Corporate Debtor. Further referred Explanation incorporated below Sec. 18 of the I B Code. As per the said Explanation it is provided that the assets owned by a third party but in possession of the Corporate Debtor under Contractual Arrangement, is not to be included for the purpose of implementation of Section 18(1)(f) of the Code. As a consequence, the Resolution Professional/Committee of Creditors has no right to withhold the stock in question, undisputedly owned by the Intervener. The Bailee/Corporate Debtor had withheld the goods merely in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt ; in the matter of Weather Makers Pvt. Ltd. Versus Parabolic Drugs Ltd. wherein a view was expressed that since the raw material was supplied under a contractual arrangement, therefore, the provisions of Explanation annexed to Section 18 of the Code should apply. In the said case, it was ordered that the applicant was entitled to take back the property from the possession of the Resolution Professional. The findings for ready reference are reproduced below:- 9. Heard the rival submission and perused the records of the case. One of the facts is not in dispute that the Applicant had supplied raw material which is in possession of the Corporate Debtor, now under insolvency, hence controlled by the appointed Ld. Resolution Professional. The Applicant has expressed an apprehension that the raw material being a chemical, is perishable in nature, hence requires to be protected before it expires or gets destroyed by any chemical reaction. 9.1 In the light of the factual matrix narrated above, a legal question has been raised that whether the raw material in possession of the Corporate Debtor, should not be allowed to be returned on commencement of Moratorium ? On one hand th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sun Pharmaceutical Ltd. has supplied the raw material which is in possession of the Corporate Debtor i.e. Parabolic Drugs Ltd. should be released without delay being perishable in nature, following section 18(1)(f) r/w Explanation. 11. A question is to be answered that what are the areas of operation of Sec. 14 vis-a-vis Sec. 18 of IBC. A fine distinction is available between these two enactments. The area of operation of Sec. 14 is in respect of property which is occupied or in possession of the Corporate Debtor. The property as defined U/s 3(27) of the Code includes money, goods, land, actionable claims etc. If the property as defined in Sec. 3 is in possession of the Corporate Debtor, then such property cannot be recovered from the Corporate Debtor by the owner of the property on commencement of Moratorium. This is the general rule through which the Corporate Insolvency Resolution Process proceedings are being triggered on admission of an insolvency petition. Under the insolvency Code, later on an exception is provided U/s 18 (Explanation) against this general rule. However, the area of operation of Sec. 18 is distinct from Sec. 14. There is a fine distinction as appearing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These details are annexed on Page 17 and 18 of the Affidavit filed by the Resolution Professional. 18 . The question of such set- off has been decided in one of the latest case of Bharti Airtel Limited and Bharti Hexacom Limited Vs. Vijaykumar V. Iyer Resolution Professional, in the matters of Dishnet Wireless Limited [CP 302/2018] Aircel Limited [CP 298/2018] Corporate Debtors MA 230/2019 in CPNo.302/IBC/NCLT/MB/MAH/2018 MA 219/2019 in CP No. 298/IBC/NCLT/MB/MAH/2018 Order dated 01.05.2019. Although this decision could not be confronted to the parties and discussed while deciding this Miscellaneous Application but referred herein only for the purpose of citing the ratio decidendi laid down therein as follows:- 22. In the foregoing paragraphs, the basic principles of set-off as per prevalent accounting principles are discussed and noticed that the Hon ble Courts have almost unanimously taken a view that in mutual dealings among the same parties it is fair and reasonable to allow for netting off or set-off of the mutual debts and credits with each other so as to arrive at a net figure for settlement of accounts. In the light of this background it is now pertinent to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the said huge liability without analysing the benefit of set-off of credit amounts. To make myself clear it is necessary that a Resolution Applicant must be aware of the correct outstanding balances appearing on the date of commencement of Insolvency in the Balance Sheet of a Corporate Debtor. It is necessary to communicate to Resolution Applicant a true and correct picture of outstanding balances in the Balance Sheet, ought to be net balances and not the gross balances. Only then a Resolution Applicant can be sure about his money position that the proposed plan is economically viable to him. Rather, it is required to make the law clear and unambiguous that there ought not to be any controversy whether a gross or a net amount is to be taken into account for submission of a Resolution Plan. While deciding this type of issue if the Tribunal leave a scope of indecisiveness the same shall mar the effective and quick implementation of the provisions of this Code. 22.2 The above view is also to be examined in the light of few other provisions of The Code which are in operation during Corporate Insolvency Resolution Process. One of such Section is 18(1)(f) of The Insolvency Code whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Airtel Entities, although not in direct control/ possession of the Corporate Debtor but out of the ambits of Section 18(1)(f), being an asset under contractual obligation of payment by the Corporate Debtor to the Operational Creditor. Interestingly, the language of Explanation (a) and the language of Section 14(1)(d) are very much identical. On co-joint reading of these two sections a message is conveyed that if an asset is in possession of the Corporate Debtor then in spite of the applicability of Moratorium , if that asset came into existence out of a contractual obligation then setoff or adjustment is required to be allowed so that the Resolution Professional be not entitled to take control over such an asset. In the recent past a problem was posed to NCLT, Chandigarh Bench in the case of Weather Makers Pvt. Ltd. v/s. Parabolic Drugs Ltd. [CA 206/2019in CP 102/CHD/2018], order dated 26.04.2019, that a perishable stock is supplied to the Corporate Debtor hence in possession of the Resolution Professional, who has denied to return the said stock back to the claimant on the ground of commencement of Moratorium but the NCLT Bench, Chandigarh has taken a view that an adjustment ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular Operational Creditor. This method of inter se adjustment ought to be available to all other Creditors (Financial/ Operational), naturally if an amount is available for mutual adjustment. 24. While reading the judgment of Swiss Ribbons we have noticed that at the time of filing of Resolution Plan, the Resolution Applicant is to take into account the amount of set-off in terms of Section 30(2)(b) of The Code, which provides that: for the repayments of the debts of operational creditor shall not be less than the amount to be paid to the operational creditor in the event of liquidation of the Corporate Debtor U/s 53 of the Code. Interestingly, it is made clear in Section 30(2) that the Resolution Professional shall examine Resolution Plan and confirm that such Resolution Plan wherein made a provision for the payment of the debts of Operational Creditors which shall not be less than the amount to be paid to the Operational Creditors in the event of a Liquidation of the Corporate Debtor u/s 53 of the Insolvency Code. Therefore, the argument of the Respondents ( Aircel ) that set off is the subject matter at the stage of Liquidation and not at this stage, is not sustainable. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding such disputes revolving around claim or counter claim or set off, it is expected to give due regards to this term mutual dealings . The scope of this terminology is wide, which must not be applied in restrictive manner. 27. Before I part with, it is necessary to place an important feature as appearing in Form B which is meant for submission of claim by operational creditor wherein as per clause 8 of the Form the details of mutual credit, mutual debit between the Corporate Debtor and creditor are required to be informed which may be arrived by set off against the claim. The amount of claim in Form B is not the gross amount to be furnished by Operational Creditor but only the amount after set off against respective claims. As a result, a conclusion can be drawn that the submission of Form B by Airtel Entity has given an entitlement of netting off the amount. Emphasis given. 19. The summum bonum is that whenever the issue of set off or cross- claims is to be settled the first step expected to be examined is the nexus between the two rival claims. As far the facts of the present case are concerned, the nexus between the goods supplied and expenditure directly incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional nor being returned, And that being perishable in nature may perish being a chemical having expiry date. We think that the Resolution Professional is also aware of this situation, hence, not seriously objected to return the goods. The main objection of the Resolution Professional is that the expenditure incurred for protection of goods whether to be borne by intervener or to be treated as a CIRP cost. At this juncture, it is also worth to place on record that none of the party has made out a case that the goods in question be declared as essential goods or services. Therefore, we cannot hold that the intervener should not stop or terminate or suspend the supply of raw material. 21. In the light of the discussion made above, next is the applicability of Section 18(1)(f). This issue is now settled by our order dated 26.04.2019 (supra). Following the ratio laid down and considering the evidence on record as well as the pleadings of the respective parties, we hereby hold that the explanation annexed to Section 18(1) is to be applied. The impugned asset shall not be treated as a property of the Corporate Debtor. The asset in question being owned by a third party but in possessi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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