NCLAT sets aside insolvency proceedings against Flipkart

The National Company Law Appellate Tribunal (NCLAT) has set aside an order initiating insolvency proceeding against e-commerce platform Flipkart. .While doing so, the NCLAT has held that Section 8 of the Insolvency & Bankruptcy Code does not provide Operational Creditors with the discretion to choose between Form 3 and Form 4 for sending demand notice as per its convenience..The NCLAT has clarified that the choice of format depended on the nature of Operational Debt..The order was passed by a three-member Bench of Member (Judicial) Justice Venugopal M, Member (Technical) Kanthi Narahari and Member(Technical) VP Singh..The National Company Law Tribunal (NCLT) Bengaluru had initiated the Corporate Insolvency Resolution Process (CIRP) against Flipkart India Pvt Ltd following a Section 9 plea preferred by CloudWalker Streaming Technologies Pvt Ltd..NCLT Bengaluru initiates insolvency process against Flipkart.The alleged default had arisen out of a supply agreement for import and supply of LED TV between the two..It was CloudWalker’s claim that as of March 2018, Flipkart had failed to collect more than 70% of the stock ordered by it and it was behind payment to the tune of crores of rupees..The NCLT order was subsequently stayed by the Karnataka High Court..Karnataka HC extends stay on NCLT order initiating insolvency process against Flipkart.Before the NCLAT, Flipkart broadly argued that CloudWalker had not produced any documentary evidence to support its claim and there was no operational debt due. Objections were also raised against the format of Section 9 plea and the Demand Notice..CloudWalker argued that it was the discretion of the operational creditor to choose from any of the two Forms for demand notice, and in case of demand notice under Form 3, it was not required to send a copy of the invoice along with the Notice or along with the Section 9 Application in Form 5..The NCLAT opined that when the operational debt involved transactions where corresponding invoices are generated, the Operational Creditor cannot choose to not file the invoice on the pretext that demand Notice was sent in Form 3.."..the use of the word ―'OR' in Section 8 cannot be interpreted as such, that the Insolvency and Bankruptcy Code has provided a choice or a discretion to an Operational Creditor, to provide an escape route from submission of the invoice, which can be treated as the most relevant document to prove the debt and amount in default."NCLAT.The NCLAT stated that if the operational debt is of nature where the invoice is generated as part of the transaction, the invoice is an essential document to prove the existence of the debt. .Therefore, it is only in cases where the transaction does not involve the generation of the invoice that Form 3 could be resorted to and then the debt would have to be proved through the documents listed out in column 7 of Form 3, it was stated. .The NCLAT further explains, ."..where the operational debt involves the generation of the invoice, then in that case, invoice raising the demand may be sent to the Corporate Debtor demanding the invoice amount. In such a situation, the Operational Creditor has to issue the demand notice in Form 4 along with the invoice.".The NCLAT also perused the document placed before it and stated that it was clear there was an existing dispute on 26th March 2018, i.e. before the initiation of CIRP..It noted that the entire claim was based on the loss caused on account of not taking delivery of 21,808 LED TVs which were imported and shipped on the assurance of the Corporate Debtor but the same was not crystallized..The NCLAT also stated that the Demand Notice issued to Flipkart under Section 8(1) of the Code against the Corporate Debtor in Form 3 was not proper as CloudWalker had failed to submit any documents to prove the existence of the Operational debt and the amount in default..In view of the above, the NCLAT opined that the initiation of insolvency against Flipkart could not be sustained. .The NCLAT has also directed that a copy of the order be communicated to IBBI and Secretary, Ministry of Corporate Affairs for reconsideration of the 'format of Application‘ in Form 5, under Rule 6(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016..Flipkart was represented by Senior Advocates Kapil Sibal, Arun Kathpalia with Shardul Amarchand Mangaldas Advocates Misha, Vaijayant Paliwal, Nikhil Mathur, Kauser Hussain, Diksha Gupta, Bani Brar, Anannya Ghosh, Dushyant Manocha, Brian Henry Moses..CloudWalker was represented by Senior Advocate Rajinder Kumar with Advocates Rajiv K Garg, Ajit, Ashish Garg, Govind Singh, Hari Khurana, Arjun Singh..Read the Order: