Karnataka HC Stays Insolvency Proceedings Against Flipkart

Karnataka HC Stays Insolvency Proceedings Against Flipkart

[Update] : The High Court of Karnataka has stayed the NCLT proceedings against Flipkart. The Stay Order dated 25th October 2019 was passed by Justice B Veerappa on the strength of submissions advanced by Senior Advocate Dhyan Chinnappa. The Senior Advocate, who appeared for Flipkart, contended that NCLT has travelled beyond its jurisdiction in admitting the company into CIRP. The counsel made the case that the petition filed against Flipkart was merely a claim for damages which the Tribunal could not have adjudicated upon. On 31st October 2019, the aforesaid interim stay order was extended.

NCLT Bengaluru Bench has initiated insolvency proceedings against Flipkart. The petition was filed by one of Flipkart's LED TV suppliers Cloud Walker Streaming Technologies Pvt. Ltd. for an outstanding operational debt of Rs. 26.95 crores.

Cloud Walker Streaming Technologies Pvt. and Flipkart entered into an agreement for supply of LED TVs in 2016. As per the petition, Flipkart showed keen interest in selling the products of the supplier for their superior technology, features and other advantages over other suppliers of the product.

Cloud Walker claimed that after placing purchase orders for LED TVs, Flipkart initially delayed accepting the order, citing the lack of a warehouse as a reason. Cloud Walker submitted that they had agreed to store the goods in their own warehouse temporarily, but Flipkart never collected the delivery, after making several excuses. Furthermore, Cloud Walker has also said that Flipkart 'coerced' them into selling the products at a discounted price, knowing that the order had been warehoused for Flipkart, for a while. In order to avoid any more losses and due to facing liquidity crunch, Cloud Walker agreed to offer a discount, but Flipkart still failed to collect delivery and make payment for over 70% of the stock ordered.

It is Cloud Walker's grievance that the supplier was forced to unload the collected goods at a heavily marked down price, as the goods had been in the warehouse for over 2 months. As a result of non-payment of balance dues, the supplier Cloud Walker issued a demand notice under section 8 of the IBC (Insolvency and Bankruptcy Code, 2016) but the Corporate Debtor (CD) Flipkart did not respond to the statutory notice, as is necessitated by the provisions of the IBC.

Flipkart challenged the petition on the ground of having made a payment of over Rs. 85.57 cr. towards the invoices raised against by Cloud Walker, as against the total Purchase Order (PO) amounting to Rs 103.62 cr. Flipkart also contended that there were huge disparities in the amount claimed by the Supplier, by way of invoices, and before these disputes are adjudicated upon by a competent civil court, the insolvency proceedings are a way of misusing the law. In addition, Flipkart submitted that an amount of Rs. 42.96 cr. payable to Cloud Walker had been withheld by them, due to deficiency in services.

The NCLT Bengaluru Bench, on the basis of the averments made, observed that Flipkart could not deny the fact that the Supplier had imported the goods and warehoused them, as no substantial evidence was placed on record. Further, an amount of Rs. 42.96 cr. that was withheld by Flipkart for 'deficiency in service', was done as an afterthought. The Bench relied on certain emails exchanged between the two entities, and was of the opinion that it was actually Flipkart which had failed to collect the delivery, and thus committed a default.

Further, the NCLT Bench also said that Flipkart had failed to raise a dispute regarding deficiency of services on the part of Cloud Walker, before the insolvency petition was preferred by the Supplier, nor did it respond to the statutory demand notice issued under section 8. It was also observed that Flipkart had failed to notify the Supplier Cloud Walker of any substantive pending dispute, suit or arbitral proceedings.

As per the demand notice, the Bench took note of the fact that Flipkart could not simply deny the outstanding operation debt of Rs. 26.95 cr, which comprised of 13.95 cr. towards payment for goods, Rs. 5.25 cr. towards customs charges, and Rs. 7.75 cr. towards interest for delay in payment.

The NCLT Bench led by Rajeswar Rao Mittal, judicial member, refused to keep the matter pending so that a settlement may be reached. The Bench was of the view that enough opportunities had been given to reach a settlement, but none had materialised, and the matter was kept pending since 22nd July, 2019.

Accordingly, with the aforesaid observations, NCLT Bengaluru admitted the insolvency petition in respect of Flipkart in the absence of any pre-existing dispute and imposed moratorium under section 14 of the IBC. Mr. Deepak Saruparia was appointed as the Interim Resolution Professional for conducting the corporate insolvency resolution process (CIRP).

Click to Read Order.