NCLAT allows Lyka Labs appeal; asks Modi Lifecare to pay Rs 63 lakh or face insolvency proceedings

The NCLAT has allowed Lyka Labs' insolvency appeal against Modi Lifecare Industries, directing the company to pay Rs 63 lakh within 30 days or face insolvency proceedings.

The NCLAT has allowed an appeal by Lyka Labs, overturning a previous order from the NCLT that had rejected its insolvency plea against Modi Lifecare Industries due to unpaid royalties stemming from a technical guidance agreement.

The appellate tribunal has directed Modi Lifecare Industries to pay Rs 63 lakh within 30 days, failing which insolvency proceedings will be initiated against the Ahmedabad-based pharmaceutical manufacturing company.

''In case it is not paid, the Adjudicating Authority (NCLT) may issue the orders for admitting the Respondent into insolvency under Section 9 of the Code,'' said a three-member bench, comprising Chairperson Justice Ashok Bhushan.

The National Company Law Appellate Tribunal (NCLAT) also rejected Modi Lifecare's plea of a pre-existing dispute between them, except for reconciliation of accounts and found material on record, including correspondence exchanged between the companies, indicating acknowledgement of dues by Modi Lifecare.

Disagreeing with the Ahmedabad bench of the National Company Law Tribunal (NCLT) view, the appellate tribunal said the absence of invoices, along with the demand notice, could not be a ground to dismiss the insolvency plea.

The NCLAT observed that the liability emanated directly from the contractual agreement, and invoices were not mandatory in such circumstances.

''...we find that debt and default are admitted. And, in turn, we find that the conditions for initiation of Section 9, i.e. the existence of the debt and default, is satisfied,'' said the NCLAT.

Appellant Lyka Labs and Modi Lifecare had executed a Technical Guidance Agreement (TG Agreement) on September 14, 2012. Under this, the respondent agreed to pay royalty fees for printing on product labels and cartons, indicating that the products were manufactured under the technical guidance of Lyka Labs.

As per the agreement, Modi Lifecare Industries agreed to pay royalty to Lyka Labs Ltd at a minimum of Rs 1 crore annually, or 5 per cent of sales, whichever was higher.

This later increased to Rs 2 crore annually from December 2013 to November 2014, with a minimum assured payment of Rs 3 crore for the initial period and the agreement remaining valid for five years.

However, after Modi Lifecare faced financial difficulties, there were changes in the payment structure based on sales.

Lyka Labs claimed that Modi Lifecare had agreed to pay a minimum guaranteed amount for at least three years, and this amount was payable irrespective of the actual sales generated by it and was not contingent upon the issuance of any invoices.

Later, Lyka Labs issued a demand notice dated October 10, 2017, and moved the National Company Law Tribunal after Modi Lifecare refused to accept the demand.

However, the NCLT rejected Lyka Labs' plea, which it challenged before the appellate tribunal.

The NCLAT set aside the order observing, ''We find that the respondent has not disputed that there was a default of an operational debt, which is in excess of Rs 1 lakh''.