NCLAT
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National Company Law Appellate Tribunal, Delhi: In a batch of appeals filed challenging order dated 22-06-2021 passed by the National Company Law Tribunal (NCLT), Mumbai approving the Resolution Plan submitted by ‘Jalan Fritesch Consortium’ with respect to the Corporate Debtor – ‘Jet Airways (India) Limited’ on various grounds primarily being non-payment of full provident fund, gratuity, leave encashment etc to the employees and workmen who are rightly entitled to it, a Division Bench of Ashok Bhushan J. (Chairperson) and Barun Mitra J. (Technical Member) held that non-payment of full provident fund amount to the workmen and employees and the gratuity payment till the insolvency commencement date amounts to noncompliance of provisions of Section 30(2)(e) of Insolvency and Bankruptcy Code, 2016 (IBC) finding no other parts of the resolution plan to be infirm in any manner. The Court further directed the Successful Resolution Applicant to make pending payments of provident fund and gratuity to the workmen and the employees.

The Court noted that Section 36(4) IBC contains an injunction “the following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation”. A plain reading of the above provision indicate that what is excluded from the liquidation estate are sums due to any workman or employee from the provident fund, pension fund and gratuity fund.

Thus, sums due to any workman from the above funds are excluded from the liquidation estate. The legislative intent is clear that any sums due to any workman from aforesaid fund are excluded and cannot be used for recovery in the liquidation. The object is that sums due to any workman and employee from the aforesaid funds should not be used for recovery in liquidation for dues of other creditors since those dues are exclusive to workmen and employees.

In State Bank of India v. Moser Baer Karamchari Union, 2019 SCC OnLine NCLAT 447, the Tribunal approved the decision of the Adjudicating Authority by which the Adjudicating Authority directed that the provident fund, pension fund and gratuity fund do not come within the meaning of liquidation estate.

Further reliance was placed on Tourism Finance Corporation of India Ltd. v. Rainbow Papers Ltd., 2019 SCC OnLine NCLAT 910, wherein the Tribunal held that no provision of the Employees Provident Funds and Miscellaneous Provision Act, 1952 is in conflict with the provisions of I&B Code and thus directed to pay the full amount of provident fund by the Successful Resolution Applicant.

In Savan Godiwala v. Apalla Siva Kumar, 2020 SCC OnLine NCLAT 191, it was held that in a case, where no fund is created by a company, in violation of the statutory provision of Section 4 of Payment of Gratuity Act, 1972, in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate.

The Supreme Court in Sunil Kumar Jain v. Sundaresh Bhatt, 2019 SCC OnLine SC 2159, directed that the share of workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available.

The Court noted that present is a case where resolution plan has been approved; present is not a case of liquidation. Under the provisions of 1952 Act, the Corporate Debtor is statutorily obliged to deposit the provident fund of the workmen and employees with the EPFO which has not been deposited as per the Additional Affidavit of the Resolution Professional dated 25-07-2022. Insolvency commencement date being 20-06-2019, the Corporate Debtor was obliged to deposit the contribution towards provident fund with EPFO.

The claim of provident fund till the insolvency commencement date, of the workmen and employees was to be accepted and Successful Resolution Applicant was liable to make payment of provident fund till the date of initiation of CIRP and statutory obligation of the Corporate Debtor was liable to be discharged by the Successful Resolution Applicant.

However, from the Affidavit of Resolution Professional, it is clear that Resolution Professional in the claim which has been admitted of the workmen for 24 months, the provident fund and gratuity amount was also included. The workmen have received payments with regard to provident fund and gratuity in part under the Resolution Plan subject to the liquidation value of the workmen.

Thus, workmen are entitled for issuing appropriate direction to Successful Resolution Applicant to make payment of the workmen of the provident fund and gratuity dues up to the date of insolvency commencement date less the amount already received under the Resolution Plan towards provident fund and gratuity. The Corporate Debtor having not deposited the statutory dues with the EPFO, the said statutory liability has to be discharged by the Successful Resolution Applicant.

The Court remarked that with regard to pension no materials have been brought before the Tribunal to indicate that the Corporate Debtor has any rules /provisions for payment of pension, hence, no direction with regard to pension were issued.

Thus, the Court held that the workmen and employees are entitled for payment of full amount of provident fund and gratuity till the date of commencement of the insolvency which amount is to be paid by the Successful Resolution Applicant consequent to approval of the Resolution Plan in addition to the 24 months workmen dues as the workmen are entitled to under Section 53(1)(b) of IBC.

[Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia, Company Appeal (Insolvency No. 752 of 2020, decided on 21-10-2022]


Advocates who appeared in this case:

For Appellant: Mr. Swarnendu Chatterjee, Ms. Deepakshi Garg, Mr. Yashwardhan Singh, Advocates.

For Respondent: Mr. Malhar Zatakia, Mr. Dhiraj Kumar Totala, Ms. Aditi Bhansali, Ms. Tanya Chib and Mr. Parimal Kashyap, Advocates for RP (AZB & Partners) Mr. Raghav Chadha, Advocate.

Mr. Raunak Dhillon, Ms. Isha Malik and Ms. Niharika Shukla, Advocates for R-2.

Ms. Ritu Sobti, Ms. Priyanka Sethia, Advocates for Intervenor in I.A 1985, 1986 of 2022.

Mr. Krishnendu Datta, Sr. Advocate with Mr. Rajat Sinha, Mr. Burjis Shabir, Ms. Srishty Kaul, Advocates for SRA


*Arunima Bose, Editorial Assistant has put this report together.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal, Mumbai: The Bench of Ashok Bhushan, J., Chairperson, M. Satyanarayana Murthy, Judicial Member, and Naresh Salecha, Technical member has dismissed a company appeal and has held that interest on delayed payment is also a form of debt and therefore, would form a part of the operational debt under Insolvency and Bankruptcy Code, 2016.

Background of the case

Operational Creditor supplies different types of yarns and has supplied goods to Bombay Rayons Fashions Ltd., Corporate Debtor. The Operational Creditor raised invoices between March, 2017 and January 2020, wherein, Operational Creditor supplied goods for Rs. 2,02,26,017/- under nine invoices. The Corporate Debtor paid three invoices with substantial delay; for one invoice part payment made and remaining five invoices, Corporate Debtor failed to make any payment.

Operational Creditor filed an application under Section 9 seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor. The Adjudicating Authority admitted the application and approved initiation of CIRP along with appointment of Insolvency Resolution Professional. The company appeal was filed against the order passed by the Adjudicating Authority dated 07-06-2022.

Analysis and decision

First, the Bench referred to the definition of debt, as per Section 3(11) of the IBC, “a debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” Therefore, the Bench observed that the definition of debt includes ‘claim’ which is being defined under Section 3(6) of the IBC. As per the provision of IBC a claim means-

“(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.”

Further, the Bench observed that vide the Notification No S.O. 1205 (E) dated 24.03.2020, issued by the Ministry of Corporate Affairs, the threshold Limit to initiate a CIRP has increased from Rupees 1 Lakh to Rupees 1 Crore.

Therefore, in the light of the above analysis, the Bench held that the total amount for maintainability of claim will include both principal debt amount as well as interest on delayed payment which was clearly stipulated in the invoice. Thus, in light of this the outstanding debt amounts to Rs. 1,60,87,838/- (principal debt amount of Rs. 97,87,220/- plus interest @18% p.a.).

Hence, as the total debt outstanding was above Rs. 1 crore as per requirement of Section 4 IBC read with notification No. S.O 1205 (E), the present Application was maintainable.

[Prashat Agarwal v. Vikash Parasrampuria, Company Appeal (AT) (Ins) No. 690 of 2022, decided on- 15-07-2022]


Advocates who appeared in this case :

Abhijeet Sinha, Sunil Vyas, Nausher Kohli, Palzer Moktan, Dipti Das, Deep Morabia, and Aditya Shukla, Advocates, for the Appellant;

Saurabh Pandya, Viraj Parikh, Mahur Mahajan, Advocates, for R-1;

Rubina Khan & Rohit Gupta, Advocates, for R-2.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Tribunal, Mumbai: The Bench of P.N. Deshmukh, J., Judicial Member, and Shyam Babu Gautam, Technical Member admitted an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the initiation of Corporate Insolvency Resolution Process (CIRP) against Sahara Hospitality Ltd. (Sahara).

In 2018, a company petition was filed by Delta Electro Mechanical Pvt. Ltd. (Delta Electro), which got disposed of in 2021, when Sahara agreed to settle the matter for Rs 20,00,00,000 in 14 installments. Delta Electro again approached the tribunal seeking the revival of the company petition after Sahara failed to perform the commitment. A new settlement agreement was drawn up. But Sahara failed again with its commitments and tried to shrug off its liabilities stating that it entered into the settlement to maintain good business relations with Delta Electro. Further, it stated that the agreement settlement failed, and hence the company petition was disposed of. Hence, contended that the petition cannot be admitted without a prayer of restoration.

Hence, Delta Electro filed a company petition seeking to initiate the CIRP against the Sahara by invoking the provisions under Section 9 of the IBC for default of Rs 51,77,97,495/-.

The Bench stated that Delta Electro had sent a demand notice dated 25-05-2018 under Section 8 of the IBC for an unpaid amount of Rs. 32,72,03,256/-. Further, the Bench stated that Sahara in its written submissions dated 24-03-2022 submitted that rental dues or dues under a leave and license agreement cannot be considered an operational debt by relying upon the judgment in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd., 2020 SCC OnLine NCLAT 674 , wherein it was held that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt' as under Section 5(21) of the IBC. Therefore, the Bench held that Sahara is liable to pay the dues payable against the facilities extended by Delta Electro.

Hence, the Bench admitted the Company Petition and ordered to initiate CIRP against Sahara. For the process, Mamta Binani was appointed as the Insolvency Professional.

[Delta Electro Mechanical Pvt. Ltd. V. Sahara Hospitality Ltd., CP No. 2430/2018, decided on- 15-07-2022]


Advocates who appeared in this case :

Shyam Kapadia, Advocate, for the Applicant;

Sandeep Bajaj, Advocate, for the Respondent.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Tribunal, New Delhi: The Bench of Ashok Bhushan J., Chairperson, Rakesh Kumar Jain and Rakesh Kumar, JJ, Judicial Members, and Barun Mitra and Naresh Salecha, Technical Members, have held that lease rentals for business purposes fall under the definition of ‘Operational Debt' as per Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Background of the case

The Appellant, corporate creditor entered into a license agreement with the Respondent, corporate debtor for five years. As per the agreement the appellant granted a license to the respondent to use a building for business purposes with a total super area measuring 31000 sq. ft. The license fee was agreed to be Rs 4,00,000/- plus government taxes on monthly basis.

The respondent made payment to the appellant through two cheques of amount Rs 20,00,000/- each dated 07-05-2018 and 08-10-2018 respectively. Both the cheques were dishonored. On 03-05-2019, the Appellant sent a demand notice under Section 8 of IBC, to which no reply was given by the respondent. Hence, on 09-05-2019, the appellant filed an application for initiation of the Corporate Insolvency Resolution Process against the respondent under Section 9 of IBC.

The Adjudicating Authority dismissed the application under Section 9 of IBC stating that the claim arising out of a grant of license to use the immovable property does not fall in the category of goods or services, thus, the amount claimed in Section 9 Application is not an unpaid operational debt. Therefore, the appellant filed a company appeal before a larger bench.

The issue before the bench

  • Whether the claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of ‘Operational Debt' within the meaning of Section 5(21) of the Code.”?

Observation and Analysis

The coram made the following observations: –

  • The definition of ‘operational debt' as contained in Section 5 (21) IBC, the definition clause provides that ‘operational debt' means a claim in respect of the provision of goods or services.

  • Definition under Section 5(21) IBC uses the expression ‘services' which is not defined under the IBC. When an expression used in the statute is not defined, the Court has to explain the meaning of the undefined expression under the well-established rules of statutory interpretation.

  • The term operation is derived from “operate” and “operating cost” is an expense incurred in the conduct of the principal activities of the enterprise therefore, operational debt is also a debt that is incurred in the conduct of the principal activities of the enterprise.

  • Further, Coram stated that Bankruptcy Law Reforms Committee Report can be treated as an aid for interpretation for IBC which explicitly provides that a lessor can be treated as an operational creditor.

  • As the ‘operational debt' as defined in Section 5(21) IBC has a meaning much wider than the essential goods and services. Essential goods and services are entirely different concepts and the protection under Section 14(2) IBC as provided for is an entirely different context.

  • The observations made in the case of M. Ravindranath Reddy v. Mr. G. Kishan, 2020 SCC OnLine NCLAT 84 that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by the scheme of the IBC. Therefore, the case does not consider the extent and expanse of the expression ‘service' used in Section 5(21) of the IBC and does not lay down the correct law.

  • The observation made in the case of Promila Taneja v. Surendri Design Pvt. Ltd. – 2020 SCC OnLine NCLAT 1105 in respect definition of “service” as mentioned under the Consumer Protection Act, 2019 and the Goods and Services Act, 2017 (CGST Act) cannot be referred to for interpretation of the term “Operational Debt” as these acts are not mentioned under Section 3(37) of the IBC. It reiterated the law laid down in the M. Ravindranath Reddy case and hence, the judgment cannot be followed.

In the light of the above observations made, the Bench opined that in the present case, where the agreement itself contemplates payment of GST for the services under the agreement, the definition of ‘service' under the CGST Act can be referred. Hence, the expression ‘service' in Section 5(21) of the IBC includes license payments. Therefore, the claim of the Licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt' within the meaning of Section 5(21) of the IBC.

[Jaipur Trade Expocentre Pvt Ltd versus Metro Jet Airways Pvt Ltd, Company Appeal (AT) (Insolvency) No. 423 of 2021, decided on- 05-07-2022]


Advocates who appeared in this case :

Ms. Sanjana Saddy, Mr. Sanyat Lodha & Ms. Harshita Singhal, Advocate, for the Appellant;

Mr. Vikrant Arora & Mr. Manish Verma, Advocates, for the Respondent.

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench (NCLT): The Coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member deliberated on what amounts to a pre-existing dispute.

The company petition was filed by the Operational Creditor seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor by invoking the provisions of Section 9 Insolvency and Bankruptcy Code for a resolution of Operational Debt of Rs 22,41,735.

Issue to be decided

Whether the notice of termination of the employment of the Operational Creditor three months or one month? And whether it would amount to a pre-existing dispute between the parties?

Analysis and Decision

Firstly, the Bench noted that there was no dispute between the parties regarding employment nor the salary and perquisites of the Operational Creditor. Similarly, there was no dispute with regard to receipt of one month notice period salary by the Operational Creditor through a cheque issued by the Corporate Debtor.

Therefore, the present Company Petition was being pressed by the Operational Creditor only in respect of salary for the remaining two months’ notice period.

The genuineness of the appointment letter relied on Corporate Debtor is at a stake in the present case and that ipso facto was a dispute.

Coram stated that the petition was for the resolution of salary of two months purported notice period which amounted to specific performance of the appointment letter, which does not fall within the definition of “Operational Debt” as it was not for the salary for the actual work done by the Operation Creditor.

Hence, Bench opined that the remedy of the Operational Creditor was to initiate necessary legal proceedings for recovery before the appropriate legal forum and through the route of IBC.

Therefore, the Bench was of the view that there was no merit in the application and hence the same was liable to be dismissed. [Sandesh Naik v. MT Educare Ltd., CP (IB)—678 (MB)/2020, decided on 12-5-2022]


Advocates before the Tribunal:

For the Applicant: Adv. Pooja Batia

For the Respondent: Adv. Nausher Kohli

Akaant MittalExperts Corner


A. Introduction


The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1]

 

For the purposes of the definition of the term “goods”, the Sale of Goods Act, 1930 can be referred to; whereas, the definition of the term “services” is still not concretely defined. A claim on operational debt may be on account of breach of an agreement or a decree of a court of law; still the same must relate to the supply of goods and services.

 

Now issue arises as to the status of lease dues forming an “operational debt”. The question has two aspects, namely, one whether the landlord could claim to be an operational creditor against the tenant for the rental dues outstanding; and two whether a tenant while using the tenanted premise, if suffers any damages, could claim to be an operational creditor.

 


B. Landlord claiming to be an Operational Creditor


The Bankruptcy Law Reforms Committee Report that formed the basis of the IB Code illustratively suggested that the definitions of “operational creditor” and “operational debt” include wholesale vendors of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold, thus making them operational creditors. Similarly, the lessor who rents out space to an entity is an operational creditor to whom the entity owes monthly rent on a three-year lease.[2] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[3]

 

While the landlord certainly could claim to be an operational debtor in light of what the Bankruptcy Law Reforms Committee seems to suggest, however, in Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd.[4], such an issue was left open by the NCLAT to be decided by the NCLT. In this case, the landlord had initiated proceedings under Section 9 against the tenant on the basis of an arbitral award which awarded rent due towards the landlord on the part of the tenant. The NCLAT, however, left this contention unaddressed and remitted the matter on other grounds.

 

In Sarla Tantia v. Nadia Health Care (P) Ltd.,[5] the question before the NCLT was whether the recovery of arrears of rent can be claimed as operational debt within the meaning of Section 5(21) of the IB Code. The counsel for the corporate debtor i.e. Nadia Health Care relied on the input output test arguing that the operational debt are only those debts that have “a correlation of direct input to output produced or supplied by the corporate debtor”. However, the NCLT herein relied on the observations from the decision of the Supreme Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,[6] to conclude that the Supreme Court in the affirmative settled the issue of lease dues being an operational debt.

 

It is submitted that the same is erroneous because (i) the Supreme Court in Mobilox Innovations[7] did not discuss the issue of lease deeds in its own observations. The court had merely reproduced paragraphs from the report of the Bankruptcy Law Reforms Committee, a part of which had also touched upon rental and lease dues as a type of operational debt; and (ii) to begin with, the issue was not the subject-matter of dispute before the Supreme Court at all.

Therefore, the opinion of the NCLT in Sarla Tantia[8] may not be on strong footing.

 

Split in jurisprudence

A split in the jurisprudence before the NCLAT is found in the two rulings rendered by the NCLAT in M. Ravindranath Reddy v. G. Kishan,[9] on one side and Anup Sushil Dubey v. National Agriculture Coop. Mktg. Federation of India Ltd.[10] on the other.

 

In Ravidranath, the specific query was addressed by the NCLAT on whether a landlord by providing lease could be treated as operational creditor. The same was held by the Full Bench of NCLAT to not fall within the ambit of the definition of the term “operational debt”.[11] The NCLAT in Ravidranath[12] opined that the recommendation of the Bankruptcy Law Reforms Committee pertaining to the treatment of lessors/landlords as operational creditors, was not adopted by the legislature and only the claim in respect of goods and services were kept in the definition of operational creditor and operational debt under Sections 5(20) and 5(21) of the IB Code. Resultantly, it was concluded that the definition of an operational debt and operational creditor could not be interpreted to include rent dues as operational debt. Therefore, non-payment of rent does not amount to an operational debt.

 

There is a qualification added to the ruling in M. Ravindranath[13], when the NCLAT in Sanjeev Kumar v. Aithent Technologies (P) Ltd.[14] distinguished the former. In Sanjeev Kumar, the relationship between the creditor landlord and the debtor tenant was found to be not merely of the one to that of a landlord tenant but was held to also include certain provision of services such as electricity, diesel, sewer and water charges amongst others given to the debtor tenant. In such cases once the dues were found to be more than the pecuniary threshold, the debt was held to fall under the definition of an operational debt and an application under Section 9 of the Code was admitted.[15]

 

On the other hand in Anup Sushil Dubey[16] the NCLAT held that lease and licence agreements fall within the ambit of Section 5(21) of the IB Code. The NCLAT here noted that the appellants had leased out the premises for “commercial purpose” and the same fell within the meaning of term “service” under Section 5(21) of the IB Code. Then the NCLAT found the definition of “service” under the Consumer Protection Act, 2019 to be of relevance, which defines a service in the following manner :

(42) “service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.

 

The NCLAT similarly referred to the provisions of the Central Goods and Services Tax Act, 2017, which under the Schedule II lists down the activities that are to be treated as supply of goods or services, and in Para 2 of the Schedule stipulates as follows:

(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

 

On the basis of the above, taking into account that the premises were leased out for a commercial purpose, it was held that the dues claimed by the creditor squarely fell within the ambit of the definition of “operational debt” as defined under Section 5(21) of the Code.

 

It is essential to note that while M. Ravindranath[17] was a decision by a Full Bench of the NCLAT, the ruling in  Anup Sushil Dubey[18] was by a Division Bench. Furthermore, the NCLAT in Anup Sushil Dubey[19] while noted that the corporate debtor appellant before it, cited the ruling in M. Ravindranath[20]; the NCLAT however did not render any findings on the reference to M. Ravindranath[21].

 


C. Tenant claiming to be an Operational Creditor


On the other hand, as regards the claim of a tenant in its tenant landlord relationship is concerned, the position seems to be settled in Jindal Steel & Power Ltd. v. DCM International Ltd.[22] wherein it was held that tenants do not come within the meaning of “operational creditor” as defined under Sections 5(20) and (21), IB Code. In this case, the tenant sought to recover the security deposit on account of the termination of the lease agreement with the landlord. The NCLAT upheld the order of the NCLT rejecting the application filed under Section 9 by the tenant holding that the tenant does not come within the meaning of the term “operational creditor”.

 

It must also be noted here that while in Sarla Tantia,[23] the NCLT had referred to the Schedule II of the CGST Act, 2017[24] which in context of land and buildings, classifies “any lease, tenancy, easement, licence to occupy land” as a supply of services. Here in Jindal Steel[25], the NCLT held that the definition of “service” in the fiscal statutes has no bearing because the purpose of fiscal statutes is to generate revenue for the Government in the form of taxes, whereas the purpose of the IB Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution.

 

Similar position was maintained in  D & I Taxcon Services (P) Ltd. v. Vinod Kumar Kothari,[26] where a tenant filed a claim on account of suffering damage in the tenanted premises due to a fire incident. The NCLAT clarified that the claim of the tenant does not constitute any operational debt since by using the demised premises as a tenant, the appellant could not be said to have been providing any “services”.

 

However, sub-tenants cannot be treated as a corporate debtor even if part of the payment is made directly by such sub-tenants to the operational creditor since the same will not create any relationship of operational creditor and debtor.[27]


Conclusion


On account of the differing viewpoints expressed by the NCLT and NCLAT, the issue on whether a landlord could claim to be an operational creditor remains unresolved.

 

Since different types of creditors are granted distinct rights under the IB Code framework, it is necessary to determine to which category, a creditor belongs to. In this context, it is possible that, in the future, a leasing agreement may not fall within either of the two categories of creditors who can file for initiating a corporate insolvency resolution process (CIRP), namely, financial and operational creditors, and that they will have to make a claim as other creditors. Categorisation as such would also lead to a significant loss of rights as such creditors would have no participatory role (whatsoever) in the CoC working.

The issue is now pending before the Supreme Court in Promila Taneja.[28]

 

Given the ambiguity surrounding the problem, the Supreme Court must evaluate the larger issue of claims resulting from the use of immovable property and other associated costs, and eventually resolve the question of whether rent arrears constitute as operational debt.

 

To sum up, unless the existing gaps in the Code regarding lease transactions, their treatment as secured creditors, the right to relinquish, and other factors discussed above are addressed, the true devil will lie in the strategically drafting of lease agreements, which will essentially make or break the rights available to the lessor.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the National Law University, Mumbai and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

“The author gratefully acknowledge the research and assistance of Sh. Priyanshu Fauzdar, pursuing law at NLU, Assam in writing this article.”

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1, available online at HERE .

[2] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.

5.2.1.

[3] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.3.2.2.

[4] 2017 SCC OnLine NCLAT 380.

[5] 2018 SCC OnLine NCLT 16726.

[6] (2018) 1 SCC 353.

[7] (2018) 1 SCC 353.

[8] 2018 SCC OnLine NCLT 16726.

[9] 2020 SCC OnLine NCLAT 84.

[10] 2020 SCC OnLine NCLAT 674.

[11] The ruling in M. Ravindranath case, 2020 SCC OnLine NCLAT 84 has been followed subsequently in Aurora Accessories (P) Ltd. v. Ace Acoustics & Audio Video Solutions (P) Ltd., 2020 SCC OnLine NCLAT 527; Promila Taneja v. Surendri Design (P) Ltd., 2020 SCC OnLine NCLAT 1105.

[12] 2020 SCC OnLine NCLAT 84.

[13] 2020 SCC OnLine NCLAT 84.

[14] 2020 SCC OnLine NCLAT 734.

[15] 2020 SCC OnLine NCLAT 734.

[16] 2020 SCC OnLine NCLAT 674.

[17] 2020 SCC OnLine NCLAT 84.

[18] 2020 SCC OnLine NCLAT 674.

[19] 2020 SCC OnLine NCLAT 674.

[20] 2020 SCC OnLine NCLAT 84.

[21] 2020 SCC OnLine NCLAT 84.

[22] Jindal Steel & Power Ltd. v. DCM International Ltd., 2017 SCC OnLine NCLAT 441 upholding the order of the NCLT in Jindal Steel and Power Ltd. v. DCM International Ltd., 2017 SCC Online NCLT 989.

[23] 2018 SCC OnLine NCLT 16726.

[24] Central Goods and Services Tax, 2017, Schedule II read with S. 2(a).

[25] 2017 SCC Online NCLT 989.

[26] 2020 SCC OnLine NCLAT 878.

[27] Rahul Gupta v. Mahesh Madhavan, 2018 SCC OnLine NCLAT 263.

[28] Promila Taneja v. Surendri Design (P) Ltd., Civil Appeal No. 4237 of 2020, order dated 28-1-2021. (SC)

Case BriefsSupreme Court

Supreme Court: While dealing with a case involving two controversial terms; “operational debt” and “operational creditor” of IBC, the 3-judge Bench of Dr Dhananjaya Y Chandrachud* Surya Kant and Vikram Nath, JJ., explained that the appellant would be an operational creditor under the IBC, since an ‘operational debt’ will include a debt arising from a contract in relation to the supply of goods or services from the corporate debtor. The Bench expressed,

“…no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.”

Factual Conspectus

The genesis of the case related to following undisputed facts:

  • the Consolidated Construction Consortium Ltd.-appellant and the Proprietary Concern; i.e. Hitro Energy Solutions entered into a contract for supply of light fittings, since the appellant had been engaged for a project by Chennai Metro Rail Corpn. (CMRL);
  • CMRL, on the appellant’s behalf, paid a sum of Rs 50 lakhs to the Proprietary Concern as an advance on its order with the appellant;
  • CMRL cancelled its project with the appellant;
  • The Proprietary Concern encashed the cheque for Rs 50 lakhs anyways; and
  • The appellant paid the sum of Rs 50 lakhs to CMRL.

Impugned Order

It was when the proprietary concerned refused to pay the aforesaid sum despite several notices and demands, the appellant approached NCLT under Section 9 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent, Hitro Energy Solutions (P) Ltd. The NCLT allowed the application holding that the respondent’s Memorandum of Association (MoA) proved that it took over the proprietary concern; and that the Proprietary Concern did owe the appellant an outstanding operational debt. Further, the NCLT declared a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional.

In appeal, the NCLAT set aside the NCLT’s decision, dismissed the application filed under Section 9 of the IBC and released the respondent from ongoing CIRP on the following grounds:

  • The appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the Proprietary Concern/respondent;
  • There was nothing on record to suggest that the respondent had taken over the Proprietary Concern; and
  • The appellant could not move an application under Sections 7 or 9 of the IBC since all purchase orders were issued on 24 June 2013 and advance cheques were issued subsequently. Hence, there was unjustified delay.

However, by an interim order, the Supreme Court had stayed the operation of NCLAT’s judgment.

Whether the appellant was an operational creditor

The NCLAT, sought to narrowly define operational debt and operational creditors under the IBC to only include those who supply goods or services to a corporate debtor and exclude those who receive goods or services from the corporate debtor. Rejecting the stand taken by NCLAT, the Bench observed the following:

Firstly, Section 5(21) defines ‘operational debt’ as a “claim in respect of the provision of goods or services”. The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver.

Secondly, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 and Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 make it abundantly clear that an operational creditor can issue a notice in relation to an operational debt either through a demand notice or an invoice. As such, the Bench opined,

“…the presence of an invoice (for having supplied goods or services) is not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt.”

Finally, in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, in comparing allottees in real estate projects to operational creditors, the Supreme Court had noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services.

Therefore, the Bench opined that the phrase “in respect of” in Section 5(21) has to be interpreted in a broad and purposive manner in order to include all those who provide or receive operational services from the corporate debtor, which ultimately lead to an operational debt. In the instant case, the appellant clearly sought an operational service from the Proprietary Concern when it contracted with them for the supply of light fittings. Further, when the contract was terminated but the Proprietary Concern nonetheless encashed the cheque for advance payment, it gave rise to an operational debt in favor of the appellant, which remained unpaid.

Whether the respondent took over the debt from Proprietary Concern

The MoA of the respondent unequivocally stated that one of its main objects was to take over the Proprietary Concern. However, the respondent had produced a resolution dated 01-09-2014 passed by its Board of Directors, purportedly resolving to not take over the Proprietary Concern. In this regard, the Bench observed,

“Admittedly, there was no reference to the resolution in the counter-statement dated 18 January 2018 and additional counter-statement dated 9 March 2018 filed by the respondent before the NCLT. However, in their appeal filed before the NCLAT, the respondent states that the resolution was, in fact, brought to the notice of the NCLT.”

Additionally, the NCLT made no mention of that resolution or the auditor’s certificate in its judgment. Therefore, the Bench opined that the conduct of the respondent in bringing up the resolution for the first time before the NCLAT would lead to an adverse inference against them for having suppressed the document earlier, if at all it was in existence.

Even otherwise, Section 13 of CA 2013 provides that where the object clause is amended in MoA, it requires the Registrar to register the Special Resolution filed by the company. However, the respondent had provided no proof that the purported resolution was a Special Resolution, it was filed before the Registrar and that the Registrar ultimately did register that. Thus, the purported amendment to the MOA would not have any legal effect. Consequently, the Bench held that the MOA of the respondent still stands and the presumption would continue to be in favour of the appellant.

Whether the application under Section 9 of IBC was barred by limitation

Rejecting the respondent’s submission that limitation commenced from 07-11-2013, when the cheque was issued by CMRL to the Proprietary Concern and that considering three years limitation period under Article 137 of the Limitation Act 1963, the period would expire on 07-11-2016, while the application under Section 9 was only filed on 01-11-2017, the Bench observed, in its application under Section 9, the appellant had mentioned 07-11-2013 as the date on which the debt became due.

However, in B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633, it was held that limitation does not commence when the debt becomes due but only when a default occurs. As noted, default is defined under Section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due. Hence, it was only on 27-02-2017 that the final letter was addressed by the appellant to the Proprietary Concern demanding the payment on or before 04-03-2017 and Proprietary Concern replied on 02-03-2017, finally refusing to make re-payment to the appellant. Consequently, the application under Section 9 would not be barred by limitation.

Conclusion

Hence, the appeal was allowed and the impugned judgment and order were set aside.  Since the CIRP in respect of the respondent was ongoing due to the Court’s order dated 18-11-2020, no further directions were issued.

[M/s Consolidated Construction Consortium Ltd. v. M/s Hitro Energy Solutions (P) Ltd., 2022 SCC OnLine SC 142, decided on 04-02-2022]


*Judgment by: Justice Dhananjaya Y Chandrachud


Appearance by:

For the Appellant: M P Parthiban, Advocate

For the Respondent: K Parameshwar, Advocate


Kamini Sharma, Editorial Assistant has put this report together


 

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench: The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) dismissed a petition filed under Section 9 of the IBC while noting that no operational debt existed under Section 5(8) and expressed that,

Operational Creditor being the Principal was always under obligation to recover the money from the client and not from his agent unless the agent failed to perform his duties.

Present company petition was filed by the THG Publishing Private Limited (Operational Creditor) seeking to initiate the Corporate Insolvency Resolution Process against Deadline Advertising Private Limited (respondent) by invoking provisions of Section 9 Insolvency and Bankruptcy Code, 2016 read with Rule 6 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for resolution of an operational debt of Rs 9,23,160.

Analysis, Law and Decision

Tribunal noted that during the course of the business, the respondent issued a release order upon the Operational Creditor for publishing advertisement in Business Line Newspaper and The Hindu newspaper which was duly done by the Operational Creditor.

Further, it was observed that the nature of business between the parties was that of a Principal and Agent, where, the Operational Creditor acted as the Principal who in turn appointed the Respondent as an agent on a commission basis in order to increase the Operational Creditor’s business revenue by attracting and engaging customers who are desirous of publishing their advertisement with the Operational Creditor.

The invoices in question had not been raised against the respondent but against M/s Avanse Financial Services Private Limited and it was clear that the client was not respondent but M/s Avanse Financial Services Private Limited who a client of the Operational Creditor through the respondent who was merely an agent to the Operational Creditor.

Since M/s Avanse Financial Services (P) Ltd. failed to remit the due to respondent, the respondent failed to remit the due to the Operational Creditor.

Coram opined that the Operational Creditor could have availed the legal remedies and initiated the appropriate legal proceedings against M/s Avanse Financial Services Private Limited to recover its monies as Avanse was the client of Operational Creditor which was reflected in the invoices raised.

Another point noted by the Coram was that the respondent was engaged by the Operational Creditor as an agent because it was accredited with the Indian Newspaper Society. As per the agreement between INS and the respondent, the respondent shall be entitled to a 15% commission pertaining to advertisement business.

Hence, it was clear that the arrangement was between the parties of principal-agent and not of Operational Creditor and Respondent, which clearly leads to the conclusion that defaulting party was not the agent of Operational Creditor, infact it was the client of Operational Creditor.

Issue: If it was a principal-agent relationship, was the respondent not liable to pay any dues arising from default?

Tribunal firstly referred to Section 182 of the Indian Contract Act, 1872 and further observed that the Operational Creditor being the Principal was always under obligation to recover the money from the client and not from his agent unless the agent failed to perform his duties.

Therefore, since the respondent performed in good faith, the agent could not be held liable for default on the part of client of the Operational Creditor.

Concluding the matter, Tribunal held that the amount claimed did not qualify as an Operational Debt under Section 5(8) of the Code and was not default under Section 3(12) of the Code.

In view of the above discussion, company petition was dismissed. [THG Publishing (P) Ltd. v. Deadline Advertising (P) Ltd., CP No. 1952/IBC/MB/2019, decided on 19-1-2022]


Advocates before the Tribunal:

For the Operational Creditor: Mr. Abhishek Tila a/w Aboli Mandik and Adv. Shivani Sanghavi i/b DMD

For the Respondent: Mr. Nausher Kohli a/w Munaf Virjee and Akash Agarwal i/b ABH Law LLP

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench, Mumbai- The Coram of Ashok Kumar Borah, Judicial Member, and Shyam Babu Gautam, Technical Member while allowing the company petition, ordered for initiation of Corporate Insolvency Resolution Process (CIRP). The Bench stated that,

“The Operational Creditor has successfully demonstrated and proved the debt and default in this case and has also proved that there is absolutely no reason for the Corporate Debtor to hold on to the payment of the invoices”.

In the present matter initiation of Corporate Insolvency Resolution Process (CIRP) against Prince MFG Industries Private Limited (Corporate Debtor) was sought for, alleging that the corporate debtor committed default in making payment to the operational creditor. This petition was filed by invoking the provisions of Section 9 Insolvency and Bankruptcy Code, 2016 read with Rule 6 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

The Tribunal after considering the statements, acts and the submissions was of the opinion that despite giving enough chances, the corporate debtor did not file its reply, showed that the amount was due and payable. Also the acts and the tactics used also elaborated the intention. The Tribunal considering the contradicting statements where a part payments was made and then later denying any pre-existing dispute, it was of the view that,

“This bench clearly visualizes the tactic played on the part of the Corporate Debtor to delay the proceedings”.

The Tribunal was thus of the opinion, “It is observed by this bench that the part payment made by the Corporate Debtor proves that it owes the claimed amount to the Operational Creditor and hence it is deemed to be an admission on the part of the Corporate Debtor”. And further stated, “Hence this Bench is left with no option except to admit the above Company Petition, since the above Company Petition in hand satisfies all necessary legal ingredients for admission under Section 9 of the Code”.

[Amit Sangal v. Prince MFG Industries Private Ltd., IA No. 1509/2021, decided on-05-10-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the parties:

For the Operational Creditor:

Mr. Anuj Solanki, Practicing Company Secretary, Mr. Rajesh Agarwal, Advocate

For the Corporate Debtor :

Mr. Dinesh Dubey, Advocate

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, NCLT Mumbai: Coram of Suchitra Kanuparthi, Judicial Member and Chandra Bhan Singh, Technical Member, observed that,

“…a Judicial authority ought not to pass Orders which would lead to further multiplicity of proceedings.”

The instant application was filed by the Operational Creditor who had earlier initiated the corporate insolvency resolution process against the Corporate Debtor−Rolta India Ltd. The applicant−Operation Creditor now sought withdrawal of his company petition admitted under Section 9 of the Insolvency and Bankruptcy Code, 2016.

The applicant worked as an employee of the Corporate Debtor from March 2013 to June 2019, when he was relieved from services without settlement of arrears of salary and other dues. Consequently, he filed a petition under Section 9 which was admitted by the National Company Law Tribunal, Mumbai (“NCLT”), in May 2021 and an Insolvency Resolution Professional was appointed for the Corporate Debtor.

Thereafter, further negotiations took place between the parties and they reached a settlement agreement. Consequently, the application requested the Insolvency Resolution Professional to file an application under Section 12-A (Withdrawal of application admitted under Section 7, 9 or 10). As the Insolvency Resolution Professional did not file the application immediately, the applicant preferred the Section 12-A application before the NCLT.

The withdrawal application was vehemently opposed by the Financial Creditors (a consortium of several Public Sector Banks) and some of the other ex-employees. Notably, over 75 other petitions under Sections 7 and 9 of  IBC were pending against the Corporate Debtor.

Analysis, Law and Decision

Instant application had been filed under Section 12-A of the IBC read with Rule 11 of the NCLT Rules, 2016 by an employee of the Corporate Debtor company in the capacity of Operational Creditor seeking withdrawal of the company petition in terms of Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Applicant mentioned that he had approached the Insolvency Resolution Professional for filing the Application in Form FA under Regulation 30-A(1)(a) to seek withdrawal of the admitted company petition. However, he stated that the Insolvency Resolution Professional did not cooperate and, therefore, the applicant was compelled to file the present application on their own motion under Rule 11 of the NCLT Rules seeking withdrawal of the admitted company petition.

The Insolvency Resolution Professional mentioned that she had received claims/intimation of claims of about Rs 5523.81 crores from financial creditors, operational creditors and workmen employees of Rolta India Limited.

Further, the Bench noted that even under Workmen and Employees’ claim there were 567 employees whose claims had been collated by the Insolvency Resolution Professional. However, the settlement entered into by the Corporate Debtor was only with 32 employees. It was also noted that even the settlement which was proposed by the promoter on behalf of the Corporate Debtor company kept aside majority of the workmen employees’ claim which had been brought out by the Insolvency Resolution Professional. Moreover, the proposed settlement with the employees under the Joint Settlement Agreement will be done only after they withdraw the petition. The Bench observed:

“…Corporate Debtor is willing to pay the major part of the dues to the employees only subsequent to withdrawal of petition through the settlement jointly and/or severally with the employees. The Bench feels that this provides an escape route to both the promoter as well as to the Corporate Debtor Company to conveniently wriggle out of the partial mini settlement at any point of time.”

Major Issue 

The Tribunal noted the major issue:

Whether it would be proper for the Bench to allow withdrawal of corporate insolvency resolution process (“CIRP”) under Section 12-A or to exercise, its discretion to reject the present application under Section 12-A?

The Bench was fully aware that after passing the “Admission Order” dated 13-05-2021 and after the commencement of CIRP, the proceeding are in rem and therefore, any decision regarding the continuation or otherwise of CIRP has to be decided in the interest of all stakeholders and not just a handful of employees. It was reiterated:

“…under Section 53 of IBC the debts of the workmen rank equally with the financial debt owed to the secure/ unsecured creditors.”

In view of the above, it was stated that it cannot be ignored that Tribunal has to take into account the interest of all stakeholders. Before taking the discussion further, the Bench relied upon some of the prominent judgments in respect of the scope and ambit of Section 12-A of IBC. Supreme Court in the decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, clearly directed that interest of all stakeholders have to be considered while accepting or disallowing an application for withdrawal.

Supreme Court recently in the matter of Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 SCC OnLine SC 268 has clearly observed that when a petition under Section 7 of IBC is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as corporate insolvency resolution process is required to be considered through the mechanism provided under IBC.

Further, the Tribunal noted that in the present matter, there were several Financial Creditors and total financial claim collated by the Insolvency Resolution Professional in the matter of Rolta India Ltd. was upward of Rs 5000 crore. Thus, this itself would be an enough ground to disallow the present application for withdrawal under Section 12-A. The Tribunal said:

“…even in the event of the original creditor [and] the Corporate Debtor settling their disputes prior to the constitution of the CoC, the Tribunal has sufficient jurisdiction to reject an application under Section 12-A of the IBC if the facts and circumstances of the case warrants such rejection.”

Tribunal in view of the above, expressed that, even if withdrawal was permitted, it is a fact that all the dues of all the employees of the Corporate Debtor company were not being settled. About more than 100 employees had lodged their claims against the Corporate Debtor. However, only some employees’ claims were being settled by the ex-management/promoter of the company. Therefore, the purported settlement lacked bona fide.

Moreover, the interest of the employees would be taken care of during the CIRP of the Corporate Debtor and they being operational creditors will be entitled to their rights as provided for under the IBC. Concluding, the Bench said that it had no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

In view of the above, the Bench dismissed the application filed under Section 12-A of the IBC and the CIRP against the Corporate Debtor company would continue. [Dinesh Gupta v. Rolta India Ltd., MA No. 1196 of 2021, decided on 6-08-2021]


Advocates before the Tribunal:

For the Promoter: Mr. Prateek Seksaria, Advocate.

For the IRP: Ms. Ranjana Roy Gawai, Mr. Pervinder, Mr. Vineet Kumar, Advocates a/w Ms. Vandana Garg, IRP.

For the Financial Creditor: Mr. Rohit Gupta, Mr. Nausher Kohli, Advocates.

For the Operational Creditor: Mr. Nausher Kohli and Mr. Rohit Gupta, Advocates

Op EdsOP. ED.

The Insolvency and Bankruptcy Code, 2016 (IBC)1 is still in the nascent stage, wherein day-to-day the legislature try to strengthen the Code with clarificatory amendments; and/or as well as the Tribunals and the courts of this country try to strengthen the Code by setting new judicial precedents, explaining the scope and ambit of the Code which came into force in 2016.

Insolvency and bankruptcy jurisprudence has undoubtedly witnessed many controversies with regard to the various facets of the Code. Notable controversies include the applicability of Section 92 application for repayment of advances lends out by the operational creditor to the corporate debtor for procuring goods which began from a decision rendered by the NCLT, Kolkata Bench in SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.3. However, NCLT, Mumbai in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.4; has taken a contrary view while dealing with the issue. Other notable controversies include the subject-matter of advance does not fall under the definition of debt i.e which has also been dealt with by the National Company Law Appellate Tribunal in Daya Engg. Works (P) Ltd. v. UIC Udyog Ltd.5,  Kavita Anil Taneja v. ISMT Ltd.6, Roma Infrastructures India (P) Ltd. v. A.S. Iron & Steel (I) (P) Ltd.7, and Andal Bonumalla v. Tomato Trading LLP8.

The latest controversy that has gained considerable importance in insolvency and bankruptcy jurisprudence is the determination of advance lend out for the procurement of goods or services. Although the National Company Law Appellate Tribunal (NCLAT) has on many occasions delivered seminal judgments on this issue there still appears to be room for uncertainty, this article will study the latest position of law propounded by the Appellate Tribunal with regards to the determination of Section 9 application filed by operational creditor.

The significance of the term operational debt and operational creditor

Under IBC, for an amount to be claimed by any person as due to a person representing an “operational creditor”9 such person should demonstrate that; first, such an amount should fall within the definition of “claim” as defined under Section 3(6)10 of the Insolvency and Bankruptcy Code, 2016, and secondly, such a claim should be able as debt as defined under Section 3(11)11 of the Insolvency and Bankruptcy Code, 2016, and thirdly, the “debt” should fall within the purview of Section 5(21)12 of the Insolvency and Bankruptcy Code, 2016.

At this juncture, it is important to understand and note that the Code, does not define and/or explicitly say that the debt due by the corporate debtor should be from an actual transfer of goods or services for a claim to be recognised as an operational debt. However, any amount to be claimed as a debt need to have a direct.

To begin understanding the principle adopted by the Tribunal and the Appellate Tribunal to deal whether the amount advanced by the operational creditor for procuring goods or services would fall under the definition of debt under IBC. It would be pertinent to note here, that the National Company Law Tribunal (NCLT), Kolkata in SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.13, the Tribunal had to interpret, whether the debt of the operational creditor as claimed falls under the definition of the debt as defined under Section 3(11) of the Insolvency and Bankruptcy Code, 2016, and whether the operational creditor would fall under the definition as defined under Section 5(20) of the  Insolvency and Bankruptcy Code, 2016. The Tribunal held that:

“14. A reading of Section 5(21) of the Code, it is clear that the debt includes a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, State Government or any local authority. Nor fall within the definition of sub-section (21) of Section 5 of the Code, so the question is whether refund claim of the advance paid for rending service by the corporate debtor would fall within the meaning of a claim in respect of the provision of goods; or services including employment.”

While deciding the above,  NCLT, Kolkata also considered the judgment of NCLT, New Delhi in Sajive Kanwar v. AMR Infrastructure15, wherein the Tribunal discussed in detail the definition of the operational creditor.

The same issues have been adjudicated by  NCLT, Mumbai Bench in TATA  Chemicals Ltd. v. Raj Process Equipments and Systems (P) Ltd.16, wherein the Tribunal also rendered that the debt does not come within the definition of “debt” as defined under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

However, the said position was again dealt with by NCLT, Mumbai in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.17, wherein the Tribunal had taken a contrary view from the other Benches of the National Company Law Tribunal. In the instant case, the issue before the Tribunal was whether the advance token amount claimed could be considered an operational debt under IBC. The Tribunal while rendering its decision, applied the test of the intention of the parties. The test was to exchange goods or services for which the operational creditor has paid in advance. While dealing with the same, the Tribunal held that the refund of advance is in connection with the goods or services for repayment of dues by the corporate debtor who had accepted the payment, even though the agreement was not fructified. Therefore, the application filed by the operational creditor is admitted as the debt due is debt as defined under the Code.

Thereafter in 2019, the National Company Law Appellate Tribunal had to revisit this topic in Kavita Anil Taneja v. ISMT Ltd.18. The respondent in this case, filed an application under Section 9 of Insolvency and Bankruptcy Code, 2016 for alleging default amounting to Rs 2,10,00,000. The Adjudicating Authority (National Company Law Tribunal), Mumbai Bench taking into consideration admitted the application by the impugned order. The appellant challenged the said order and the main issue before the Tribunal was that the respondent does not come within the definition of “operational creditor”. The 2-Member Bench of the Tribunal held:

  1. 4. Section 5(20) defines “operational creditor” which is read with Section 5(21) which defines “operational debt”. Hence in this present case, it is clear from the work order that the amount of Rs 2,60,000,00 was advanced by the respondent to the appellant for the supply of 10,000 metric tons of Indonesian Thermal Coal. Form the aforesaid fact, we find that the respondent had not supplied any goods nor provided any services and therefore, it does not come within the meaning of “operational creditor” and set aside the impugned order by the adjudicating authority.

In August 2020, a 3-Member Bench of the National Company Law Appellate Tribunal had another occasion to revisit this topic in Andal Bonumalla v. Tomato Trading LLP19.  The Tribunal while deciding on this issue whether the advance amount paid by Respondent 1 to Respondent 2 for supply is an operational debt, considered the views of the Tribunal as rendered in Kavita Anil Taneja case20 and Roma Infrastructures India (P) Ltd. case21, and concluded that the advance amount paid by the respondent is not an operational debt, hence the impugned order dated 3-6-2019 was set aside.

Thereafter in 2021, another conundrum had arisen before the 2-Member Bench of the National Company Law Appellate Tribunal in Joseph Jayananda v. Navalmar (UK) Ltd.[22]. While interpreting the position, inter alia took a contrary view in respect of the same position which was decided and/or settled by the three-Member Bench of the Appellate Tribunal. In this instant case, the monies were advanced by Respondent 1 to the corporate debtor as  advance payment for work to be done in the future. Admittedly, the work was to be done in terms of the General Agency Agreement between the parties. The advance payment was made for the purpose of Turnkey projects and capital goods, but the said amount was adjusted towards cost and expense by the corporate debtor.

The Tribunal instead of applying the ratio as laid down by the three-Member Bench  Appellate Tribunal employed a different method of inquiry altogether. Although the Tribunal took into consideration a decision adjudicated by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[23], that an operational debt there is no consideration for the time value of money. Rather, the Tribunal in this present case has held:

As per the General Agency Agreement between the operational creditor and the corporate debtor, the corporate debtor acted as an agent of the former in India and collected various payments due in operational credito’s customers name. Since the corporate debtor is an agent and service provider of the operational creditor, the amounts due under the transaction would fall within the ambit of operational debt as defined under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

Conclusion

It flows from SHRM Biotechnologies (P) Ltd. v. VAB Commercial (P) Ltd.[24], that as per the NCLT’s Kolkata Bench, the advance amount given in a situation where the underlying basis of the advance amount is a contract to transfer goods or services, in these situations the advance amount given will not be treated as operational debt, because the intention of parties was to engage in an exchange of goods or services. As such, other Benches of the NCLT have a contrary view the one dealt by NCLT, Mumbai Bench in Sunteck Realty Ltd. v. Goodwill Theatres (P) Ltd.[25]

However, the same ratio has been settled by a three-Member Bench of NCLAT in Andal Bonumalla v. Tomato Trading LLP[26], but recently the issue again cropped up before a 2-Member Bench of NCLAT in Joseph Jayananda v. Navalamar (UK) Ltd.[27], which had a contrary view as regards to the advance amount given in a situation where the underlying basis of the advance amount is a contract to transfer goods or services, in this situation the advance amount given will not be treated as operational debt because the intention of parties was to engage in an exchange of goods or services.

What is interesting, however, is that one of the Members of the 2-Member Bench was also a member of the 3-Member Bench of NCLAT which has categorically held that the basis amount advanced, no Section 9 application lies where the applicant had neither supplied goods or services. There also exists another 3-Member Bench decision of NCLAT reiterating the aforesaid provision.

Going forward would be interesting to see whether NCLT/NCLAT decides to follow the 2-Member Bench decision (which appears to correct interpretation) or the contrary view taken by the 3-Member Bench.


*Advocate. Author can be reached at  rahul.poddar94@gmail.com

1 Insolvency and Bankruptcy, Code, 2016.

2 Section 9 IBC.

3 2018 SCC OnLine NCLT 28558.

4 CP (IB) 3990/MB/2019, decided on 7-1-2021 (Mumbai Bench).

5 2018 SCC OnLine NCLAT 349.

6 2019 SCC OnLine NCLAT 512.

7 2019 SCC OnLine NCLAT 822.

8 2020 SCC OnLine NCLAT 624

9 “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

10 “claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; and (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

11 “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

12 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

13 See supra Note 3.

15 2017 SCC OnLine NCLT 16279 

16 2018 SCC OnLine NCLT 29791

17 See supra Note  4.

18 See supra Note  6.

19 See supra Note  8.

20 See supra Note  6.

21 See supra Note  7.

[22] 2021 SCC OnLine NCLAT 116.

[23] (2019) 8 SCC 416 : 2019 SCC OnLine SC 1005.

[24] See supra Note  3.

[25] See supra Note  4.

[26] See supra Note  8.

[27] See supra Note  23.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Venugopal M (Judicial Member) and Alok Srivastava (Technical Member) held that a demand notice is a forerunner to the commencement of insolvency proceedings against a corporate debtor. Unpaid demand notice is good enough to exhibit the debtor’s inability to pay its debts for bankruptcy proceedings. If a bonafide dispute is established then an ‘Insolvency’ petition is not the appropriate proceeding to determine the validity of a disputed debt.

On being aggrieved with the decision of National Company Law Tribunal, Mumbai, the present Company Appeal was preferred by the appellant.

Appellant submitted that no ‘Demand Notice’ was ever served on the Corporate Debtor/Second Respondent as per Section 8 of the Insolvency and Bankruptcy Code.

Tribunal’s Assessment

Tribunal noted that the appellant’s plea stated that the alleged Demand Notice of the respondent 1 was sent to an address and the same was not registered address of the ‘Corporate Debtor’ as per the master data of the ‘Corporate Debtor’ on MCA website.

Further, it was submitted by the appellant that the Demand Notice was knowingly addressed to the wrong address of the ‘Corporate Debtor’ by respondent 1.

Tribunal expressed that:

As per Section 8 of the I&B Code an Operational Creditor is required to deliver a demand notice on the occurrence of the default within ten days from the receipt of the demand notice, the Corporate Debtor shall bring to the notice of the Operational Creditor ‘the existence of the dispute’, if any, and the record of the pendency of the suit or arbitration proceedings before the receipt of such notice or invoice in relation to such dispute.

While proceeding with discussion in the above matter, Bench also stated that a change in address of the registered office of the ‘Corporate Debtor’ cannot be a ruse for the failure of the party concerned to send/issue a ‘Demand Notice’ as per Section 8 of the I&B Code. In fact, serving the demand notice to the corporate debtor is mandatory.

“If a demand notice payment under the code is issued, the ‘Corporate Debtor’ will appreciate in right earnest the consequences flowing on account of failure to pay the ‘operational debt’. Also, that . after transfer of the case form High Court to Tribunal (in respect of winding up petition) an Operational Creditor is required to submit all information including the details of the proposed Insolvency Professional.”

Tribunal opined that service of ‘Demand Notice’ to the second respondent is mandatory as per Section 8 of the Code.

Further the Bench while making observations in the present matter also added that it cannot be forgotten that the proceedings under Section 138 NI Act pertain to criminal liability for dishonour of cheques issued and do not bar an application under Section 9 of the Code. Likewise, the pendency of proceedings under Order 37 of the civil Procedure Code will not prohibit an application under Section 9 of the Code.

While concluding, the Tribunal held that:

Since the ‘Service of notice’ at the registered address of the ‘Corporate Debtor’ was not established to the subjective satisfaction of the Tribunal and the admitted fact being that the notice sent to the second respondent at its registered office got returned, the said admission of debt and the reference with regard to NI Act that a holder of cheque received the cheque for the discharge either in whole or in part of any debt or other liability will not in any way heighten or improve the case of appellant.

Since the notice as per Section 8 of I&B Code was not served upon the corporate debtor and the same got returned, NCLT’s decision is to be set aside.

Hence NCLT’s order is to be declared as illegal in appointing the ‘Interim Resolution Professional’ declaring moratorium and all other orders passed.  Corporate Debtor is therefore released from all the rigour of law and is allowed to function independently through its Board of Directors.

Before parting, Tribunal granted liberty to the Operational Creditor to issue a fresh notice under Section 8 of I&B Code and on receipt of such notice of service if there is ‘Debt and Default’ to file a fresh application under Section 9 IBC. [Shailendra Sharma v. Ercon Composites, 2021 SCC OnLine NCLAT 3, decided on 13-01-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi: The 3-Member Bench of Justice Bansi Lal Bhat (Acting Chairperson), V.P. Singh, Member (Technical) and Shreesha Merla, Member (Technical), rejected the appeal filed by the Operational Creditor against the order of NCLT, after finding a need for ‘further investigation’ in the case.

The Appellant (Operational Creditor) and the Respondent (Corporate Debtor) entered into a Business Transfer Agreement (BTA) dated 7 April 2018 for the transfer of undertaking on a Slump Sale basis under Section 2(42-C) of the Income Tax Act, 1961 at a lump sum amount of Rs 123 Crores. The appellant contended that the Corporate Debtor had only transferred a sum of Rs 65 Crores and the remaining debt of Rs 58 Crores was unpaid.

The Appellant contended that after the satisfaction of ‘condition precedent’ relating to transfer, a compliance notice was submitted to the Corporate Debtor on 4 June 2018, which was acknowledged by the Corporate Debtor. It was further submitted, the sale was consummated and the possession of Undertaking was handed over by the Operational Creditor to the Corporate Debtor. Demand for payment was regularly communicated to the debtor but no payment was made. He also contended that the NCLT erred in deciding the judgement by not appreciating the facts and correct perspective of law.

The Respondent contended that the impugned appeal was premised on the suppression of facts and information, misrepresentation and gross misconstruction of the provision of the business transfer agreement. They further argued that it had replied to the demand notices and the payment of outstanding debt was made into 3 Tranche Payments as more particularly specified in the BTA. They also argued that post slump sale transaction was under the scope of IBC proceedings and in reply to the demand notice the corporate Debtor raised the issue of pre-existing dispute.

The Tribunal relied on the principle of ‘pre-existence’ of dispute as interpreted in the case of Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353. The Court said that “all that the Adjudicating Authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster”. After examining the documents supplied by both the parties, the Tribunal found that issues had been raised by the corporate debtor before the receipt of demand notices which proved ‘pre-existence’ of dispute and there was a plausible contention in the defence raised by the corporate debtor which required further investigation. Therefore, the appeal was rejected and no substance was found in the appeal. [Allied Silica Limited v. Tata Chemicals Ltd.,  2020 SCC OnLine NCLAT 613, decided on 11-08-2020].

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench of S.J. Mukhopadhaya, Chairperson and Justice A.I.S Cheema, Member (Judicial) and Kanthi Narahari, Member (Technical) upheld the impugned decision whereby the appellant’s (Operational Creditor’s) application under Section 9 of the Insolvency and Bankruptcy Code, 2016, filed against the respondent (Corporate Debtor) was rejected.

Operational Creditor’s case was that despite repeated requests, the Corporate Debtor failed to make payments. Per contra, the Corporate Debtor submitted that it was willing to pay the entire amount subject to the condition that the Operational Creditor gets himself registered under the Goods and Services Tax, 2017. The Corporate Debtor also offered a demand draft to the Operational Creditor, which he refused to accept.

Aditya Diwan, Arpit Marwah and Karan Nagpal, Advocates appeared for the Operational Creditor. Per contra, the Corporate Debtor was represented by Y. Suryanarayana, Advocate.

On considering the facts and circumstances, the Appellate Tribunal was of the view that the Operational Creditor initiated the Corporate Insolvency Resolution Process (“CIRP”) with fraudulent and malicious intent for any purpose other than the resolution of insolvency or liquidation and therefore it was clearly covered under Section 65 IBC (fraudulent or malicious initiation of proceedings).

In such view of the matter, the Appellate Tribunal was inclined to interfere with the impugned order. The appeal was, thus, dismissed. [Praveen Kumar Mundra v. CIL Securities Ltd., 2019 SCC OnLine NCLAT 334, decided on 14-05-2019]

Case BriefsSupreme Court

Supreme Court: Holding that the trade union represents its members who are workers, to whom dues may be owed by the employer, which are certainly debts owed for services rendered by each individual workman, who are collectively represented by the trade union, the bench of RF Nariman and Vineet Saran, JJ said,

“to state that for each workman there will be a separate cause of action, a separate claim, and a separate date of default would ignore the fact that a joint petition could be filed under Rule 6 read with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with authority from several workmen to one of them to file such petition on behalf of all.”

The Court was deciding the question whether a trade union could be said to be an operational creditor for the purpose of the Insolvency and Bankruptcy Code, 2016.

The Court noticed that a trade union is certainly an entity established under a statute – namely, the Trade Unions Act, and would therefore fall within the definition of “person” under Sections 3(23) of the Code. This being so, it is clear that an “operational debt”, meaning a claim in respect of employment, could certainly be made by a person duly authorised to make such claim on behalf of a workman. Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognises the fact that claims may be made not only in an individual capacity, but also conjointly.

It was further noticed that a registered trade union recognised by Section 8 of the Trade Unions Act, makes it clear that it can sue and be sued as a body corporate under Section 13 of that Act. Equally, the general fund of the trade union, which inter alia is from collections from workmen who are its members, can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party, and which is undertaken for the purpose of protecting the rights arising out of the relation of its members with their employer, which would include wages and other sums due from the employer to workmen.

The Court, hence, said,

“Looked at from any angle, there is no doubt that a registered trade union which is formed for the purpose of regulating the relations between workmen and their employer can maintain a petition as an operational creditor on behalf of its members. We must never forget that procedure is the handmaid of justice and is meant to serve justice.”

[JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills, 2019 SCC OnLine SC 619, decided on 30.04.2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice A.I.S Cheema, Member (Judicial) and Kanthi Narahari, Member (Technical) allowed the appellant (shareholder of the Corporate Debtor) to pay the total dues of the Operational Creditor after the application filed against it under Section 9 of the Insolvency and Bankruptcy Code, 2016 was admitted by the the National Company Appellate Tribunal, Bengaluru.

The appellant submitted that though the Section 9 application was admitted against it, however, the Committee of Creditors was not yet constituted. He submitted that he was ready to pay the total dues of the Operational Creditor which brought the application before NCLT.

Three demand drafts brought by the appellant were produced before the Appellate Tribunal, which were directed to be handed over to the Operational Creditor in the discharge of Corporate Debtor’s liability towards it. In view of the fact that the total amount was paid to the Operational Creditor and the Committee of Creditors was not yet constituted, the Appellate Tribunal set aside the impugned order of NCLT admitting the Section 9 application against the Corporate Debtor. [A.P. Abdul Kareem v. Om Industrial Corpn., 2019 SCC OnLine NCLAT 154, Order dated 16-04-2019]