Operational Debt

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.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The bench of Abni Rajan Kumar Sinha, Judicial Member and Hemant Kumar Sarangi, Technical Member has held, that default made in payment of instalment amount as per the terms of the settlement agreement does not fall under the definition of operational debt.

Facts of the case

Operational creditor, Ahluwali Contracts (India) Pvt. Ltd. entered into a Memorandum of Understanding (MoU)/ Settlement Agreement with corporate debtor, Logix Infratech Pvt. Ltd. on 30-09-2019 for the final settlement against the work done by the operational creditor according to the ‘Work Contracts’.

The operational debtor defaulted in making payments of instalments as determined under the settlement agreement. Operational creditor filed a company petition seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against corporate debtor by invoking the provisions of Section 9 r/w Rule 6 of the Insolvency and Bankruptcy Code, 2016 (IBC) for a resolution of Operational Debt of Rs 7,72,00,000.

Issue Whether the breach of terms and conditions mentioned under the settlement agreement comes within the purview of ‘operational debt’?

Analysis and decision

Firstly, the Bench noted that operational debt means a claim in respect of provision of goods and services including employment. In the present petition, the claim of the operational creditor did not fall under the category of either goods or services provided by the operational debtor. Rather, the present application was being pressed by the operational creditor only in respect of default made due to the breach of terms and conditions mentioned under the settlement agreement.

At this juncture, the bench referred to the decision of NCLT, Allahabad in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. (Company Petition (IB) No. 343/ALD/ 2018 wherein the bench held that, “unpaid instalment as per the agreement cannot be treated as operational debt a per Section 5(21) of IBC. The failure or Breach of settlement agreement can’t be a ground to trigger CIRP against corporate debtor under the provision of IBC 2016 and remedy may lie elsewhere not necessarily before the Adjudicating Authority”. A similar view was followed in the case Nitin Gupta v. International Land Developers Pvt. Ltd. (IB No. 507/ND/2020).

Hence, the bench applied the same principle as laid down in the aforementioned cases and considered that the default of payment of settlement agreement does not come under the definition of operational debt.

Therefore, the bench dismissed the application.

[Ahluwali Contracts (India) Pvt. Ltd. v Logix Infratech Pvt. Ltd., 2022 SCC OnLine NCLT 169, decided on 03-06-2022]

Advocates before the Tribunal

For the Applicant: Adv. Dhruv Rohatgi

For the Respondent: Adv. Nitish K. Sharma

Akaant MittalExperts Corner

Recently, the Supreme Court in Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd.[1] settled on a crucial issue of defining the contours of the terms “operational creditors” and “operational debt” and expanded the same to include even the acquirer of such services and goods within its ambit.

 

In this column post, we will discuss on whether an advance payment made by one party to acquire the service or goods of the other party, entitles the former to claim an operational debt when such service or good is not provided or supplied by the latter.

Introduction

Generally, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[2] 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.

 

The problem in classifying advance payments made by one party to acquire the services or goods from the other party is that the inherent meaning of the term “operational creditor” and “operational debt”. The party which is giving the advance sum is generally the acquirer, not the provider of goods and services, hence such party cannot be the creditor who is providing any services or supplying any goods towards the operations of a company.

 

The same seems to be case when one peruses the Bankruptcy Law Reforms Committee Report that formed the basis of the Insolvency and Bankruptcy Code, 2016 (IB Code). The report 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.[3] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[4]

 

Judicial Discourse on the Issue of Advance Payment

Section 5(21) of the IB Code defines an “operational debt” as:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment 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.

 

For the present article, it is the scope of the phrase “a claim in respect of the provision of goods or services” which decides and spins the interpretation on the subject-matter.

 

Earlier, the position of law seemed to be clear on the issue that if an entity has provided goods or services, then only such a person could raise an issue that it must be paid its debt since such debt could be paid in terms of money. However, on the other hand, if a person claims that it has paid in advance for securing the services or seeking supply of goods, then the question arose whether such a person could claim that the goods or services grant such payer the status of an “operational creditor” holding a claim of an “operational debt” against the corporate debtor. Even additionally, whether repayment or reimbursement of money paid in advance could be taken to show that an “operational debt” is due.

 

The NCLAT has consistently maintained that in such cases, such payers of advance money either for receiving a supply of goods[5] or for procuring the services[6] could not claim to be operational creditors and such payment is not an operational debt.[7] While such a person is no doubt a creditor, but the payer is not an operational creditor. Consequently, such a person neither can file an application under Section 9 against its corporate debtor nor could stake any rights under the IB Code that are given to an operational creditor.[8] Even if the advance money is to be refunded by the corporate debtor, still the refund does not constitute an operational debt.[9]

 

In B. Karthikeyan v. Nonstop Courier & Cargo (P) Ltd.[10], the NCLAT took note of the fact that the appellant neither supplied any goods nor provided any services and had merely deposited money for securing franchisee rights and resultantly, held that the debt could not be termed as an operational debt.

 

However, opposite conclusion was reached in Overseas Infrastructure Alliance (India) (P) Ltd. v. Kay Bouvet Engg. Ltd.[11], where the NCLAT reached the opposite conclusion. It was held that a claim for refund of advance is an “operational debt”. The creditor, who was the contractor, had advanced funds to the debtor, who was the sub-contractor, for the completion of the project. The creditor pursued recovery of the advance from the debtor after the project was terminated, but the debtor failed and/or refused to pay. While the NCLT did not decide on this issue, the NCLAT specifically held that “the appellant having advanced 10% of the contract value to respondent — sub-contractor as advance payment had a claim in respect of provision of goods or services bringing him within the definition of ‘operational creditor’, to whom an ‘operational debt’ was owed by the respondent – ‘corporate debtor’ “. (emphasis added)

 

The NCLAT here opted for an expansive interpretation of the phrase “a claim in respect of the provision of goods or services” in the definition of the term “operational debt” under Section 5(21) of the IB Code.

 

However, when the case went for appeal in the Supreme Court, it was observed that there was a genuine pre-existing dispute and the appeal was dismissed on that ground only. Therefore, the question whether non-repayment of advance payments amounted to an operational debt or not was left undecided.[12]

 

It was this phrase of an operational debt being “a claim in respect of the provision of goods or services” that became the subject matter of discussion in the decision of the Supreme Court in Consolidated Construction Consortium[13] where the Court held that a creditor seeking refund of the advanced money can stake the claim for being an operational creditor since such creditor had advanced money to the debtor in respect of provision of goods or services. In other words, it is not material as to who was the acquirer or provider of the goods or services; what was material is that the debt arose in respect of goods and services. Since an acquirer had paid advance money to the service or goods provider to procure and secure the goods and services from such provider, the same was sufficient to cloth the person who paid the advance money with the status of an “operational creditor”.

 

In Consolidated Construction Consortium[14], the appellant — Consolidated Construction Consortium Limited entered into a contract to supply light fittings to Chennai Metro Rail Limited (CMRL). The appellant had placed purchase orders for light fittings with Hitro Energy Solutions (proprietary concern) pursuant to the contract with CMRL. On behalf of the appellant, CMRL issued a cheque for INR 50 lakh to the proprietary concern, but afterwards cancelled its contract with the appellant when the project on which CMRL was working was terminated. While the appellant cleared the dues towards the CMRL by returning Rs 50 lakh, it itself was unable to recover the stated sum from the proprietary concern on account of some facts and circumstances. While the NCLT decided in favour of the appellant – advance payer, the NCLAT decided against it and dismissed the application filed under Section 9 of the IB Code.

 

When the creditor went into appeal before the Supreme Court, it first considered the relevant provisions, rules and regulations, the legislative history of the IB Code in order for a better understanding of the issue in hand.  Consequently, the Supreme Court observed that the term “operational debt” under Section 5(21) of the IB Code is defined as “claim in respect of the provision of goods and services”. Resultantly, it was opined that the definition does not restrict the claim to only those who supply goods and services, but it requires that “the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver”.

 

With respect to the observations from the report of the Bankruptcy Law Reform Committee (noted above in the column post), the Supreme Court stated that the report also “specifies that operational debt is in relation to operational requirements of an entity”.

 

It is submitted that the judgment may have overstepped the core idea behind the inclusion of operational creditors, especially when such creditors are allowed to initiate insolvency process against a corporate debtor. The idea is that the corporate debtor is ailing financially to such an extent that even its own suppliers and employees are not getting paid.

 

Conclusion

The ruling of the Supreme Court in Consolidated Construction Consortium[15] is significant because it has resolved the controversy over the legality of forward payment for goods and services, as well as the ambiguity caused by various judgments of NCLTs and the NCLAT. However, whether the interpretation opted for by the Supreme Court truly conforms to the idea behind the definition of an operational debt and an operational creditor is still unclear. Nonetheless, the ruling of the Supreme Court is another step toward narrowing conflicting positions of law in the IB Code.

† 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.

[1] 2022 SCC OnLine SC 142.

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

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

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

[5] Andal Bonumalla v. Tomato Trading LLP, 2020 SCC OnLine NCLAT 624; N.S. Rangachari v. Consolidated Construction Consortium Ltd., 2019 SCC OnLine NCLAT 1424; Kavita Anil Taneja v. ISMT Ltd., 2019 SCC OnLine NCLAT 512; Roma Infrastructures India (P) Ltd. v. A.S. Iron & Steel (I) (P) Ltd., 2019 SCC OnLine NCLAT 822.

[6]  Bhadreshwar Vidyut (P) Ltd. v. Maheshwari Handling Agency (P) Ltd., 2020 SCC OnLine NCLT 1224; Hitachi India (P) Ltd. v. Prime Infrapark (P) Ltd., 2018 SCC OnLine NCLAT 1044; P.R. Earnarst v. Ajantha Flat Owners Assn., 2019 SCC OnLine NCLAT 247, para 4.

[7]  Co. Jegannathan v. Spring Field Shelters (P) Ltd., 2018 SCC OnLine NCLAT 107.

[8] See, Ss. 24(3)(c), 24(4) and 30(2)(b) for the rights that an operational creditor is granted under the IB Code.

[9] Andal Bonumalla v. Tomato Trading LLP, 2020 SCC OnLine NCLAT 624.

[10] 2019 SCC OnLine NCLAT 873.

[11] 2018 SCC OnLine NCLAT 873.

[12] Kay Bouvet Engg. Ltd. v. Overseas Infrastructure Alliance (India) (P) Ltd., (2021) 10 SCC 483.

[13] 2022 SCC OnLine SC 142.

[14] 2022 SCC OnLine SC 142.

[15] 2022 SCC OnLine SC 142.

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)

Cyril Amarchand MangaldasExperts Corner

Insolvency and Bankruptcy Code, 2016 (IBC) has been a hot topic since its inception. However, despite it being in force for almost 6 years now, and witnessing innumerable challenges and disputes, there are still some areas which lacks clarity. “Interest” qua debt is one such zone. There has been some discussion around this issue before courts, however, there are still certain nuances that are yet developing. In this blog, we attempt to consolidate the prevalent views on some of such issues. More precisely, the following:

  1. Why is there a distinction in treatment of “interest” qua “financial debt” and “operational debt” under IBC.
  2. Whether “interest” is chargeable on “operational debt”.
  3. Whether “interest” alone would qualify as “operational debt” to maintain insolvency application.
  4. Whether “interest” can be clubbed with principal debt to crossover the threshold limit of INR 1 crore.

 

Distinction in treatment of “interest” under “financial debt” versus “operational debt”

Prior to IBC, financial debt and operational debt were not considered differently for the purpose of initiating winding-up proceedings against a company for its inability to pay debt under the Companies Act.[1] However, with the introduction of IBC, the debts have been classified into two categories, namely, (i) financial debt; and (ii) operational debt. For both these debts, IBC provides for different procedures with corresponding rules and regulations.

 

Amongst many, one relevant distinction between the two debts is in relation to the component of “interest”. The term “financial debt” is defined to include “interest” (if any), while there is no mention of “interest” in the definition of “operational debt”. The definitions are reproduced below:

    1. […]

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes […]

*          *          *

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] 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;

 

Although, the distinction in the treatment of “financial” and “operational” debt and creditor has been sufficiently deliberated and upheld by the Supreme Court in the celebrated case of Swiss Ribbons (P) Ltd. v. Union of India[2], the distinction viz. the component of “interest” is not explicitly dealt with yet.

 

Some guidance, however, in this regard may be drawn from the Supreme Court decision in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[3] wherein while classifying home buyers as “financial creditors” and not as “operational creditors”, Supreme Court noted that:

  1. 42. One other important distinction is that in an operational debt, there is no consideration for the time value of money—the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor.

 

Evidently, there is no concept of “time value of money” for a debt to qualify as an “operational debt”, unlike a “financial debt”. Thus, “interest” which may be considered as a factor evidencing “time value of money” against a debt is not a sine qua non for an “operational debt”,[4] justifying absence of the term “interest” from the definition of operational debt.

 

In other terms, “interest” is not necessary for an “operational debt”, as there the consideration is the value of the goods or services sold or availed by the corporate debtor from the operational creditor. Limited relevance it may drawis when payment of the said consideration is delayed beyond a due date, and the “interest” is levied. Such interest, however, is in the form of “penalty” and not a return on investment. Thus, it could be argued that the distinction in definition do hold some rationale.

 

However, this distinction has expansive implications under IBC and has given light to newer issues such as whether “interest” is even chargeable upon an “operational debt”, and if yes, whether such interest is an “operational debt” capable of giving rise to an action under IBC Section 9, or whether can it be clubbed with the principal component of the debt to cross-over the threshold limit of INR 1 crore for filing an insolvency application. Lets see the position of law as it exists today on these issues.

Whether “interest” is chargeable on “operational debt”

There has been a difference in reasoning of different NCLTs in regard to this issue. Some have held it appropriate for “interest” to be charged as default, while others consider it more appropriate if there is a mutual agreement between parties to charge interest.

 

In the case of the former, for e.g. NCLT Mumbai in D.F. Deutsche Forfait AG  v. Uttam Galva Steel Ltd.,[5] observed that there is also some time value of money for an “operational debt” as goods or services are supplied against money as consideration. It observed that it is not expected that delay in payments of consideration beyond time is left uncharged. It is a known fact that the money today will worth less from what it was worth yesterday, and hence, any delay beyond the credit period should entitle the creditor to claim “interest”. NCLT noted that:

“[…] On commercial side, the [operational] creditor claiming interest is quite normal and justifying, after all, business always runs keeping in mind the time value of money […]”

 

Against this, NCLT Chandigarh[6] and Kolkata[7] have aligned more in line with the latter approach and held that it ismust that there is a mutual understanding between the parties for interest to be chargeable and that it cannot be a unilateral act of the creditor. For instance, in Wanbury Ltd. v. Panacea Biotech Ltd.,[8] NCLT Chandigarh held that in absence of an agreement stipulating “interest”, interest is not chargeable. It was observed that IBC does not empower the adjudicating authority to impose interest on the parties, much less determine the rate of such interest.

 

Subsequently, even NCLT Mumbai revisited this question in Vitson Steel Corp (P) Ltd. v. Capacite Infraprojects Ltd.,[9] and united with the latter approach by holding that interest cannot be claimed as an “industry practice” on an operational debt. It held:

 

“24. The object of the Code is not advanced by surprising the corporate debtor with a claim for interest firstly by claiming that it was as per industry practice and thereafter making a pitch that it was as per (MSME Act) Micro, Small and Medium Enterprises Development Act, 2006, when the operational creditor was confronted with a question posed by this Bench as to how the claim for interest was sustainable when neither the purchase order nor the invoices carried a provision therefor. […]

    1. For the reasons stated above, the present petition fails and therefore, the same is rejected.”

NCLAT too in Steel India v. Theme Developers (P) Ltd.,[10] upheld the latter approach and held that interest cannot be claimed if not agreed upon between the parties.

“[…] It is settled that the charging of interest, ought to be an actionable claim, enforceable under law, provided it was properly agreed upon between the parties.”

Thus, while there is still scope for a Supreme Court decision to settle the issue conclusively, the NCLAT decision does clarifies the position of law on this issue that “interest” is chargeable on an “operational debt” provided there is an agreement to that effect.

Whether “interest” would qualify as “operational debt” to file insolvency application under Section 9 of IBC.

While it is a good development that the interest on operational debt is being recognised and considered, there is also an unintended upshot of it as the creditors have started approaching NCLT seeking initiation of insolvency proceedings basis solely their claim towards interest even though the principal debt stands paid. This practice has, however, been deprecated regularly by both NCLT and NCLAT.

 

One of the earliest pronouncement on this issue was NCLAT decision in Krishna Enterprises v. Gammon India Ltd.[11] Here, the creditor filed a Section 9 Petition based merely upon “interest”. No principal amount was due. NCLAT Delhi although rightly dismissed the Section 9 petition but it was based on an incorrect reasoning that “interest” does not qualify as “debt” under IBC unless the interest is payable under the terms of the agreement. In other words, as per this decision, interest would qualify as “debt” if agreed between the parties.

 

  1. 5. […] the principle amount has already been paid and as per agreement no interest was payable, the applications under Section 9 on the basis of claims for entitlement of interest, were not maintainable. If for delayed payment appellant(s) claim any interest, it will be open to them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency resolution process is not the answer.

Subsequently, however, NCLAT in S.S. Polymers v. Kanodia Technoplast Ltd.,[12] moved beyond the ruling in Gammon[13] and dismissed the Section 9 petition noting that it was being pursued only for realisation of interest amount in gross misuse of the IBC process as recovery mechanism. NCLAT held:

  1. Admittedly, before the admission of an application under Section 9 of the I&B Code, the “corporate debtor” paid the total debt. The application was pursued for realisation of the interest amount, which, according to us is against the principle of the I&B Code, as it should be treated to be an application pursued by the applicant with malicious intent (to realise only interest) for any purpose other than for the resolution of insolvency, or liquidation of the “corporate debtor” and which is barred in view of Section 65 of the I&B Code.

 

In a more recent decision, Amsons Communication (P) Ltd. v. ATS Estates (P) Ltd.[14], NCLAT Delhi reaffirmed this position and held that the provisions of IBC cannot be allowed as a recovery mechanism or to recover the claim of interest by operational creditor. It was held that Section 9 petition cannot be converted into proceedings for recovery of interest by operational creditor on delayed payment, as that is not the object of IBC.

Thus, it has been settled that “interest” in itself is not sufficient to maintain a Section 9 petition under IBC.

Whether “interest” can be clubbed with principal debt to cross-over the threshold limit of 1 crore

Post Notification dated 24-3-2020[15], the executive has revised the threshold for initiating insolvency proceedings under IBC to INR 1 crore from INR 1 lakh. Consequent thereto, courts[16] have held that if the insolvency application is filed after 24-3-2020, the increased threshold will apply. High Court of Kerala too, more recently, in Tharakan Web Innovations (P) Ltd. v. NCLT,[17] held that from the date of notification, IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is INR 1 crore. Thus, no application can be filed after 24-3-2020 regarding an amount where the default is less than INR 1 crore.

 

This revision was intended to weed out applications filed for smaller defaults and to provide a breathing space to debtors during the COVID crisis. However, parties attempted to circumvent this by clubbing “interest” with “principal” debt to crossover the threshold limit.

 

Recently, in one such situation, NCLT Delhi in CBRE South Asia (P) Ltd. v. United Concepts and Solutions (P) Ltd.,[18] dismissed the Section 9 petition and held that interest amount cannot be clubbed with the principal amount to arrive at the minimum threshold of INR 1 crore. In this case, operational creditor had claimed a default of total amount of Rs. 1,39,84,400, out of which INR 88,50,886 was towards principal whereas the remaining INR 51,33,514 was towards interest. Since the principal outstanding was less than INR 1 crore, NCLT dismissed the petition as not maintainable. NCLT held:

“[…] it can be inferred that the ‘interest’ can be claimed as the financial debt, but neither there is any provision nor there is any scope to include the interest to constitute as the operational debt.”

 

While this reasoning is in line with the position of law as settled on related issues of “interest” viz. operational debt (as dealt above), it remains to be seen how different NCLTs and NCLATs look at this issue in the times to come. However, in order to prevent divergent views, it would be more apposite if these issues are settled through an authoritative judgment from NCLAT or Supreme Court and help avoid congestion before NCLT on account of filing of numerous otherwise non-maintainable Section  9 petitions.

†Partner, Cyril Amarchand Mangaldas.

†† Associate, Cyril Amarchand Mangaldas.

[1] See Delhi Cloth & General Mills Co. Ltd. v. Stepan Chemicals Ltd., 1984 SCC OnLine P&H 546 : (1986) 60 Comp Cas 1046; Krishna Chemicals v. Orient Paper and Industries Ltd., 2005 SCC OnLine Ori 159 : (2005) 128 Comp Cas 412.

[2] (2019) 4 SCC 17.

[3] (2019) 8 SCC 416.

[4] ‘Interest’ is not a sine qua non even for “financial debt” as held in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., 2021 SCC OnLine SC 513.

[5] 2017 SCC OnLine NCLT 546. In this case, there were two bills of exchange and the debtor agreed to pay within 180 days. Since, the payments were not made, interest was sought to be levied by the creditor. This order was however later set-aside by NCLAT on different grounds.

[6] Wanbury Ltd. v. Panacea Biotech Ltd., 2017 SCC OnLine NCLT 475.

[7] Gulf Oil Lubricants India Ltd. v. Eastern Coalfields Ltd., 2019 SCC OnLine NCLT 7749. In this case, invoices carried a stipulation of interest on overdue payment and the debtor countersigned the same. This order was, however, later set aside by NCLAT in view of settlement between parties.

[8] 2017 SCC OnLine NCLT 475

[9] C.P. (IB) No. 1579/MB/C-IV/2019, order dated 28-4-2020.

[10] 2020 SCC Online NCLAT 200.

[11] 2018 SCC OnLine NCLAT 360.

[12] 2019 SCC OnLine NCLAT 1310.

[13] 2018 SCC OnLine NCLAT 360.

[14] 2021 SCC OnLine NCLAT 223.

[15] See MCA Notification dated 24-3-2020 increasing the threshold from INR 1 lakh to INR 1 crore.

[16] Jumbo Paper Products v. Hansraj Agrofresh (P) Ltd., Company Appeal(AT)(Ins) – 813 of 2021 (25-10-2021). Civil Appeal No. 7092 of 2021 is pending against the NCLAT Order. No Stay is ordered yet.

[17] 2020 SCC Online Ker 23744.

[18] CP (IB) No. 797/(ND)/2021.

Akaant MittalExperts Corner

In the previous two columns, we had covered the position of law on whether a claim for an operational debt or a financial debt could be based on a decree by a court or an arbitral award. The rulings in Dena Bank v. C. Shivakumar Reddy[1], and G. Shivramkrishna v. Isgec Covema Ltd.[2] provide us with the guidance with respect to decree and/or an arbitral award being based on a financial debt and an operational debt respectively.

 

Now we will proceed with the third and final column in this three-part series.

 

The issue whether a settlement agreement is sufficient to constitute a financial or an operational debt has a long line of inconsistent rulings.

Settlement Agreement – As a Financial Debt

In Amrit Kumar Agrawal v. Tempo Appliances (P) Ltd.,[3] the financial creditor sought to base its claim of a financial debt against the corporate debtor/guarantor on a memorandum of understanding dated 22-9-2017 wherein the creditor had agreed to advance a loan of Rs 1,50,00,000 to one principal borrower along with with interest @18% per annum payable monthly. As per the MoU, the corporate debtor stood as a guarantor. However, when the cheques of the principal borrower had bounced, a settlement agreement was executed between the creditor and the corporate debtor. The corporate debtor, since was a guarantor had come forward to pay the outstanding amount of Rs 86 lakh with interest calculated at Rs 22 lakh and issued two cheques in consideration of such liability.

 

The creditor argued that their claim is based on the MoU and not the settlement agreement. The NCLAT (a) firstly held that as per the terms of the settlement agreement, the terms of the memorandum of understanding stood superseded. Then (b) it held that the obligation undertaken by the guarantor to pay Rs 86 lakh with interest calculated at Rs 22 lakh does not satisfy the ingredients of a financial debt, especially when no disbursement is made to the guarantor itself and the principal borrower was not a party to the settlement agreement.

It is submitted that the above ruling is an instance of a hyper-technical understanding of the provisions of the IB Code.

 

Previously in another ruling, when the debtor failed to comply with the terms of the master restructuring agreement, the appellant debtor pleaded that the terms of the debt stood altered and revised and therefore the element of default was missing. The aforesaid plea was rejected by the NCLAT and the order of admission was upheld.[4]

 

The position of law that a debt based on a consent decree will not be treated as a financial debt can also be found in context of real estate projects. In Arenja Enterprises (P) Ltd. v. Edward Keventer (Successors) (P) Ltd.,[5] the appellant and its associates entered into MoU about the land followed by two other supplementary MoUs. Later on, some dispute arose between the parties. The appellant, along with its associates filed a civil suit for specific performance along with other reliefs against the corporate debtor. Based on an amicable settled entered into between the parties, the civil suit was decreed where as per the settlement filed before the court, the corporate debtor had agreed to develop a group-housing complex on a plot of land measuring 22.95 acres. Out of this area, the applicant, along with another, was entitled to only 34,000 sq ft residential covered/built-up area along with proportionate super area. Given the terms of settlement if the sanction of plans is not obtained within a maximum period of 3 years from the date of signing of the settlement, in that event, further built-up area as well as liability of additional area would be imposed on the debtor.

 

Issue arose whether the terms of the consent decree tantamount to a financial debt. The NCLAT opined that in terms of Section 5(8)(f) of the IB Code, the appellant could claim a financial debt only when the amount raised from it as an “allottee” is used for a real estate project. Based on the facts and circumstances, the NCLAT firstly observed that no sum has been raised from an allottee under the real estate project. Then, it found that the financial creditor and its associates have not paid any money towards the allotment of built-up area and the entitlement of the appellant creditor is premised on the terms of settlement. In other words, in the light of the “consent decree and settlement terms”, the appellant had paid nothing in terms of money to the financial creditor and its associates. Resultantly, it was held that the appellant could neither be termed to be an “allottee” nor has any amount “being raised” from the appellant that could constitute to have the effect of a borrowing.

 

On the other hand, there is the ruling in Mahesh Kumar Panwar v. Neelam Singh[6], where the settlement agreement between the parties formed the basis of financial debt. One of the terms of the settlement agreement stipulated:

    1. …

In terms of the clauses B and 8 of the earlier valid agreement dated 6-10-2008 entered between the same parties, the first party was to handover the vacant possession of space of about 2004 sq ft on 3rd floor in tower 1 in the proposed IT complex cum corporate hub to be constructed at Plot No. 02/02 situated at Sector – 154, in the name and style “the grid” of the unit duly completed in all respect by 30-6-2011.

It is ascertained and agreed by the first party that till date no construction work has started. Consequent upon the factual position both the parties have agreed for the amicable settlement.

*                                        *                                        *

Both the parties agreed and settled for a sum of Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) which includes booking amount paid, compensation, commitment, services rendered, appreciation, etc.

 The first party has handed over post dated Cheque No. 617815 dated 1-2-2015 amounting to Rs 29,61,261 and Cheque No. 617818 amount to Rs. 1,04,39,727 both drawn at Corporation Bank, Noida total amounting to Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) to the second party in discharge of his liability and post-dated cheques for interest of deferred payment applicable as per the agreement reckoning from 1-6-2014 as per details hereunder:

*                                        *                                       *

Noting the above-mentioned terms, the NCLAT had concluded that there was a disbursal of a sum of Rs 1,34,00,988 which was against the “consideration of time value of money” i.e. interest @12.5% per annum payable from 1-6-2014.

 

Similarly, in Ludhiana Scrips (P) Ltd. v. K.C. Land & Finance Ltd.[7], the adjudicating authority had dismissed an application under Section 7 of the IB Code on the ground that the creditor did not bring on record the books of accounts with any entry showing any debit of interest in the account of the corporate debtor. The NCLAT, however, overruling the order referred to the settlement agreements[8] entered into between the parties to conclude that the interest element was very much present and the condition of time value of money stood satisfied. Consequently, the NCLAT held that the earlier compromise agreement dated 20-5-2017 and the subsequent agreement dated 15-6-2018 clarify the nature of the transaction and show that the appellant is a financial creditor to whom the respondent owes financial debt, and which is in default.

Clearly, the jurisprudence on this issue is diverging and conflicting.

 

Settlement Agreement – As an Operational Debt

With respect to an operational debt, the issue came up in Brand Realty Services Ltd. v. Sir John Bakeries India (P) Ltd.,[9] as to whether default of installments under a settlement agreement could be considered as an operational debt under the IB Code. In this case, the debtor had approached the creditor seeking investment and consultancy services and an agreement dated 28-11-2014 was entered into by the parties to that effect. Subsequently, a settlement agreement dated 15-6-2018 was entered into wherein the debtor undertook to clear the dues of the creditor.

 

Issue arose when the dues were not cleared. The NCLT in this case, firstly opined that the application under Section 9 was filed on account of breach of the terms of the settlement agreement dated 15-6-2018. The NCLT categorically rendered the findings that the claim of the creditor is not based on the invoices raised on account of the agreement dated 28-11-2014.

 

Consequently, the NCLT then referring to several precedents, including the ruling in Delhi Control Devices (P) Ltd. v. Fedders Electric and Engg. Ltd.[10], held that the debt due in terms of a settlement agreement cannot be considered as an operational debt in terms of Section 5(21) of IB Code and hence unpaid installments under the settlement agreement do not suffice to trigger resolution process against a corporate debtor.

 

Conclusion

From the three-part series discussion, it is crystal clear that: first, the decree-holder cannot be excluded from the definition of a financial or operational debt; second, an arbitral award may also be sufficient to constitute a financial or operational debt; third, the underlying debt must be based on a transaction that fulfills the criterion of a definitions laid down of financial debt and an operational debt. Lastly, the position with respect to a settlement agreement constituting a financial or an operational debt is still divergent and conflicting.

± Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice.

[1] (2021) 10 SCC 330.

[2] 2020 SCC OnLine NCLAT 909.

[3] 2020 SCC OnLine NCLAT 1202.

[4] Esther Malini Victor v. Oriental Bank of Commerce, 2019 SCC OnLine NCLAT 1107.

[5] 2020 SCC OnLine NCLAT 1188.

[6] 2018 SCC OnLine NCLAT 596.

[7] 2019 SCC OnLine NCLAT 355.

[8] Ludhiana Scrips (P) Ltd. v. K.C. Land and Finance Ltd., 2019 SCC OnLine NCLAT 355, para 9 reproduces one of the agreements dated 15-6-2018 wherein one of the clauses of the agreement purported:

A company winding petition was filed before the Punjab and Haryana High Court by Part 1 against Part 2 which is pending adjudication.

There after it was agreed between the parties that Part 2 i.e. K.C. Land & Finance Ltd will pay Rs 4.40 crores as principal amount and Rs 1.60 crores as interest. An agreement was executed between the parties on 20-5-2017 and various post dated cheques were issued.

… Part 2 i.e. M/s K.C. Land and Finance Ltd. undertakes and assures that all these cheques will be honoured in the event of default Part 1 will be at liberty to enforce this agreement by way of initiating legal proceedings against Part 1 and the amount recoverable will be with interest @18% from the date of default till the realisation of the full amount. (emphasis added)

[9] 2020 SCC OnLine NCLT 6066.

[10] 2019 SCC OnLine NCLT 8030.

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

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): A Coram of Venugopal M. (Judicial Member) and Shreesha Merla (Technical Member), while addressing the present company appeal observed that,

“…subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt’ as envisaged under Section 5 (21) of the I&B Code.”

National Company Law Tribunal, Mumbai’s Order has been challenged in the present appeal.

Leave & License Agreement

National Agriculture Co-operative Marketing Federation of India Ltd./Operational Creditor and the Corporate Debtor entered into a Leave and License Agreement for the usage of cold storage facilities for a period of 3 years.

As per Clause 1.14 of the said Agreement, in case of default in payment of any monthly licence fee, the Corporate Debtor would be liable to pay an interest @ 21% p.a. for the delayed period.

Default in Payment

The first respondent stated that the Corporate Debtor defaulted in the payment of monthly rentals. Further, the first respondent stated that the Corporate Debtor acknowledged and confirmed the ‘outstanding debt’ but despite a number of reminders and eviction notice, the debt was not paid.

In view of the above, a demand notice under in Form 3 under Section 8 of I&B Code, 2016 was issued.

Corporate Debtor denied all the above-stated claims and sought the renewal of Leave and License Agreement.

Counsel for the Appellant vehemently argued that the ‘Adjudicating Authority’ had passed an ‘Ex-Parte Order’ without giving it a sufficient opportunity to be heard.

Tribunal | Decision Analysis

Opportunity of being heard

Tribunal found force in appellant counsel’s submission that the appellant was in custody during the period and hence the minimal delay of 9 days ought to be condoned.

Tribunal noted that letters dated 15-07-2019 and 18-09-2019 were received by the Advocate for the Corporate Debtor which establish that the Corporate Debtor was aware of the proceedings.

Additionally, the Corporate Debtor is a Private Limited Company and it cannot be stated that it could not have been represented by any other person merely because the Director of the Corporate Debtor Company, was in custody.

Hence in view of the above-stated reasons, tribunal opined that sufficient opportunity was given.

  • Whether due, if any, arising from the ‘Leave and license Agreement’ is construed as an ‘Operational Debt’?
  •  Whether there is any ‘Pre-Existing Dispute’ prior to the issuance of the Demand Notice?

Criteria to prove a ‘Debt’ as an ‘Operational Debt’

(a) Claim in respect of provisions for goods and services
(b) Employment or debt in respect of dues and
(c) Such repayment of dues which should arise under any law in force at that time.

Whether the First Respondent by providing ‘Lease’ would be treated as an ‘Operational Creditor’, it is necessary to ascertain whether the First Respondent is providing services to the Corporate Debtor and whether the alleged dues fall within the meaning of Section 5 (21) of the Code?

Appellant’s Counsel relied on the Tribunal’s decision in M. Ravindranath Reddy v. G. Kishan,2020 SCC OnLine NCLAT 84 wherein it was observed that the appellant being a tenant, having not made any claim in respect of the provisions of the goods or services and debt in respect of repayment of dues does not arise under any law for the time being in force payable to the Central Government or State Government.

Tribunal stated that since the law has not gone into defining goods or services– hence, one has to rely on general usage of the terms so used in the law, with due regard to the context in which the same has been used.

Bankruptcy Law Reforms Committee (BLRC), in its report dated November 2015 recommends the treatment of lessors/landlords as Operational Creditors. However, in the definition adopted by the Legislature only claims relating to ‘Goods and Services’ were included within the definition and purview of ‘Operational Debt’.

In view of the terms and conditions of the Leave and License Agreement, appellants have leased out the premises for ‘Commercial Purpose’ which comes under the meaning of ‘Service’ for the purpose of Section 5(21) of the I&B Code, 2016.

Therefore, as the premises in the case on hand is leased out for ‘Commercial Purpose’, the cold storage owner/NAFED on collection is required to pay ‘service tax’ which is reflected in the tax invoices and ‘Ledger Accounts’ which is part of the record filed.

Further, with regard to issue number second, it was noted that though the Agreement was terminated, yet the Corporate Debtor continued to be in possession of the said storage facility and even sought an extension for a further period of 2 years.

Hence, Tribunal stated that ‘Debt’ was ‘ due and payable’.

Test of ‘existence of a dispute’ | Pre-Existing Dispute

It is evident on applying the test of ‘existence of dispute’ that without going into merits of the disputes, the argument raised by the Appellant cannot be construed as a plausible contention requiring further investigation or an assertion of facts supported by evidence.

A dispute does not truly exist in fact between the Parties and, therefore, this Tribunal held that the communication on record specifically the letter dated 19-09-2018, addressed by the Appellant themselves prior to the issuance of the Demand Notice clearly established that there is a ‘Debt due and payable’ and there is no ‘Pre-Existing Dispute’.

Tribunal also relied on the Supreme Court decision in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353.

In view of the above, the present appeal failed. [Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd., 2020 SCC OnLine NCLAT 674, decided on 07-10-2020]