Introduction
Since the enactment of the Insolvency and Bankruptcy Code, 2016, (“IBC”), the Indian judiciary has been facing numerous interpretational challenges on various provisions of the IBC. While certain challenges have been put to rest by introducing amendments to the legislation, a larger bunch of the issues have been settled by interpretations adopted by the judiciary. The Courts and Tribunals, in interpreting the provisions of the IBC, have aspired to achieve the objective of the IBC, i.e. maximising the value of assets of the corporate debtor.
One such interpretational challenge that has surfaced while dealing with the various categories of claims under the IBC, is whether the claim for refund of an advance amount against a corporate debtor will tantamount to an ‘operational debt’ under the IBC, and therefore, by extension, can such a creditor be categorised as an ‘operational creditor’ for the purposes of the IBC.
Until February 4, 2022, such category of creditors took a leap in the dark by filing petition as operational creditors without having visibility on the success of such claims. This was especially due to contrasting judgments rendered by the Hon’ble National Company Law Tribunals (NCLTs), and also the Hon’ble Appellate Tribunal (NCLAT), on the aforesaid question. However, this conundrum has been recently settled by the Hon’ble Supreme Court vide its landmark judgement in M/s Consolidated Construction Consortium Limited v. M/s Hitro Energy Solutions Private Limited [1] (“C3L v. Hitro”), as elucidated below.
Factual Matrix
M/s Consolidated Construction Consortium Limited (“Operational Creditor”) had entered into a contract for supply of light fittings to Chennai Metro Rail Corporation (“CMRC”). It was to source these light fittings from M/s Hitro Energy Solutions, a proprietary firm subsequently acquired by M/s Hitro Energy Solutions Private Limited (for ease of reference, hereinafter referred to as the “Corporate Debtor”. This blog focusses on the issue of scope of operational debt and does not deal with the issue of raising a claim against a proprietary firm being acquired by a company).
In furtherance of this arrangement, and upon the request of the Operational Creditor, CMRC issued cheques amounting to Indian Rupees Fifty Lakh (“Advance Amount”) to the Corporate Debtor as an advance for its order with the Operational Creditor. Thereafter, CMRC cancelled its project with the Operational Creditor but the Corporate Debtor, nevertheless, encashed the cheques for the Advance Amount. The Operational Creditor repaid the Advance Amount to CMRC and, in turn, claimed the reimbursement from the Corporate Debtor. In response, the Corporate Debtor maintained that they would be willing to refund the Advance Amount if, and only if, the CMRC approached them directly.
The Hon’ble NCLT admitted the application made by the Operational Creditor under Section 9 of the IBC and opined that the Corporate Debtor did owe the Operational Creditor an outstanding operational debt to the tune of the Advance Amount. In appeal, the NCLAT set aside the NCLT’s decision, dismissed the application of the Operational Creditor under Section 9 of the IBC and released the Corporate Debtor from the ongoing corporate insolvency resolution process on the ground that the Operational Creditor was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ since it did not supply any goods or services to the Corporate Debtor. Against this background, the Operational Creditor preferred an appeal before the Hon’ble Supreme Court, thereby challenging the order of the Hon’ble NCLAT.
Analysis
Prior to embarking upon the path adopted by the Hon’ble Supreme Court to resolve this issue, it is pertinent to peruse the definitions of certain relevant terms, such as ‘operational creditor’ and ‘operational debt’ as defined under Sections 5(20) and 5(21) of the IBC, respectively, which form the genesis of the issue at hand:
“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”
“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”
The question that arises from a bare reading of the definitions is – who is entitled to raise a claim in respect of the provision of goods or services – could it be raised only by the provider of the goods and/ or services or could it be raised both by the provider as well as the recipient of the goods and/ or services.
The Hon’ble NCLTs have taken different views at different points in time. In certain cases,[2] the Hon’ble NCLTs have adopted the purposive and contextual interpretation of ‘operational debt’ and have opined that claims made by the recipient of goods/ services are covered well within the ambit of ‘operational debt’. However, in certain other cases[3], in stark contrast, the Hon’ble NCLTs have adopted the narrower interpretation of the term ‘operational debt’ and have opined that only the claims made by the provider of goods/ services are covered within the ambit of ‘operational debt’.
Even the Hon’ble NCLAT has taken different views on this point. For instance, the Hon’ble NCLAT adopted a wider interpretation in the case of Overseas Infrastructure Alliance (India) Private Limited v. Kay Bouvet Engineering Limited[4], but adopted a narrower interpretation in the case of Kavita Anil Taneja v. ISMT Limited[5] that was decided shortly thereafter. In the case of Jospeh Jayananda v. Navalmar (UK) Limited[6], the Hon’ble NCLAT held that while the advance made by the creditor to the corporate debtor did not involve any time value for money (and hence could not be classified as a ‘financial debt’), the same was in the nature of an amount paid for services to be delivered in the future by the corporate debtor, and thus the same has to be classified as an ‘operational debt’.
The aforesaid question of law has been conclusively settled by a three-judge bench of the Hon’ble Supreme Court in the case of C3L v. Hitro. In the given fact situation (as provided above), the Hon’ble Supreme Court has opined that the Operational Creditor was entitled to the reimbursement of the Advance Amount in its capacity as an Operational Creditor of the Corporate Debtor.
The Hon’ble Supreme Court opined that the definition of ‘operational debt’ contained in the IBC means a claim in respect of the provision of goods or services. Hence, the operative requirement is that the claim must bear some nexus with the provision of goods or services, without specifying who is to be the supplier or the receiver. The judgment further goes on to state that the aforesaid interpretation is also in consonance with the observations in the Bankruptcy Law Reforms Committee Report (November 2015), which specifically states that operational debt is in relation to operational requirements of an entity. Accordingly, the Hon’ble Supreme Court opined that the phrase ‘in respect of’ contained in Section 5(21) of the IBC has to be interpreted in a broad and purposive manner in order to include, within the ambit of operational creditor, all those who provide or receive operational services/ goods from the corporate debtor.
Further, the Hon’ble Supreme Court has dwelled on the requirement of issuing a notice in relation to an operational debt either through (i) a demand notice or (ii) an invoice (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), in order to prove that the presence of an invoice (for having supplied goods or services) is not a sine qua non. A demand notice can also be issued on the basis of other documents, which prove the existence of debt. Even Regulation 7(2)(b)(i) and (ii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016, gives operational creditors an option to rely either on (i) a contract for the supply of goods and services with the corporate debtor, or (ii) an invoice demanding payment for the goods and services supplied to the corporate debtor. The option to rely on a contract (point (i) above) is purposively prescribed under the given framework, to enable even such creditors to claim as operational creditor, who are receivers of goods and services from corporate debtors.
Thus, in the opinion of the Hon’ble Supreme Court, a debt which arises out of advance payment made to a corporate debtor for supply of goods or services, would also be covered within the ambit of ‘operational debt’ under the framework of the IBC.
Interestingly, the advance money provided by home buyers is construed as ‘financial debt’[7], whereas advance monies by recipient of goods and services fall within the ambit of ‘operational debt’ under the IBC. This differential treatment has been reconciled by the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[8], as also reiterated in the case of C3L v. Hitro, by highlighting the following differences:
- operational creditors are suppliers of goods and services whereas the home buyer advances money to the developer, so that the debtor is the supplier (of the flat);
- operational creditor has no interest in or stake in the corporate debtor, unlike a home buyer who is vitally concerned with the real estate project; and
- in an operational debt, there is no consideration for the time value of money since the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor whereas in real estate projects, money raised from the allottee, is being raised against consideration for the time value of money.
Conclusion
The Hon’ble NCLAT and NCLTs were reluctant to interfere and expand the definition of “operational debt” under Section 5(21) of the IBC. However, by virtue of this landmark judgment, the Hon’ble Supreme Court has provided much needed clarity on the scope of operational debt. It is essential that terms such as “claims” and “operational debt” under the IBC are given a broader interpretation in order to protect the rights of such class of operational creditors and circumvent unnecessary conception of a separate category of creditors under the IBC. It is rather odd to construe that goods and services can only flow in one direction, for a claim to arise under the IBC. In fact, in the pre-IBC regime, creditors claiming refund of advance monies could file a petition under Section 433(e) of the Companies Act, 1956, for winding up of such company’s affairs. Thus, it is in the interest of equity that the providers of advance monies be permitted to claim as operational creditors under the IBC.
Interestingly, while this landmark judgment by the Hon’ble Supreme Court puts to rest cases wherein monies are advanced to corporate debtors for goods and services, it still remains to be seen whether monies advanced to corporate debtors for any other purposes will also be included within the ambit of operational debt.
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
bishwajit.dubey@cyrilshroff.com
[1] M/s Consolidated Construction Consortium Limited v. M/s Hitro Energy Solutions Private Limited, Civil Appeal No. 2839 of 2020 (judgment dated February 4, 2022).
[2] (i) Renish Petrochem FZE v. Ardor Global Private Limited, C.P. (I.B.) No. 33/9/NCLT/AHM/2017, before the NCLT, Ahmedabad Bench (order dated July 31, 2017).
(ii) Nupower Renewables Private Limited v. Cape Infrastructure Private Limited., TCP/3(IB)/CB/2017, before the NCLT, Chennai (order dated July 7, 2017).
(iii) Auspice Trading Private Limited v. Global Proserv Limited, CP No. 1584/IBC/NCLT/MB/MAH/2017, before the NCLT, Mumbai (order dated February 23, 2018).
[3] (i) Ranual Technology Private Limited v. Calprin Ads Private Limited, CP(IB) No. 212/KB/2018, before the NCLT, Kolkata (order dated April 26, 2018).
(ii) Daya Engineering Works Private Limited v. UIC Udyog Limited, CP(IB) No. 547/KB/2017, before the NCLT, Kolkata (order dated May 16, 2018).
(iii) Messrs. SHRM Biotechnologies Private Limited v. Messrs. VAB Commercial Private Limited, CP (IB) No. 799/KB of 2018, before the NCLT, Kolkata (order dated October 11, 2018.
(iv) Tata Chemicals Limited v. Raj Process Equipments and Systems Private Limited, CP 21/I&BP/NCLT/MAH/2018, before the NCLT, Mumbai Bench (order dated November 30, 2018.
[4] Overseas Infrastructure Alliance (India) Private Limited v. Kay Bouvet Engineering Limited, Company Appeal (AT) (Insolvency) No. 582 of 2018 (judgment dated December 21, 2018).
[5] Kavita Anil Taneja v. ISMT Limited, Company Appeal (AT) (Insolvency) No. 545-546 of 2018 (judgment dated January 24, 2019).
[6] Jospeh Jayananda v. Navalmar (UK) Limited, Company Appeal (AT) (Insolvency) No. 718 of 2020 (judgment dated April 7, 2021).
[7] Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 (judgment dated August 9, 2019).
[8] Ibid.
