IBC – Operational debt includes advance payment made to a debtor company for the provision of goods or services: Supreme Court

The Supreme Court observed that the operational creditor includes all those who provide or receive operational services from the debtor company, which ultimately leads to an operational debt.

A debt arising from a deposit paid to a debtor company for the supply of goods or services would be considered an operating debt, said the bench consisting of judges DY Chandrachud, Surya Kant and Vikram Nath.

In this case, the National Company Law Appellate Tribunal (NCLAT) (which reversed the NCLT’s decision) dismissed an application under Section 9 of the Insolvency and Bankruptcy Code 2016 (IBC) finding that the plaintiff was a “purchaser”, and therefore did not fall within the definition of an “operational creditor” according to the IBC since it did not provide any goods or services to the Owner Company.

One of the issues raised in the appeal to the Supreme Court was whether appellant-plaintiff is an operational creditor under the IBC even though it was a “purchaser”? [Other issues were (a) Whether the respondent took over the debt from the Proprietary Concern; and (iii) Whether the application under Section 9 of the IBC is barred by limitation.? ]

Operational creditor and debt

Article 5(21) defines “operating debt” as “a debt relating to the provision of goods or services, including employment, or a debt relating to the reimbursement of duties resulting from any law now in force and payable to the central government, any state government or any local authority”. “Operating Creditor” means a person to whom an operating indebtedness is owed and includes any person to whom such indebtedness has been lawfully assigned or transferred.

The phrase “in respect of” in Article 5(21) should be interpreted broadly and purposively

The court noted that the NCLAT in that case accepted the assertion that operational debt and operational creditors under the IBC would only include those who provide goods or services to a corporate debtor and would exclude those who receive goods or services from the debtor company. The bench disagreed with this “narrow” interpretation and gave the following reasons:

Article 5(21) defines “operating debt” as a “claim relating to the supply of goods or services”. The operating condition is that the debt must have a link with a supply of goods or services, without specifying who should be the supplier or the recipient. Such an interpretation is also supported by the observations of the BLRC report, which clarifies that operational debt is related to the operational needs of an entity. Secondly, Section 8(1) of the IBC, read together with Rule 5(1) and Form 3 of the 2016 Implementing Rules, makes it very clear that an operational creditor may issue an opinion relating to an operational debt. either by means of a formal notice or a purchase invoice. Thus, the presence of an invoice (for having provided a good or a service) is not a sine qua non condition, since a notice of formal notice can also be issued on the basis of other documents proving the existence of the debt. This is made even clearer by Regulation 7(2)(b)(i) and (ii) of the CIRP Regulation 2016 which provides an operational creditor, seeking to claim operational debt in a CIRP, an option between relying on a contract for the supply of goods and services with the social debtor or an invoice requiring payment for the goods and services provided to the social debtor. While the latter indicates that the operational creditor should have provided goods or services to the debtor company, the former is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and the debtor company, including those where the creditor may have received goods or services from the debtor company. Finally, the judgment of this Court in the Pioneer Urban case (supra), in comparing the assignees in real estate projects to the operational creditors, noted that the latter do not receive any time value for their money in return but only provide it in exchange for goods or services. Indeed, the decision notes that “[e]The examples given of down payments made for turnkey projects and capital goods, where customization and uniqueness of such goods are important due to which down payments are made, are totally inappropriate as examples vis- vis-à-vis the installments paid by the beneficiaries”, this leaves no doubt that a debt arising from an installment paid to a debtor company for the supply of goods or services would be considered an operating debt. .

The court added that the phrase “in respect of” in Article 5(21) should be interpreted broadly and purposively to include all those who provide or receive operational services from the debtor company, who conduct ultimately a debt. “In the present case, the appellant clearly sought operational service from the Proprietary Concern when it entered into a contract with them for the supply of light fixtures. Moreover, when the contract was terminated but the Company nevertheless cashed the deposit cheque, an operating debt arose in favor of the appellant, which remains unpaid today. Therefore, the appellant is an operational creditor under section 5(20) of the IBC.“, said the court.

The court also noted that the dispute in this case is not related to the quality of the services provided by the owner company, but relates entirely to the reimbursement of the advance paid to it, upon the cancellation of the project. underlying.

Answering other questions also in favor of the plaintiff-appellant, the bench allowed the appeals, setting aside the NCLAT judgment.

Case Name: Consolidated Construction Consortium Limited v Hitro Energy Solutions Private Limited

Quote. : 2022 LiveLaw (SC) 129

Case n°|date: CA 2839 of 2020 | February 4, 2022

Coram: judges DY Chandrachud, Surya Kant and Vikram Nath

Counsel: Adv MP Parthiban for the appellant, Adv K Parameshwar for the respondent

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