Advance Paid Towards Service Is Operational Debt: NCLAT Delhi

Background Facts

Chipsan Aviation Pvt. Ltd. ("Appellant/Operational Creditor") was engaged in business with Punj Llyod Aviation Limited ("Respondent/Corporate Debtor"), for charter services of aeroplanes and helicopter, hired on long term basis from non-scheduled operators/owners. On 28.03.2016 the Operational Creditor had advanced an amount of Rs.60 lakhs to the Corporate Debtor for aviation related services. However, the services were not provided by the Corporate Debtor nor the advance amount was refunded. The advance payment made by the Operational Creditor to the Corporate Debtor reflected in the Balance Sheets of the Corporate Debtor as on 31.03.2016 under the head current liabilities. The amount of Rs.60 lakhs was continuously shown as advance received from the customers during financial years 2015-16, 2016-17 and 2017-18.

On 19.09.2019, the Operational Creditor issued a Demand Notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 ("IBC") to the Corporate Debtor demanding refund of the advance amount. When no refund was received, the Operational Creditor filed a petition under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor over a default of Rs.97,40,055/-, inclusive of interest.

The Corporate Debtor in its Reply to Section 9 petition contended that there was no privity of contract between the Parties and no Operational Debt exists under Section 5(21) of IBC. The contract of the Operational Creditor dated 01.04.2016 was with M/s Buildarch Aviation. Further the petition was barred by limitation as the advance payment was made on 28.03.2016 and the petition was filed after expiry of the three years.

The Adjudicating Authority vide an order dated 06.01.2022 rejected the Section 9 petition while holding that advance payment made by Operational Creditor to the Corporate Debtor does not fall within definition of Operational Debt. The Operational Creditor filed an appeal before the NCLAT against the order dated 06.01.2022.

Relevant Law

Section 5(21) of IBC

"5(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;"

Decision Of The NCLAT

The Bench placed reliance on the Supreme Court judgment in Construction Consortium Limited v Hitro Energy Solutions Pvt. Ltd., (2022) SCC OnLine SC 142, wherein it was held that the expression 'in respect of' in Section 5(21) has to be interpreted in a broad and purposive manner and advance payment for goods and services is an Operational Debt.

Though there was no privity of contract between the Parties, the Bench yet opined that the advance payment of Rs. 60 lakhs was clearly an Operational Debt. The Adjudicating Authority had committed error in rejecting Section 9 petition and thus Order dated 06.01.2022 was set aside. The Section 9 petition was revived.

Case Title: Chipsan Aviation Private Limited v Punj Llyod Aviation Limited

Case No.: Company Appeal (AT) (Insolvency) No. 261 of 2022

Counsel For Appellant: Mr. Barun Kumar Sinha, Ms. Nidhi Vardhan, Advocates.

Counsel For Respondent: Mr. Karan Luthra and Ms. Aarushi Tiku, Advocates.

ClickHere To Read/Download Order