Mobilization Advance Is An Operational Debt: NCLAT Delhi

Background Facts

On 24.12.2010, Athena Demwe Power Ltd. ("Appellant") had awarded a contract to Abir Infrastructure Private Limited & Ors. ("Corporate Debtor") for execution of 1750 MW Demwe Lower Hydroelectric Project in Arunachal Pradesh. A mobilization advance of Rs. 7,48,40,06,136/- was transferred by the Appellant to the Corporate Debtor through the Bank Transfer in pursuance of the Contract. On 14.02.2011, Corporate Debtor had issued Corporate Guarantee in favour of the Appellant, which was extended till 23.11.2021. However, the Contract work could not be completed since site was never made available by the owner.

Thereafter, NCLT New Delhi Bench ("Adjudicating Authority") had initiated Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor and the Appellant had filed its claim before the Interim Resolution Professional (IRP) for an amount of Rs. 1784,99,28,651/- as a Financial Creditor. The IRP informed the Appellant that his claim falls within operational debt and not financial. Therefore, the Appellant filed his claim as an Operational Creditor, which was yet again rejected by the Resolution Professional on the ground that the claim falls under 'other creditor' head. In the meanwhile, the Adjudicating Authority vide an order dated 28.10.2021 had approved the Resolution Plan submitted by SREI Multiple Asset Investment Trust i.e. Respondent No. 2 for the Corporate Debtor.

The Appellant had filed an interim application before the Adjudicating Authority challenging the rejection of its claim, which was dismissed by the Adjudicating Authority on 12.01.2022. The Appellant filed an appeal before the NCLAT against the order dated 12.01.2022.

Contentions Of The Appellant

Appellant argued that it is a Financial Creditor having advanced an amount of Rs. 7,48,40,06,136/- as a mobilization advance. As the Corporate Debtor had issued a Corporate Guarantee towards the mobilization advance to the Appellant, the provisions of Section 5(8)(i) of Insolvency and Bankruptcy Code, 2016 ("IBC") were attracted making the transaction a Financial Debt. Further, the Resolution Professional has no power to adjudicate the claim filed by the Appellant.

Contentions Of The Respondent

The Respondent No. 1 argued that mobilization advance is not a loan/borrowing raised and meant to be repaid by the Respondent No.1 and therefore it was not a Financial Debt. The transaction does not come under Section 5(8)(i) of IBC since the Corporate Guarantee has not been provided to support any liability falling under or within the meaning of (a) to (h) clauses of Section 5(8) of the IBC. The Appellant has not rendered any services or delivered any goods to the Corporate Debtor hence the Appellant is not an Operational Creditor.

Issues

1. Whether the mobilization advance given by the Appellant to the Corporate Debtor is a Financial Debt within the meaning of Section 5(8) of the IBC?

2. Whether the mobilization advance given by the Appellant to the Corporate Debtor is an Operational Debt within the meaning of Section 5(21) of the IBC?

Relevant Laws

Section 5(8) of IBC

"Section 5(8): "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes–

(a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold on non-recourse basis;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; XXX

(g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause;"

Section 5(21) of IBC

"Section 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

Not a Financial Debt

The Bench observed that the mobilization advance which was given for mobilization of material and workforce on the site; and was not disbursed against the consideration for time value of money. It was held that the guarantee referred to in Section 5(8)(i) relates to any of the items referred to in subclauses (a) to (h) of Section 5(8) of the IBC and since these clauses do not include mobilization advance, the same cannot be categorized as financial debt.

Mobilization advance is an operational debt

The Bench observed that mobilization advance was given by the Appellant in pursuance of an EPC Contract dated 24.12.2010. The advance given was to be adjusted in the running bills as per the terms and conditions of the contract or could have been demanded back by the Appellant. The contract between the parties could not be carried out due to non-providing of site for carrying out the work. The contract was virtually given up and was never implemented.

Reliance was placed on the Supreme Court judgment in M/s. Consolidated Construction Consortium Limited Vs. M/s. Hitro Energy Solutions Private Limited, Civil Appeal No. 2839 of 2020, in which it was held that the words "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 view of the law laid down by the Hon'ble Supreme Court in M/s. Consolidated Construction Consortium Limited, the mobilization advance given by the Appellant to the Corporate Debtor is clearly an Operational Debt and the Adjudicating Authority committed error in rejecting the claim of the Appellant as an Operational Debt."

The Bench directed implementation of the approved Resolution Plan and to treat the claim of the Appellant as an Operational Debt and the Resolution Applicant would be obliged to include such claim and make payment to the Appellant accordingly. The appeal was allowed by the Bench.

Case Title: Athena Demwe Power Ltd. v Abir Infrastructure Private Limited & Ors., Company Appeal (AT) (Insolvency) No.158 of 2022

Counsel For Appellant: Mr. Kunal Godhwani, Advocate

Counsel For Respondent: Mr. P. Ramesh Babu, Advocate for R-1 (RP). Mr. Ramji Srinivasan, Sr. Advocate with Mr. R. S. Sravankumar, Advocate for R-2 (SRA).

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