IBC- Operational Debt Includes Advance Payment Made To A Corporate Debtor For Supply Of Goods Or Services: Supreme Court

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

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, the bench comprising Justices DY Chandrachud, Surya Kant and Vikram Nath said.

In this case, the National Company Law Appellate Tribunal (NCLAT) (which set aside the NCLT's decision), dismissed an application under Section 9 of the Insolvency and Bankruptcy Code 2016 (IBC) holding that the applicant 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.

One of the issues raised in the appeal before the Apex Court was whether the appellant-applicant 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

Section 5(21) defines "operational debt" as "a claim in respect of the provision of goods or services including employment or a debt in respect of the re-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". "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.

Phrase "in respect of" in Section 5(21) has to be interpreted in a broad and purposive manne

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

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. Such an interpretation is also supported by the observations in the BLRC Report, which specifies that operational debt is in relation to operational requirements of an entity. Second, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the 2016 Application Rules makes 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 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. This is made even more clear by Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 which provides an operational creditor, seeking to claim an operational debt in a CIRP, an option between relying on a contract for the supply of  goods and services with the corporate debtor or an invoice demanding payment for the goods and services supplied to the corporate debtor. While the latter indicates that the operational creditor should have supplied goods or services to the corporate debtor, the former is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and corporate debtor, including ones where the operational creditor may have been the receiver of goods or services from the corporate debtor. Finally, the judgment of this Court in Pioneer Urban (supra), in comparing allottees in real estate projects to operational creditors, has 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. Indeed, the decision notes that "[e]xamples given of advance payments being made for turnkey projects and capital goods, where customisation and uniqueness of such goods are important by reason of which advance payments are made, are wholly inapposite as examples vis-à-vis advance payments made by allottees". Hence, this leaves 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.

The court added 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 present 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 now remains unpaid. Hence, the appellant is an operational creditor under Section 5(20) of the IBC.", the court said.

The court also noted that the dispute in this case is not in relation to the quality of the services provided by the Proprietary Concern but is entirely about the repayment of the advance amount paid to them, upon the cancellation of the underlying project.

Answering other issues also in the favour of the appellant-applicant, the bench allowed the appeals by setting aside the NCLAT judgment.

Case name: Consolidated Construction Consortium Limited vs Hitro Energy Solutions Private Limited

Citation. : 2022 LiveLaw (SC) 129

Case no.|date: CA 2839 of 2020 | 4 Feb 2022

Coram: Justices DY Chandrachud , Surya Kant and Vikram Nath

Counsel: Adv M P Parthiban for appellant, Adv K Parameshwar for respondent

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