CS Divesh Goyal

SHORT SUMMARY:

In this Flash editorial, the author begins by referring the provisions of Insolvency & Bankruptcy Code, 2016. The provision of Insolvency and Bankruptcy Code, 2016 (the “Code”) came into effect for from December 2016. Since the code come into effect all three categories of applicants have begun to file applications under the Code. The main thrust of the article, however, is upon the “analyses some decisions of the some benches of NCLT relating to the application filed by the “Operational Creditor”. Despite the fact that some decisions helped in clear the ambiguity in interpretation and indentify whether creditor falls under operational creditor or not and some decisions raise the questions in the mind of the professionals and the Corporates. In this editorial author discuss the decisions of some benches of Hon’ble NCLT.

This is article no. 226 of the series of editorials written by the author on corporate laws

{including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

The Object of the code is “to consolidate and amend the laws relating to reorganization and in-solvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, avaibility of credit and balance the interest of all the stakeholders”.

It is Insolvency Resolution process of “Corporate Person” i.e. A Company, A Limited Liability Partnership or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.

The following persons could initiate the corporate insolvency resolution process, on the commission of a default by the corporate person:

  • A Financial Creditor
  • An Operational Creditor
  • The Corporate Person itself

Given the fact that the insolvency proceeding could be initiated in the event of default. Default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

The Code distinguishes between a ‘Financial Creditor’ and ‘Operational Creditor’ and lay down different procedure for initiating the proceeding by each of them. Both the terms are defined under the code as:

Financial Creditor Operational Creditor
“financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; 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 (four categories)

§  Goods or

§  Services

§  employment or

§  a debt in respect of the repayment 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;

 

DECISIONS ON Operational Creditor BY Hon’ble NCLT decisions

Situation: 1:

Whether claim can be made against more than one Corporate Debtor [Group Companies of Corporate Debtor] in a single petition?

The Tribunal, Principal Bench considered the boundaries of the definitions of operational creditor, in the case of “Mr. Ishwar Khandelwal V/s. Amarpali Infrastructure Private Limited”. In this case, The petition filed by the petitioner seeking to set in motion the Corporate IRP as contemplated u/s 9 of IBC, 2016.

The Company (Corporate Debtor) engages in real estate business. Petitioner supplying various types of steels and iron goods / raw material as per needs, requirement and specification of the Company. The petitioner claims that the Company owes the petitioner a sum of Rs. 1,84,85,018.44. It is claimed that despite reminders the Corporate Debtor has failed to pay the balance outstanding. Thus the nonpayment of balance outstanding the petitioner serve a notice of demand u/s 8 of the code. However, no reply has been received despite service nor nay payment has been received.

The interesting point of case is that ‘the petitioner claimed the amount from the Amarpali Group not only from Amarpali Infrastructure private Limited.’ It is seen that 11 Companies have been named to whom goods is alleged to have been supplied by the petitioner.

The Hon’ble judge states “in order to apply the provisions of the code, it is necessary it must be against a corporate person as defined u/s 3(7) of the code who must be also be a corporate debtor. Hence the remedy of the petitioner above named lies elsewhere and not under the provision of the code. For the reason afore stated they reject the application.

Situation: 2:

If petition for insolvency resolution is filed by both “operational creditor” and “Corporate Debtor”.

The Tribunal, Principal Bench, in the case of “M/s Incredible Unique Buildcon Pvt Limited V/s M/s Clutch Auto Limited” In this case, two petitions are filed; petition (1) filed by the operational creditor u/s 9 and Petition (2) filed by the Corporate Debtor u/s 10. The second petition u/s 10 filed before petition u/s 9.

The interesting point of case is that ‘The Corporate Debtor itself files the petition for initiation of Corporate Insolvency Resolution Process against it.’ A list of financial and operation creditors has also been attached. The petitioner has further disclosed the details of property against which the loan of the corporate debtor is fully or partially secured along with details of the date of its creation.

The Hon’ble judge states as the Corporate Debtor itself has admitted default. Accordingly, we hold that the petition merits admission and the same is accordingly admitted.

However, First petition filed by the operational creditors ‘IB No.20(PB)/2017 is dismissed with the observation that The Operational Creditor may file its claims before the Insolvency Resolution Professional in accordance with the public notice to be issued like all other claimants.

Both the petitions disposed of by admission of the petition of corporate debtor u/s 10 and dismissal of the petition of operational creditor u/s 9.

Situation: 3:

Whether a petitioner seek to avail multiple remedies in respect of same cause of action under NCLT”.

The Tribunal, Principal Bench, in the case of “M/s Deem Roll Tech Limited V/s R. L. Steel & Energy Limited” In this case, The petition filed by the petitioner seeking to set in motion the Corporate IRP as contemplated u/s 9 of IBC, 2016. The Petitioner claim to supply goods to respondent Company, produce invoices and relevant documents for the same.

The interesting point of case is that, ‘The petitioner, with a view to recover the balance amount due to it of Rs. 559,600 had initiated a summary suit under order  XXXVII of CPC in the court of SR. Civil Judge, Ahemdabad (Rural) A Mirzapur, Ahmedabad I in summary suit No. 217/2014 and that in the said suit the learned judge had decreed ex-parte on 19.10.2016 the suit in favour of hte plantiff for with simple interest at the rate of 8% per annum from the date of filing of the suit till the date of its realization as well as the costs of the suit to the petitioner.

The Hon’ble judge states, in relation to the decree obtained from the civil court in relation to the amounts claimed, we are of the considered view that the petitioner is well within its rights to have to executed before the appropriate civil courts meant for execution and that this tribunal cannot be converted into an executing court of the above said ex parte decree obtained. Further we have categorically held in matter of “Annpurna Infrastrucyture Pvt. Ltd. & Ors. Vs. Soril Infra REsources Ltd. in C.P.No.(IB)-22(PB)/2017 dated 24.03.2017 that a petitioner cannot seek to avail multiple remedies in respect of the same cause of action and thus venture into forum shopping.

The Tribunal further states that, IBC coupled with the provisions of section 433 of Companies Act, 2013. Section 433 states about the applicability of Limitation Act. Hence, Limitation Act application to Tribunal also.  Hence, the debt as claimed by the petitioner is barred by limitation and hence cannot be the basis for invoking IBC before the Tribunal.

Situation: 4:

Who is an Operational Creditor?

 The Tribunal, Principal Bench considered the boundaries of the definitions of operational creditor and operational debt in the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd. (C.P. No. (IB)-10(PB)/2017. February 20, 2017). In this case, the petitioner had paid a real estate developer, AMR Infrastructures Ltd. (“AMR”), a certain sum in 2011 as an advance for booking a flat, with possession of the flat to be delivered subsequently. However, AMR failed to deliver possession within the stipulated time and stopped making the assured return payments to the petitioner after December 2013. The petitioner filed an “operational creditor” application under Section 9 of the Code to commence insolvency resolution proceedings against AMR.

The issues the Tribunal considered were whether the petitioner qualified as an “operational creditor” and if the payments owed by AMR constituted “operational debt” under the Code. The Tribunal stated that “operational debt” as defined in Section 5(20) of the Code was debt that “may arise out of the provision of goods or services including dues on account of employment or a debt in respect of repayment of dues arising under any law for time being in force and payable to centre or local authority.”

The Tribunal states that, petitioner in the present case has neither supplied any goods nor has rendered any service to acquire the status of an ‘Operational Creditor’. The payments owed by AMR could, therefore, not be considered “operational debt” and the petitioner could not be considered an operational creditor. The Tribunal, Principal Bench also passed very similar orders in two other cases with nearly identical facts, including another case against the same developer, AMR (Mukesh Kumar v. AMR Infrastructure (C.P. No. (IB)-30(PB)/2017) March 31, 2017; Pawan Dubey & Anr v. JBK Developers Pvt. Ltd. (C.P. No. (IB)-19(PB)/2017) March 31, 2017).

Hence, one can opine that OPERATIONAL CREDITOR means:

  • A person to whom an operational debt is owed and
  • Any person to whom such debt has been legally assigned or transferred

Operational debt has been defined by section 5(21) of IBC and it must fulfill following substantive elements namely:

(a) Debt arising out of professional goods; or

(b) Services: or

(c)  Out of Employment.

(d) It also covers dues arising under any law for the time being in force and payable to the Central or State Government or local authority.

Note:

The other category of debt used in the Code was “financial debt,” which was defined as debt disbursed against the time value of money (such as bank loans, debentures etc.). However, the Code did not define “operational debt” as including any debt that was not financial debt.

As stated by the tribunal in case of Col. Vinod Awasthy v. AMR Infrastructures Ltd it is doubtful whether it operational debt include all debts other than ‘Financial Debt’ because we do not find any such ‘Legislative intendment’ from the Part II of IBC which deals with ‘Insolvency and Liquidation

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.

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