Facets of Operational Debt under IBC – By Divesh Sawhney & Sanyam Aggarwal

Facets of Operational Debt under IBC

-Divesh Sawhney & Sanyam Aggarwal

Operational debt under the Insolvency and Bankruptcy Code, 2016 (“Code”) is generally referred to, or has generally been judicially construed as, payment due from the Corporate Debtor for the receipt of goods or services from the supplier/Operational Creditor. But instances galore where the Corporate Debtor was the supplier of goods or services and received some money to that effect, and then failed to honor its commitments i.e., provide the goods or services to the buyer. Can this second episode be categorized as operational debt under the Code?

The authors worked on a matter recently that was then pending before a bench of NCLT, Delhi recently (We refrain from disclosing details as attorney-client privilege is still a thing!), where the above issue cropped up. The authors, being callow IBC enthusiasts, zipped to a conclusion, hastily, that this was a sort of a reverse operational debt transaction and would fall outside the ambit of operational debt as per the Code. A few days later, our case before the NCLT got decided on this line of reasoning, thereby reprieving the Corporate Debtor there.

As luck would have it, this issue was pending adjudication before the top Court. And the judgment was handed down by the Supreme Court about a week after the NCLT decided our case. The Court did not concur with the view of the callow IBC enthusiasts (if the NCLT could get it wrong, sure enough, callow IBC enthusiasts may also be forgiven to interpret ‘operational debt’ incorrectly.)

The Supreme Court decision we are referring to is M/s Consolidated Construction Consortium Limited Versus M/s Hitro Energy Solutions Private Limited (2022) ibclaw.in 09 SC, which was delivered on February 2nd 2022. Prior to the Apex Court’s judgment, there were contrasting Orders from various Adjudicating Authorities with regard to the same. Kolkata Bench of the NCLT in SHRM Biotechnologies Private Limited v. VAB Commercial Private Limited (2018) ibclaw.in 96 NCLT dismissed a petition wherein the petitioner had given an advance to the Corporate Debtor. Even a Delhi Bench of the NCLT followed the same course in CG Finco Private Limited v. Nextgen Telesolutions Pvt. Ltd. (2022) ibclaw.in 314 NCLT On the other hand, in Acasia Tele Services Private Limited v. Auspice Trading Private Limited, the Mumbai Bench of the NCLT admitted a similar petition. The Court in Consolidated Construction (supra) settled the position of law with regard to above issue: A purchaser of the goods or services, on occurrence of default on behalf of the Corporate Debtor, will also sit in the saddle of an Operational Creditor. The law was established as thus:

Firstly, a ‘claim’ must bear nexus with a provision of goods or services, without specifying who is to be the supplier or receiver. The Court rejected the narrow definition of ‘operational creditors’ which excluded those who receive, or were to receive in future, goods and services from the Corporate Debtor.

A simple reading of the definitions envisaged in section 3 and 5 of the Code would also make this proposition clear. Section 5(20) defines ‘Operational Creditor’ as a person to whom operational debt is owed. Sec 5(21) states that an ‘Operational Debt’ is a claim in respect of the provision of goods or services. And, sec 3(6) defines ‘claim’ as a right to payment.

Therefore, a claim “in respect of provision of” goods or services would include not only those who supply goods or services to the Corporate Debtor, but also those who receive the goods or services from the Corporate Debtor. The Court supplied emphasis on the expression “in respect of” employed by the legislature. The expression being wide, the interpretation thereof also needed to be expansive.

Secondly, Section 8 of the Code envisages the steps that an operational creditor needs to undertake prior to filing a claim of insolvency. Additionally, Rule 5 of the 2016 Application Rules, which provides the manner in which the demand notice under Section 8 has to be delivered, clarifies that an operational creditor can issue a notice with respect to an operational debt either through a demand notice or an invoice. Further, Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 provides operational creditors 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. The former option envisages a broad category which includes all forms of contracts for supply of goods or services between the Operational Creditor and the Corporate Debtor, including the ones where the Operational Creditor is actually the receiver of the goods or services supplied or rendered by the Corporate Debtor.

Thus, 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. With that, the Supreme Court added to the ever-growing jurisprudence on the Code.

(The authors are Delhi-based lawyers)