2022 (2) TMI 254 - SC - Insolvency and Bankruptcy

Initiation of CIRP - NCLT admitted the application - NCLAT allowing the appeal dismiss the application and relieased the respondent from ongoing CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - appellant is an operational creditor under the IBC even though it was a purchaser or not - respondent took over the debt from the Proprietary Concern or not - application under Section 9 of the IBC is barred by limitation or not. Whether the appellant is an operational creditor? - HELD THAT - Operational creditors are those whose debt arises from operational transactions, i.e., transactions which are undertaken in relation to the operation of an enterprise. As the examples in the BLRC Report suggest, these generally include transactions involving goods or services which are considered necessary for the operational functioning of an entity - another point of difference between financial and operational creditors would be in the nature of their role in the Committee of Creditors, CoC , because it is assumed the operational creditors will be unwilling to take the risk of restructuring their debts in order to make the corporate debtor a going concern. Thus, their debt is not seen as a long-term investment in the going concern status of the corporate debtor, which would incentivize them to restructure it, but merely as a one-off transaction with the corporate debtor for certain goods or services. 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 - 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. In the present case, 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. Evidentiary value of respondent s MOA as amended - Whether the debt owed to the appellant can actually be realized from the respondent? - HELD THAT - The object clause in an MOA is considered to be representative of the purpose of a company and it is expected that the company will fulfill/attempt to fulfill the objects it has laid out in its MOA. - the MOA of the respondent unequivocally states that one of its main objects is to take over the Proprietary Concern. However, the respondent has produced a resolution dated 1 September 2014 passed by its Board of Directors, purportedly resolving to not take over the Proprietary Concern. Section 13 of CA 2013 provides for the procedure which has to be followed when the MOA is to be amended. In cases where the object clause is amended, it requires the Registrar to register the Special Resolution filed by the company. However, the respondent has provided no proof that (i) the purported resolution dated 1 September 2014 was a Special Resolution; (ii) it was filed before the Registrar; and (iii) that the Registrar ultimately did register it. Thus, in terms of Section 13(10) of CA 2013, the purported amendment to the MOA would not have any legal effect. Whether the application under Section 9 is barred by limitation? - HELD THAT - In the present case, CMRL issued the cheque of ₹ 50,00,000 to the Proprietary Concern on 7 November 2013. However, at that time, it was issued as an advance payment for the purchase order of the appellant. It was only on 2 January 2014 that CMRL terminated its project with the appellant, and it was after this that the Proprietary Concern encashed the cheque. Subsequently, correspondence was exchanged between the appellant and the Proprietary Concern in July 2016 in relation to the re-payment of the amount. Thereafter, a joint meeting was also held on 4 August 2016. Till this point in time, both the parties were in negotiation in relation to the re-payment and the minutes of meeting show that the Proprietary Concern was willing to make the re-payment if CMRL issued a letter stating that they will not pursue a claim in the future or if the appellant provided a bank guarantee for the amount. A final letter was addressed by the appellant to the Proprietary Concern on 27 February 2017, demanding the payment on or before 4 March 2017. The Proprietary Concern replied to this letter on 2 March 2017, finally refusing to make re-payment to the appellant. Consequently, the application under Section 9 will not be barred by limitation. Appeal allowed.

Summary

Issues Involved:
1. Whether the appellant is an operational creditor under the IBC even though it was a 'purchaser'.
2. Whether the respondent took over the debt from the Proprietary Concern.
3. Whether the application under Section 9 of the IBC is barred by limitation.

Issue-Wise Detailed Analysis:

1. Whether the appellant is an operational creditor under the IBC even though it was a 'purchaser':
The primary submission of the respondent, accepted by the NCLAT, was that the appellant is not an operational creditor within the ambit of the IBC. The Court examined the relevant statutory provisions, legislative history, and judicial precedents to assess this claim.

Statutory Provisions:
Section 5(20) of the IBC defines "operational creditor" as a person to whom an operational debt is owed. Section 5(21) defines "operational debt" as a claim in respect of the provision of goods or services. The phrase "claim" is defined in Section 3(6) of IBC.

Legislative History:
The BLRC Report explains that operational creditors are those whose debt arises from operational transactions, such as employees, rental obligations, utilities payments, and trade credit. The Joint Parliamentary Committee Report on the IBC differentiates between financial and operational creditors, emphasizing that operational creditors are typically unwilling to restructure their debts.

Judicial Precedent:
In Swiss Ribbons (P) Ltd. v. Union of India, the Court noted an intelligible differentia between financial and operational creditors. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, the Court highlighted differences between home buyers and operational creditors. In Innoventive Industries Ltd. v. ICICI Bank and Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., the Court explained the process for an operational creditor initiating CIRP.

Analysis:
The Court concluded that the appellant is an operational creditor as the debt arises from a contract for supply of goods or services, even if the appellant was the receiver. The phrase "in respect of" in Section 5(21) must be interpreted broadly to include all those who provide or receive operational services from the corporate debtor, leading to an operational debt.

2. Whether the respondent took over the debt from the Proprietary Concern:
The dispute revolved around the MOA of the respondent, which stated one of its main objects was to take over the Proprietary Concern. The NCLT accepted this as proof, while the NCLAT did not.

Statutory Provisions:
Section 4 of the Companies Act 2013 defines an MOA. Section 10(1) elucidates the legal effect of an MOA, binding the company and its members. Section 13 provides the requirements for altering an MOA, including filing a Special Resolution with the Registrar.

Analysis:
The respondent produced a Board resolution dated 1 September 2014, resolving not to take over the Proprietary Concern. However, there was no proof that this resolution was a Special Resolution, filed with the Registrar, or registered by the Registrar. Thus, the purported amendment to the MOA would have no legal effect. The presumption remains that the respondent took over the Proprietary Concern and was liable to repay the debt to the appellant.

3. Whether the application under Section 9 of the IBC is barred by limitation:
The respondent argued that the application was barred by limitation, with the date of default being 7 November 2013.

Judicial Precedent:
In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, the Court held that the Limitation Act applies to applications under Sections 7 and 9 of the IBC, with limitation commencing when a default occurs.

Analysis:
The Court rejected the respondent's submission that limitation commenced on 7 November 2013. The default occurred when the Proprietary Concern refused to repay the amount on 2 March 2017. Consequently, the application filed on 1 November 2017 was within the limitation period.

Conclusion:
1. The appellant is an operational creditor under the IBC.
2. The respondent took over the Proprietary Concern in accordance with its MOA.
3. The application under Section 9 of the IBC is not barred by limitation.

The appeal is allowed, and the judgment and order of the NCLAT dated 12 December 2019 are set aside. The CIRP in respect of the respondent is ongoing. Pending applications, if any, stand disposed of.