MOBILISATION OF FUND – A FINANCIAL DEBT OR AN OPERATIONAL DEBT?

[Mr. M. GOVINDARAJAN]

Corporate Insolvency Resolution Process

Section 7, section 9 and Section 10 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for initiation of corporate insolvency resolution process by Financial Creditor, Operational Creditor and Corporate applicant respectively.  Section 5(8) of the Code defines the expression ‘financial debt’ and section 5(21) defines the expression ‘operational debt’.  The Adjudicating Authority, if it is satisfied that there is default in respect of financial debt under section 7 or there is no dispute in operational debt under section 9, may admit the application for initiating corporate insolvency resolution process.

Issue

We have come across many a case on ascertaining a debt as to whether it is a financial debt or operational debt besides there are clear definition for financial debt and operational debt.  In this article the issue whether ‘mobilization advance’ amounts to financial debt or operational debt is to be discussed.

Mobilization Advance is a monetary payment made by the client to the contractor for initial expenditure in respect of site mobilization, and a fair proportion of job overheads or preliminaries. Mobilization Advance payment reduces contractors' need for working capital.  The 'mobilization advance' is adjusted against the final payment due and is not linked to the work but as a pledge of the contract between the appellant and principal. It is also subject to furnishing of prescribed 'bank guarantee'; there is no connection with the performance of the contract.

Mobilization Advance Operational credit

The National Company Law Appellate Tribunal in ATHENA DEMWE POWER LTD. VERSUS ABIR INFRASTRUCTURE PRIVATE LIMITED, SREI MULTIPLE ASSET INVESTMENT TRUST - 2022 (8) TMI 766 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI held that the mobilization advance granted by a person to another person for a contract amounts to operational credit. 

The Appellant awarded a contract to Abir Infrastructure (P) Limited (‘Corporate Debtor’) for execution of 1750 MW Demwe Lower Hydroelectric Project, Arunachal Pradesh on 24.12.2010.  A  Mobilization advance of Rs. 7,48,40,06,136/- was paid by the appellant to the Corporate Debtor by means of bank transfer.  For this purpose the Corporate Debtor issued corporate guarantee in favor of the appellant on 14.02.2011 which was extended now and then till 30.01.2019. 

Since the contract has not been fulfilled the appellant initiated corporate insolvency resolution process against the corporate debtor as a financial creditor for the amount Rs. 1784,99,28,651/- The Adjudicating Authority admitted the application.  The appellant filed its claim to the Resolution Professional on 26.04.2019.  The appellant was inserted in the Committee of Creditors by the Resolution Professional.  The appellant was also invited to attend meeting of the Committee of Creditors on 21st June, 2019 by the Resolution Professional.  On 25th June, 2019, the Resolution Professional informed the Appellant that his claim does not fall as a Financial Creditor rather it falls as an Operational Creditor.  Therefore the appellant filed its claim as on operational creditor on 03.06.2020.  The same was also rejected by the Resolution Professional as the appellant is not also an operational creditor on 03.06.2020.  . The Appellant on 05.06.2020 filed his claim as other creditor reserving his right to approach the Adjudicating Authority. The Resolution Professional informed the Appellant that his claim will be considered in the capacity of other Creditor only when Appellant accepts that he is neither Financial Creditor nor the Operational Creditor.  An application was filed before the Adjudicating Authority. 

In the meanwhile the Committee of Creditors approved the resolution plan and the Resolution Professional filed an application for the approval.  The Adjudicating Authority approved the resolution plan on 28.10.2021.  The appellant filed an application before the Adjudicating Authority against the approval of resolution plan by the Adjudicating Authority.  The application was dismissed by the Adjudicating Authority.   Against this order the appellant filed the present appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short). 

The appellant submitted the following before NCLAT-

• The amount advanced by the Appellant was received by the Corporate Debtor by Bank Transfer which is a Financial Debt within the meaning of Section 5 (8) of the Code.
• The corporate debtor has given a bank guarantee towards the mobilization advance; therefore the provisions of Section 5(8)(i) is fully attracted in the present case making the transaction as a Financial Debt.
• The Adjudicating Authority committed error in rejecting the claim of the Appellant as Financial Debt.
• The mobilization advance was refundable any time before the adjustment of the said advance against the running bills.
• Since the claim of the appellant as a financial creditor is rejected, the appellant filed the said claim as operational creditor.
• The Resolution Professional initially accepted the claim of the Appellant as Financial Creditor which suo moto was subsequently rejected by the Resolution Professional.
• The Adjudicating Authority also rejected the claim of the appellant as operational creditor.

The respondent No. 1 submitted the following before NCLAT-

• Mobilization advance was not a Financial Debt. The transaction does not come under Section 5(8)(i) 
• .  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 Code.
• The Appellant has not rendered any services or delivered any goods to the Corporate Debtor hence the Appellant is not an Operational Creditor.

NCLAT heard the submissions of both the sides.  NCLAT observed that the mobilization advance which was given by the Appellant to the Corporate Debtor was in pursuance of a contract agreement between the Appellant and the Corporate Debtor. The Corporate Debtor was to carry on the contract work as per the contract agreement. The Contract work could not be completed since site was never made available by the owner.

NCLAT framed the following questions to be considered in the present appeal-

• 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 Code?
• 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 Code.

NCLAT analyzed the definition of ‘financial debt’ under section 5(8) of the Code.  Section 5(8)(i) of the Code  made it  clear that the guarantee referred to in Section 5(8)(i) relates to any of the items referred to in sub-clauses (a) to (h) of Section 5(8) of the Code , as detailed below-

1. money borrowed against the payment of interest;
2. any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
3. any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
4.  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;
5.  receivables sold or discounted other than any receivables sold on non-recourse basis;
6. any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;

Explanation.-For the purposes of this sub-clause,-

1.  any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and
2. the expressions, ‘allottee’ and ‘real estate project’ shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

7. 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;
8. 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.

Mobilization advance given by the Appellant to the Corporate Debtor was for mobilization of material and workforce on the site. Mobilization advance was not disbursed against the consideration for the time value of money. The mobilization advance is not covered by any of the sub-clauses (a) to (h) of sub-section 8 of Section 5 of the Code hence the provisions of Section 5(8) (i) does not lend any support to the Appellant for their argument as it amounts to financial debt.

NCLAT then considers whether the mobilization advance amounts to operational debt.  NCLAT observed that the mobilization advance was given by the Appellant in pursuance of a contract entered between the parties i.e. 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. 

Section 5(21) of the Code defines the expression ‘operational debt’ as  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.  The NCLAT considered that 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. NCLAT held that 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.  In the present case, the Resolution Plan has already been approved by the Adjudicating Authority on 28.10.2021.  NCLAT held that the Resolution Applicant is under obligation to include the claim of the Appellant as an Operational Debt and make payment to the Appellant also as an Operational Creditor.