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TMI Blog2022 (2) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. - Civil Appeal No 2839 of 2020 - - - Dated:- 4-2-2022 - Dr Justice Dhananjaya Y Chandrachud, J Petitioner's Advocate: M.P. Parthiban JUDGMENT Dr Justice Dhananjaya Y Chandrachud, J This judgement has been divided into the following sections to facilitate analysis: A The Appeal B Factual Background ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and order dated 12 December 2019. The following issues now arise before this Court in the present appeal: (i) Whether the appellant is an operational creditor under the IBC even though it was a purchaser ; (ii) 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. PART B B Factual Background 5 The genesis of the appeal arises from a project which was being executed by the appellant with Chennai Metro Rail Limited, CMRL , in the course of which the latter placed an order for supply of light fittings. In turn, the appellant placed orders with the Proprietary Concern, which was the supplier of Thorn Lighting India Private Limited, TLIPL , through three purchase orders dated 24 June 2013. It was noted in these purchase orders that the delivery of the light fittings would strictly be in accordance with the schedule provided by the appellant. 6 The Proprietary Concern requested the appellant for an advance payment of ₹ 50,00,000. CMRL issued a cheque of ₹ 50,00,000 in favor of the respondent, with the condition that the delivery of the light fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no liability shall be cast on you towards the same. Upon release of the aforesaid payment to M/s. Thom Light/rig Ind/a Pvt Ltd as agreed by you, the CCCL shall indemnify you against any claim from the CMRL towards the advances directly paid to you. 11 In its reply dated 25 July 2016, the Proprietary Concern stated that it would return the amount directly to CMRL, if it was insisted upon by them. It further noted that till date it had not received any letter from the appellant informing them that the contract had been terminated with CMRL, and that it had never agreed to return the amount. The letter notes: This has reference your letter dt.23rd July 2016 wherein you are asking us to pay the amount of ₹ 50,00,000/- which we had received from Chennai Metro Rail Limited (CMRL), to M/S.Thorn Lighting India Pvt. Ltd. Since, the amount has been received by us directly from CMRL, the said amount will be returned only to CMRL if they claim the same. We would like to inform you that we have not received any letter of communication from your organisation till date mentioning that the contract with CMRL is cancelled and it has never been agreed at any point of time to give t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, EAS 05 EAS 06 contracts duly debiting CCCL's account. This letter was sent by the appellant to the Proprietary Concern, but no payment was made. 14 The appellant then sent a letter to the Proprietary Concern on 27 February 2017 and it demanded the return of the amount of ₹ 50,00,000, along with interest calculated at 18 per cent per annum from 4 November 2013, on or before 4 March 2017. In its reply dated 2 March 2017, the Proprietary Concern refused and noted that they only became aware of the termination of the contract with CMRL by the appellant s letter dated 23 July 2016. The light fittings were stated to be lying in their warehouse since then because they could not be re-sold as they had been made on customized specifications, leading to a loss. Further, it noted that CMRL s letter dated 27 December 2016 did not provide that it will not attempt to recover the amount from the Proprietary Concern in the future. 15 On 18 July 2017, the appellant sent a Form-3 Demand Notice under Section 8 of the IBC to the respondent, where the amount of the debt is noted as ₹ 83,13,973, inclusive of interest calculated at 18 per cent per annum from 7 November 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e record to suggest that by any list prepared 'M/s. Hitro Energy Solutions Private Limited' has taken over 'M/s. Hitro Energy Solutions' [ ] 9. The 'Purchase Orders', which makes it clear that 'M/s. Consolidated Construction Consortium Limited' is a 'Purchaser' and do not come within the meaning of 'Operational Creditor' having not supplied any goods nor given any services to M/s. Hitro Energy Solutions Private Limited'. In any case, whether 'M/s. Hitro Energy Solutions Private Limited' or 'M/s. Hitro Energy Solutions' all 'Purchase Orders' having issued on 24th June, 2013 and advance cheques have been issued for subsequently such orders, 'M/s. Consolidated Construction Consortium Limited' cannot move application under Sections, 7 or 9 or the 'I B Code'. The appeal arises from the decision of the NCLAT. PART C C Submissions of counsel 18 Mr M P Parthiban, Counsel appearing on behalf of the appellant submitted that: (i) The MOA of the respondent states that one of its four main objects is to take over the Proprietary Concern. Thus, the findings contained in paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider the relevant provisions, rules and regulations, the legislative history of the IBC and precedents of this Court. D.1 Statutory Provisions 22 Section 5(20) of the IBC defines operational creditor in the following terms: (20) 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; Section 5(21) defines the meaning of operational debt . Section 5(21), as it stood at the relevant time, was as follows: (21) operational debt means 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; (emphasis supplied) An operational debt needs to involve a claim in respect of the provision of goods or services. The phrase claim is defined in Section 3(6) of IBC in the following terms: (6) claim means- (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on; or (ii) to prove that the debt has already been paid. 24 Rule 5 of the 2016 Application Rules provides the manner in which the demand notice under Section 8(1) has to be delivered. It provides thus: 5. Demand notice by operational creditor. -(1) An operational creditor shall deliver to the corporate debtor, the following documents, namely.- (a) a demand notice in Form 3; or (b) a copy of an invoice attached with a notice in Form 4. (2) The demand notice or the copy of the invoice demanding payment referred to in sub-section (2) of section 8 of the Code, may be delivered to the corporate debtor, (a) at the registered office by hand, registered post or speed post with acknowledgement due; or (b) by electronic mail service to a whole time director or designated partner or key managerial personnel, if any, of the corporate debtor. (3) A copy of demand notice or invoice demanding payment served under this rule by an operational creditor shall also be filed with an information utility, if any. Thus, under sub-Rule (1) of Rule 5, an operational creditor can send the demand notice under Section 8(1) of the IBC through two methods: (i) a demand notice in Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant time, provided thus: 7. Claims by operational creditors. (1) A person claiming to be an operational creditor, other than workman or employee of the corporate debtor, shall submit proof of claim to the interim resolution professional in person, by post or by electronic means in Form B of the Schedule: Provided that such person may submit supplementary documents or clarifications in support of the claim before the constitution of the committee. (2) The existence of debt due to the operational creditor under this Regulation may be proved on the basis of- (a) the records available with an information utility, if any; or (b) other relevant documents, including - (i) a contract for the supply of goods and services with corporate debtor; (ii) an invoice demanding payment for the goods and services supplied to the corporate debtor; (iii) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any; or (iv) financial accounts. Under Regulation 7(2), an operational creditor can prove their claim not only through an invoice demanding payment for the goods and services supplied to the corporate debtor (Regulation 7(2)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or there is no record of dispute in the information utility; and (e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any. (ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if- (a) the application made under sub-section (2) is incomplete; (b) there has been repayment of the unpaid operational debt; (c) the creditor has not delivered the invoice or notice for payment to the corporate debtor; (d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or (e) any disciplinary proceeding is pending against any proposed resolution professional: Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the Adjudicating Authority. (6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section. In ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Unlike other foreign jurisdictions, which usually differentiate between secured and unsecured creditors only, the IBC is unique because it provides for two different classes of creditors: operational creditors and financial creditors. To understand the position of the former within the framework of the IBC, it is important to understand the distinction between these two classes. 29 The primary source is Volume I of the Report of the Bankruptcy Law Reforms Committee, BLRC Report . It notes that [e]nterprises have financial creditors by way of loan and debt contracts as well as operational creditors such as employees, rental obligations, utilities payments and trade credit , Pg 22, available at https://www.ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf accessed on 13 January 2022. It provides that a corporate debtor will have financial and operational liabilities, and explains the difference as follows, Ibid, Pg 54: Liabilities fall into two broad sets: liabilities based on financial contracts, and liabilities based on operational contracts. Financial contracts involve an exchange of funds between the entity and a counterparty which is a financial firm or inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The committee has to be composed of members who have the capability to assess the commercial viability of the corporate debtor and who are willing to modify the terms of the debt contracts in negotiations between the creditors and the corporate debtor. Operational creditors are typically not able to decide on matters relating to commercial viability of the corporate debtor, nor are they typically willing to take the risk of restructuring their debts in order to make the corporate debtor a going concern. Similarly, financial creditors who are also operational creditors will be given representation on the committee of creditors only to the extent of their financial debts. Nevertheless, in order to ensure that the financial creditors do not treat the operational creditors unfairly, any resolution plan must ensure that the operational creditors receive an amount not less than the liquidation value of their debt (assuming the corporate debtor were to be liquidated). (emphasis supplied) 32 This makes it clear that 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable. 51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor's business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a goin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time value of money. The Court held: 42. It is impossible to say that classifying real estate developers is not founded upon an intelligible differentia which distinguishes them from other operational creditors, nor is it possible to say that such classification is palpably arbitrary having no rational relation to the objects of the Code. It was vehemently argued by the learned counsel on behalf of the petitioners that if at all real estate developers were to be brought within the clutches of the Code, being like operational debtors, at best they could have been brought in under this rubric and not as financial debtors. Here again, what is unique to real estate developers vis- -vis operational debts, is the fact that, in operational debts generally, when a person supplies goods and services, such person is the creditor and the person who has to pay for such goods and services is the debtor. In the case of real estate developers, the developer who is the supplier of the flat/apartment is the debtor inasmuch as the home buyer/allottee funds his own apartment by paying amounts in advance to the developer for construction of the building in which his apartment is to be found. Ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation utilities under the Code, makes it easy for homebuyers/allottees to approach NCLT under Section 7 of the Code to trigger the Code on the real estate developer's own information given on its webpage as to delay in construction, etc. It is these fundamental differences between the real estate developer and the supplier of goods and services that the legislature has focused upon and included real estate developers as financial debtors. This being the case, it is clear that there cannot be said to be any infraction of equal protection of the laws. (emphasis supplied) 35 In Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 , a two judge Bench of this Court explained the framework of the IBC in relation to an operational creditor triggering the CIRP. The Court held: 29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an operational creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may trigger the insolvency process by filing an application before the adjudicating authority under Sections 9(1) and 9(2). This application is to be filed under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 in Form 5, accompanied with documents and records that are required under the said form. Under Rule 6(2), the applicant is to dispatch by registered post or speed post, a copy of the application to the registered office of the corporate debtor. Under Section 9(3), along with the application, the statutory requirement is to furnish a copy of the invoice or demand notice, an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt and a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor. Apart from this information, the other information required under Form 5 is also to be given. Once this is done, the adjudicating authority may either admit the application or reject it. If the application made under sub-section (2) is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delivered in the prescribed form. The corporate debtor is then given a period of 10 days from the receipt of the demand notice or copy of the invoice to bring to the notice of the operational creditor the existence of a dispute, if any. We have also seen the notes on clauses annexed to the Insolvency and Bankruptcy Bill of 2015, in which the existence of a dispute alone is mentioned. Even otherwise, the word and occurring in Section 8(2)(a) must be read as or keeping in mind the legislative intent and the fact that an anomalous situation would arise if it is not read as or . If read as and , disputes would only stave off the bankruptcy process if they are already pending in a suit or arbitration proceedings and not otherwise. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an Arbitral Tribunal or a court. Further, given the fact that long limitation periods are allowed, where disputes may arise and do not reach an Arbitral Tribunal or a court for up to three years, such persons would be outside the purview of Section 8(2) lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends. (emphasis supplied) D.4 Analysis 39 In the present case, there are few undisputed facts: (i) the appellant and the Proprietary Concern entered into a contract for supply of light fittings, since the appellant had been engaged for a project by CMRL; (ii) CMRL, on the appellant s behalf, paid a sum of ₹ 50 lakhs to the Proprietary Concern as an advance on its order with the appellant; (iii) CMRL cancelled its project with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim 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 suppli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the exclusion thereunder. Mr Kaul has argued, correctly in our opinion, that if this interpretation is not given to the first proviso of Section 21(2), then a related party financial creditor can devise a mechanism to remove its label of a related party before the corporate debtor undergoes CIRP, so as to be able to enter the CoC and influence its decision making at the cost of other financial creditors. Thus, the Court struck a balance between the text of the statute and the purpose which it sought to achieve by excluding those related party financial creditors who ceased to be related parties only in order to circumvent the exclusion under the first proviso to Section 21(2). 45 Similarly, 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 Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. 51 Further, Section 13 provides the requirements for the alteration of an MOA. The relevant parts of Section 13 are as follows: 13. Alteration of memorandum. -(1) Save as provided in Section 61, a company may, by a special resolution and after complying with the procedure specified in this section, alter the provisions of its memorandum. [ ] (6) Save as provided in Section 64, a company shall, in relation to any alteration of its memorandum, file with the Registrar- (a) the special resolution passed by the company under sub-section (1); (b) the approval of the Central Government under sub-section (2), if the alteration involves any change in the name of the company. [ ] (9) The Registrar shall register any alteration of the memorandum with respect to the objects of the company and certify the registration within a period of thirty days from the date of filing of the special resolution in accordance with clause (a) of sub-section (6) of this section. (10) No alteration made under this section shall have any effect until it has been registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ISTERED OFFICE OF THE COMPANY AT CHENNAI. RESOLVED THAT the company do hereby decided not to take over the Proprietorship concern M/S.HITRO ENERGY SOLUTIONS as envisaged in clause 4 of main objects of the Memorandum of Associations of the Company. In support of the resolution, the respondent has also produced a certification from the banker of the Proprietary Concern, Indian Bank, Mylapore Branch, on 10 April 2018 and from the Chartered Accountants of the Proprietary Concern, K R Sarangapani and Co, on 27 April 2018. 54 Admittedly, there was no reference to the resolution in the counter-statement dated 18 January 2018 and additional counter-statement dated 9 March 2018 filed by the respondent before the NCLT. However, in their appeal filed before the NCLAT, the respondent states that the resolution was, in fact, brought to the notice of the NCLT: (xii). It is submitted that a Board resolution dt 01.09.2014 of M/s. Hitro Energy Solutions Pvt Ltd coupled with the Auditor Certificate dated 01.09.2014 was also placed on record and brought to the attention and Notice of the Learned NCLT Tribunal, Chennai in which it was resolved that clause 4 of the Memorandum of Associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held: 42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. The right to sue , therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application. 59 The respondent s submission that limitation commences from 7 November 2013 has to be rejected. In its application under Section 9, the appellant has mentioned this as the date on which the debt became due. However, as noted in B.K. Educational Services (supra), limitation does not commence when the debt becomes due but only when a default occurs. As noted earlier in the judgment, default is defined under Section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due. 60 In the present case, CMRL issued the cheque of ₹ 50,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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