By Nihit Nagpal and Devika Mehra
Since the enactment of the Insolvency and Bankruptcy Code in 2016 (“IBC, 2016), the judiciary has been very active in settling disputes and addressing the gaps arising from this controversial legislation. Recently, yet another dispute arising out of a technical gap in the IBC has been resolved by the Apex Court in the case of M/s Consolidated Construction Consortium Limited v. M/s Hitro Energy Solutions Private Limited1 .
Brief facts of the case
An agreement for a new project was entered into between Chennai Metro Rail Limited (“CMRL”) and M/s Consolidated Construction Consortium Limited (“Appellant/ “Operational Creditor”). For the purpose of supplying light fittings, on June 24, 2013, the Appellant had placed orders with Hitro Energy Solutions (“Proprietary Concern”/ “Respondent”). The Proprietary Concern requested an advance payment of INR 50,00,000/- (Fifty Lakhs) and a cheque for the said amount was issued by CMRL in favour of the Proprietary Concern.
On January 02, 2014, Appellant was informed by CMRL that the agreement for the new project had been terminated. The Appellant contended that they had notified the Proprietary Concern of the termination on the very same day, however, the Respondent contended that no such notification had been received by them.
The Respondent had encashed the cheque, so CMRL demanded a refund of INR 50,00,000/- else it would be deducted from the dues payable for other projects. CMRL refunded the amount from its own pocket and intimated the same to the Proprietary Concern, demanding a reimbursement of INR 50,00,000/-.
Respondent, M/s Hitro Energy Solutions Pvt. Ltd., was incorporated on January 28, 2014, whose Memorandum of Association (“MoA”) stated that they have taken over the existing Proprietary Concern. The Appellant, vide letter dated July 23, 2016, requested the Respondent to return the amount of INR 50,00,000/- and promised to indemnify the Respondent against any claim, if raised by CMRL in future. On July 25, 2016, the Respondent stated in a letter that the amount was refundable directly to CMRL only and denied the fact that any information had been provided to them about the termination of the contract with CMRL.
In a meeting on August 04, 2016, the Respondent finally agreed to refund the amount on the condition that they be provided with written assurance from CMRL stating that they will not make any claim against them in future. Subsequently, Respondent received a letter from CMRL stating, inter alia, that they had already received the amount from the Appellant’s account, despite no payment having yet been made by the Respondent.
On February 27, 2017, the Appellant again demanded refund of INR 50,00,000/- along with 18% interest per annum to be calculated from November 04, 2013. On March 02, 2017, the Respondent replied, inter alia refusing to pay the requested amount on the ground that the light fittings were still lying unused at their warehouse and causing them losses. On July 18, 2017, the Appellant issued a notice demanding payment of INR 83,13,973/- from the Respondent under Section 8 of the IBC, 2016. The Respondent again, through their letter on July 28, 2017 stated that no debt was owed by them to the Appellant.
On November 01, 2017, the Appellant filed an application before the National Company Law Tribunal (“NCLT”) under Section 9 of the IBC, 2016 for initiating Corporate Insolvency Resolution Process (“CIRP”) against the Respondent. The Respondent contended that the Proprietary Concern is a separate entity, but the NCLT held that the MoA is a constitutional document of the Respondent and it clearly states that the Proprietary Concern had been taken over by the Respondent, thereby making them vicariously responsible. The NCLT passed an order to initiate the CIRP of the Respondent.
Aggrieved by this, the Respondent appealed to the National Company Law Appellate Tribunal (NCLAT) where the order of the NCLT was reversed and it was held that there is nothing to show that the Respondent had in fact taken over the Proprietary Concern and the Appellant, being a ‘purchaser’, “does not come within the meaning of ‘operational creditor’” since it had not supplied any goods or services to the ‘corporate debtor’ (i.e. the Respondent).
Aggrieved by this, the present Appellant approached the Hon’ble Supreme Court against the decision of the NCLAT by way of an appeal under Section 62 of the IBC, 2016.
The following issues were raised (and eventually resolved) by the apex court:
- Whether the Appellant is also an ‘operational creditor’ as defined under the IBC, 2016, even though it was a ‘purchaser’?
- Whether the Respondent can be deemed to have taken over the debt from the Proprietary Concern?
- Whether the application under Section 9 of the IBC, 2016 is barred by limitation?
Contentions of the parties
- That the MoA of the Respondent clearly states that they have taken over the existing Proprietary Concern and hence, the NCLAT’s holding is erroneous;
- That since the Appellant had paid due amount of INR 50,00,000/- to CMRL, which should have been payable by the Respondent, the Respondent is now liable to reimburse the Appellant;
- That the Appellant comes within the ambit of the definition of an ‘operational creditor’, as the supply of light fittings by the Respondent had been operational requirements of the Appellant;
- That the application filed by the Appellant under Section 9 of the IBC, 2016 is not barred by limitation.
- That all the dealings had been done by the Proprietary Concern and thus, there is no role of the Respondent. Although the MoA states that the Respondent is taking over the Proprietary Concern, the liability take-over had been done away with through a board resolution;
- That the payment of the amount had been made from CMRL to the Proprietary Concern, thus there is no privity of contract between the Appellant and the Respondent;
- That the Appellant does not come under the ambit of an ‘operational creditor’ as, firstly, no goods and services had been provided to the Appellant by the Respondent, and secondly, in case any dues remain pending, then they are payable to CMRL directly by the Proprietary Concern;
- That the date of default was November 07, 2013 and the application under Section 9, IBC, had been filed on November 01, 2017, i.e., after more than three years, thus, it is barred by limitation;
- That the Appellant is wrongfully trying to recover their dues through the proceedings under the IBC, 2016.
Observations of the Hon’ble Supreme Court
In order to deal with this issue, the Court took into account all statutory provisions, legislative history of the IBC, 2016, and judicial precedents. The Court took a very wide approach in interpreting the existing law. It stated that the definition of ‘operational debt’ under Section 5(21) of the IBC, 2016 required some nexus with the “provision of goods and services”, however, who has to be the supplier or the receiver has not been specified anywhere in the Code.
After perusal of Section 8(1) of the IBC, 2016, read with Rule 5 and Form-3 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, it was observed that notice with regard to an operational debt can be issued by an operational creditor through a demand notice or an invoice. Also, an operational creditor who is seeking to claim an operational debt in a CIRP can rely either on a contract or on an invoice for the supply of goods and services with the corporate debtor under Regulation 7(2)(b)(i) and (ii) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016. Thus, all forms of contracts for the supply of goods or services between the operational creditor and the corporate debtor are included in this.
The Supreme Court referring to its decision in the case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India2 , wherein it had held that “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”.
Thus, keeping in view the authorities and the circumstances, it was held that the Appellant is an ‘operational creditor’ as defined under Section 5(20) of the IBC, 2016 as the Respondent had been providing operational service to the Appellant. Therefore, upon the termination of the contract, the advance payment had turned into an operational debt, making the Appellant an ‘operational creditor’ even though he had started out as a purchaser.
There was no issue with regard to the fact that the initial contract had been entered into between the Appellant and the Proprietary Concern. However, an issue did arise with respect to the MoA of the Respondent, so the Supreme Court looked at the relevant statutory provisions relating to MoAs. Section 4(1)(c) of the Companies Act, 2013 provides for inclusion of objects of the company in the MoA and Section 10(1) binds the company to abide by the MoA. Further, Section 13 provides that the only way for alteration of the MoA will be through a Special Resolution to be passed and then filed with the Registrar of Companies, who has to register and certify it within 30 days.
However, in the instant case, there was no proof that the resolution produced by the Respondent was a Special Resolution for official alternation of the MoA, that it had been filed with the Registrar, or that it had been registered and certified by the Registrar. Hence, the alteration was not considered valid, and the original objectives in the MoA were deemed to still stand.
It was concluded that as the Proprietary Concern had been taken over by the Respondent, the Respondent was vicariously liable to pay the Concern’s dues to the Appellant and the application filed by the Appellant under Section 9 of the IBC, 2016 was maintainable.
With regard to this issue, the Supreme Court considered the case of B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates3 and stated that “limitation does not commence when the debt becomes due, but only when a default occurs”. Default is the “non-payment of the debt by the corporate debtor when it has become due” as defined under Section 3(12) of the IBC, 2016.
Thus, it was concluded that the impugned cheque had been issued to the Proprietary Concern on November 07, 2013, and until at least August 04, 2016 when the meeting between the parties had been held, they had been negotiating the re-payment of the amount. It was on March 02, 2016 when the Respondent had finally refused completely to pay the dues. Hence, the suit was held not to be barred by limitation.
Considering the above observations, the appeal was allowed and the order of the NCLT was upheld, setting aside the order of the NCLAT. The Supreme Court directed resuming CIRP of the Respondent.
A major gap in the IBC, 2016 has been resolved by this judgement with regard to interpretation of the terms ‘operational creditors’ and ‘corporate debtors’. The broad approach adopted by the Supreme Court is a step ahead in making the IBC, 2016 a more viable legislation, however, a lot of ambiguities still persist, awaiting eventual judicial or legislative resolution.
12022 SCC OnLine SC 142
2(2019) 8 SCC 416
3(2019) 11 SCC 633