Supreme Court (04.02.2022) in Consolidated Construction Consortium Limited Vs. Hitro Energy Solutions Private Limited. [Civil Appeal No 2839 of 2020] held that;
Section 5(21) defines ‘operational debt’ as a “claim 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.
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.
Hence, this leaves no doubt 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.
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.
However, in the present case, the dispute is not in relation to the quality of the services provided by the Proprietary Concern but is entirely about the repayment of the advance amount paid to them,
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
Consequently, the MOA of the respondent still stands and the presumption will continue to be in favor of the appellant. Thus, it can be concluded that the respondent took over the Proprietary Concern and was liable to re-pay the debt to the appellant.
Limitation does not commence when the debt becomes due but only when a default occurs.
Excerpts of the order;
# 1 The present appeal under Section 62 of the Insolvency and Bankruptcy Code 2016 arises from a judgment and order dated 12 December 2019 of the National Company Law Appellate Tribunal by which it reversed the decision of the National Company Law Tribunal, Chennai3 dated 6 December 2018.
# 2 By its judgment and order dated 6 December 2018, the NCLT admitted an application4 filed by the appellant, Consolidated Construction Consortium Limited, under Section 9 of the IBC for the initiation of the Corporate Insolvency Resolution Process against the respondent, Hitro Energy Solutions Private Limited. While admitting the application, the NCLT held that the respondent’s Memorandum of Association, without evidence to the contrary, proved that it took over a proprietary concern, Hitro Energy Solutions, and that the Proprietary Concern did owe the appellant an outstanding operational debt. Further, the NCLT declared a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional.
# 3 In appeal, the NCLAT set aside the NCLT’s decision, dismissed the application of the appellant under Section 9 of the IBC and released the respondent from the ongoing CIRP. In support of its conclusions, it held:
(i) the appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the Proprietary Concern/respondent;
(ii) there is nothing on record to suggest that the respondent has taken over the Proprietary Concern; and
(iii) in any case, the appellant cannot move an application under Sections 7 or 9 of the IBC since all purchase orders were issued on 24 June 2013 and advance cheques were issued subsequently.
# 4 While issuing notice by its order dated 18 November 2020, this Court stayed the operation of NCLAT’s judgment 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.
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, 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, 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 Rs 50,00,000. CMRL issued a cheque of Rs 50,00,000 in favor of the respondent, with the condition that the delivery of the light fittings should be in compliance with the schedule provided by the appellant.
# 7 On 2 January 2014, CMRL informed the appellant that the project they had been working on stood terminated. According to the appellant, this information was communicated to the Proprietary Concern on the same day. However, this has been denied by the respondent.
# 8 Thereafter, the Proprietary Concern deposited the cheque issued by CMRL and withdrew the amount of Rs 50,00,000. Since the project had been terminated, CMRL informed the appellant that the amount would be deducted from the dues payable to it unless the amount was returned. The appellant paid the amount of Rs 50,00,000 to CMRL and intimated this to the Proprietary Concern and requested them to make the payment.
# 9 In the interim, the respondent was incorporated on 28 January 2014, on the basis of an MOA dated 24 January 2014. Under the MOA, one of the four main objects of the respondent was to take over the Proprietary Concern. It reads as follows:
“(A) THE MAIN OBJECTS OF THE COMPANY TO BE PURSUED BY COMPANY ON ITS INCORPORATION:
[…]
4. To take over the existing Proprietorship firm Viz. M/S. Hitro Energy Solutions having its registered office at Chennai.”
# 10 By its letter dated 23 July 2016, the appellant requested the Proprietary Concern to refund the amount of Rs 50,00,000 since the contract had been terminated and the amount had been returned by the appellant to CMRL. It noted that once the amount was released by the Proprietary Concern, it would indemnify them against any future claim from CMRL. The letter reads as follows:
“This is in reference to the purchase order Nos. KH000115, KH000116, KH000117, dated 24.06.2013 towards the supply of light fittings for our CMRL project. The advance amount of Rs.50.00 Lakhs paid to you was directly released by our client, the CMRL at our request and the amount has already been debited to your account However, the contract with CMRL was terminated by us and it was intimated to you not to proceed with the supply or materials ordered under the aforesaid purchase orders. We, therefore, request you to pay the advance amount of Rs.50,00,000/- to M/s. Thom Lighting India Pvt Ltd as agreed by you.
We once again wish to state that the amounts paid to you by the CMRL have already been recovered from our payments and therefore, we assure that 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 Rs.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 the amount to M/s.Thron Lighting India Pvt. Ltd.”
# 12 A joint meeting was held between the appellant, the Proprietary Concern and TLIPL on 4 August 2016, where the appellant requested that the amount of Rs 50,00,000 be returned to TLIPL. To assuage the concerns of the Proprietary Concern, that CMRL may also try to recover the amount from them at a later date, the representatives of the appellant agreed to provide an indemnity to the Proprietary Concern for the amount. However, this was refused by the Proprietary Concern, which instead asked for a bank guarantee of the same amount, which was refused by the appellant. Finally, the Proprietary Concern noted that the appellant should obtain a letter from CMRL stating that the advance paid by them to the Proprietary Concern belongs to the appellant, and will not be claimed by them in the future. The minutes of the meeting state as follows:
“The following points were discussed during the meeting
• RSK explained the reasons and procedure for the direct payment from CMRL to vendors of CCCL.
• RSK requested NSR to return the advance paid to Hitro Energy to Thom Light.
• NSR refused the same since the payment had been received from CMRL through cheque and can be returned to CMRL only if CMRL claim the same.
• RSK explained that, CCCL requested CMRL to release this advance to Hitro and the amount already been deducted in CCCL payables by CMRL, hence this amount belongs to CCCL and can be returned.
• NSR refused the same and asked CCCL to get a letter from CMRL stating that, the advance paid to Hitro belongs to CCCL and CMRL does not claim the same in future from Hitro.
• SR asked NSR, that CCCL can provide a Indemnity Bond to Hitro to return the Advance, and NSR refused and asked BG For the same amount to return the Advance, CCCL refused the same.”
# 13 Thereafter, the appellant obtained a letter dated 27 December 2016 from CMRL where it noted that it had issued the cheque for Rs 50,00,000 only on the request of the appellant. The letter reads as follows:
“With reference to your letter under reference above, it is to confirm that CMRL had issued a cheque of Rs.50,00,000/- (Rupees fifty lakhs only) bearing no. 991712 dt. 7.11.2013, based on the request of M/s. Consolidated Construction Consortium Ltd., to M/s. Hitro Energy Solutions, as a part of Special Advance to M/s. CCCL under EAS 04, 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 Rs 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 Rs 83,13,973, inclusive of interest calculated at 18 per cent per annum from 7 November 2013. In its response dated 28 July 2017, the respondent denied that any debt was owed by them to the appellant. Thereafter, the appellant filed its application under Section 9 of the IBC read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 on 1 November 2017 along with the supporting affidavits.
# 16 By its judgment dated 6 December 2018, the NCLT admitted the application under Section 9 of the IBC, declared a moratorium under Section 14 of the IBC and appointed an IRP. The operative parts of the order are extracted below:
“11. It has also been noted by this Authority that the Memorandum of Association being the constitutional document of the Corporate Debtor is not rebutted by other documentary evidence. In view of it, the objection raised by the Counsel for the Corporate Debtor stands rejected.
12. It has been submitted by the Counsel for the Corporate Debtor that till date, the Proprietorship Firm is paying the income tax and also carrying on the business which is contrary to the Memorandum of Association of the Corporate Debtor viz., M/s. Hitro Energy Solutions Private Limited. It seems that the Director of the Corporate Debtor viz., N. S. Rangachari may be making communications on behalf of Proprietorship Firm for the purpose of dubious transactions or Tax benefits but as per the Memorandum of Association, the same has been taken over by the Corporate Debtor of which there is no doubt at all. Thus, the Memorandum of Association being the constitutional document of the Corporate Debtor is an authentic documentary proof that the Proprietorship Firm has been taken over or converted into a corporate entity.
13. It has been submitted by the Counsel for the Corporate Debtor that in case the CMRL could have given a certificate that they would not claim Rs.50 Lakhs from M/s Hitro Energy Solutions then, the amount could have been paid by the Corporate Debtor to the Operational Creditor, to which the Counsel for the Operational Creditor has submitted that his client has always been ready and willing to give indemnity bond against any claim made by the CMRL, but the Counsel for Corporate Debtor did not any response with regard to the security offered.”
# 17 The order of the NCLT was set aside by the NCLAT on 12 December 2019. The order notes:
“7. However, there is nothing on the 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.
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 Rs 50 lakhs to the Proprietary Concern as an advance on its order with the appellant;
(iii) CMRL cancelled its project with the appellant;
(iv) the Proprietary Concern encashed the cheque for Rs 50 lakhs anyways; and
(v) the appellant paid the sum of Rs 50 lakhs to CMRL.
# 41 We have to now consider the ‘debt’ in the present appeal. According to the appellant, it is the advance payment CMRL made on their behalf to the Proprietary Concern, which was encashed even though the project between CMRL and the appellant was terminated. On the other hand, the respondent has attempted to urge that there was no privity of contract between the appellant and the respondent, and that CMRL had not transferred the debt to the appellant. We reject both these submissions. It is amply clear from the facts that the debt arises from purchase orders between the appellant and the Proprietary Concern (which is the underlying contract), regardless of whether CMRL may have made the payment on behalf of the appellant. Thus, the ultimate dispute still remains between the appellant and the Proprietary Concern, and the debt arises from that.
# 42 It is then that we come to the core of the dispute – while the appellant has argued that the debt is in the nature of an operational debt which makes them an operational creditor, the respondent has opposed this submission. The respondent’s submission, which was accepted by the NCLAT, seeks to narrowly define operational debt and operational creditors under the IBC to only include those who supply goods or services to a corporate debtor and exclude those who receive goods or services from the corporate debtor. For reasons which shall follow, we reject this argument.
# 43 First, Section 5(21) defines ‘operational debt’ as a “claim 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 supplied to the corporate debtor. While the latter indicates that the operational creditor should have supplied goods or services to the corporate debtor, the former is broad enough to include all forms of contracts for the supply of goods and services between the operational creditor and corporate debtor, including ones where the operational creditor may have been the receiver of goods or services from the corporate debtor. Finally, the judgment of this Court in Pioneer Urban (supra), in comparing allottees in real estate projects to operational creditors, has noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services. Indeed, the decision notes that “[e]examples given of advance payments being made for turnkey projects and capital goods, where customisation and uniqueness of such goods are important by reason of which advance payments are made, are wholly inapposite as examples vis-Ã -vis advance payments made by allottees”. Hence, this leaves no doubt 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.
# 44 In Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., a three-judge Bench of this Court purposively interpreted Section 21(2) of the IBC in order to understand who should be excluded from the CoC due to their being a “related party”. The Court held:
“99. Accepting the submission of Mr Viswanathan would allow the statutory provision to be defeated by a related party of a corporate debtor creating commercial contrivances which have the effect of denuding its status as a related party, by the time that the CIRP is initiated. The true test for determining whether the exclusion in the first proviso to Section 21(2) applies must be formulated in a manner which would advance the object and purpose of the statute and not lead to its provisions being defeated by disingenuous strategies.
[…]
104. Hence, while the default rule under the first proviso to Section 21(2) is that only those financial creditors that are related parties in praesenti would be debarred from the CoC, those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered 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 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.
# 46 In doing so, we are cognizant of the observations of this Court in judgments such as Swiss Ribbons (supra), that IBC proceedings should not become recovery proceedings. However, in the present case, the dispute is not in relation to the quality of the services provided by the Proprietary Concern but is entirely about the repayment of the advance amount paid to them, upon the cancellation of the underlying project.
E Evidentiary value of respondent’s MOA
# 47 Having established that the appellant is an operational creditor, we must now analyze whether the debt owed to the appellant can actually be realized from the respondent. In the present case, it is uncontested that the appellant entered into a contract with the Proprietary Concern and continued communications with them till the very end, finally sending its notice under Section 8(1) of the IBC to the respondent.
# 48 The dispute revolves around the MOA of the respondent, dated 24 January 2014, which states:
“(A) THE MAIN OBJECTS OF THE COMPANY TO BE PURSUED BY COMPANY ON ITS INCORPORATION:
[…]
4. To take over the existing Proprietorship firm Viz. M/S. Hitro Energy Solutions having its registered office at Chennai.”
The NCLT understood this to be undeniable proof that the respondent had taken over the business and liabilities of the Proprietary Concern, while the NCLAT took a different position.
52 A company’s MOA is its charter and outlines the purpose for which the company has been created. Some of those purposes/objects have to then be placed in the MOA, in accordance with Section 4(1)(c) of the CA 2013. In the 19th edition of A Ramaiya’s Guide to the Companies Act, it has been stated29:
“[s 4.2.3] Objects for which the company is proposed to be incorporated and any matter considered necessary for the furtherance of its objectives
[…]
It is pertinent to note that section 4(1)(c) speaks about ‘the objects for which the company is proposed to be incorporated’. This implies that the company contemplates to pursue its objects either immediately after incorporation or within a reasonable period of time. It is the duty of the registrar to verify whether the objects included in the draft memorandum are indeed the ones which the company proposes to pursue upon incorporation. He should satisfy himself on this score by verifying the documents/ information provided by the company.”
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.
# 55 In any case, 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.
# 56 Consequently, the MOA of the respondent still stands and the presumption will continue to be in favor of the appellant. Thus, it can be concluded that the respondent took over the Proprietary Concern and was liable to re-pay the debt to the appellant. Hence, the application under Section 9 of the IBC was maintainable.
F Whether the application under Section 9 is barred by limitation
# 57 The respondent urged that the application under Section 9 is barred by limitation. The respondent has argued that the date of default mentioned by the appellant is 7 November 2013, when the cheque was issued by CMRL to the Proprietary Concern. As such, the submission is that the limitation of three years under Article 137 of the Limitation Act 196330 would expire on 7 November 2016, while the application under Section 9 was only filed on 1 November 2017.
# 58 In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates (“B.K. Educational Services”), a two-judge Bench of this Court held that the Limitation Act would apply to applications filed under Sections 7 and 9 of the IBC. The 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 Rs 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.
# 61 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.
G Conclusion
# 62 Therefore, we answer the three issues formulated earlier in the following terms:
(i) The appellant is an operational creditor under the IBC, since an ‘operational debt’ will include a debt arising from a contract in relation to the supply of goods or services from the corporate debtor;
(ii) The respondent will be considered to have taken over the Proprietary Concern in accordance with its MOA; and
(iii) The application under Section 9 of the IBC is not barred by limitation.
# 63 The appeal is allowed by setting aside the impugned judgment and order of the NCLAT dated 12 December 2019. Since the CIRP in respect of the respondent is ongoing due to this Court’s order dated 18 November 2020, no further directions are required.
# 64 Pending application(s), if any, stand disposed of.
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