Shri IRK Raju Vs. Immaneni Eswara Rao & Ors. - The statutory dues are payable under law to the Central Government for which the Central Government can claim to be the ‘Operational Creditor’. The 2nd Respondent does not come within the meaning of ‘Operational Creditor’ for the purpose of Custom Duty.

NCLAT (30.01.2020) in Shri IRK Raju Vs. Immaneni Eswara Rao & Ors. [Company Appeal (AT) (Insolvency) No. 1058 of 2019  ] held that;

• The statutory dues are payable under law to the Central Government for which the Central Government can claim to be the ‘Operational Creditor’. The 2nd Respondent does not come within the meaning of ‘Operational Creditor’ for the purpose of Custom Duty.

• Section 5(21) makes a provision of payment of statutory dues as ‘operational debt’. however, what is pertinent to mention is “payment” of statutory dues. This by itself indicates that a statutory due is only operational in nature when it is paid to the relevant authority, and not when it is repaid to a party that has paid such statutory authority.

Excerpts of the order;  

# 18. The Demand Notice is also not in terms of Section 8(1), as it allows 15 days’ time which will be evident from paragraph 21 of the said Notice, as under:

•  “21………………..In the premises, we once again request Your Company to release our justified outstanding payments amounting to Rs.2,36,18,518/- (Two Crore Thirty Six Lakhs Eighteen Thousand Five Hundred and Eighteen Only) along with interest @ 24% due to us within 15 days of receiving this notice, failing which we will be constrained to take legal action against Your Company at your risk & cost.”

# 19. It is a legal notice as distinguished from Demand Notice under Section 8(1). It has allowed 15 days’ time to pay the amount with interest and mentioned that on failure the 2nd Respondent will take legal action against the Company. On the contrary, in terms of Section 8(1), in the total amount of Rs.6,10,76,798/- was due and payable by the Corporate Debtor to the Operational Creditor in respect of the cost and custom duty for the 45,000 DSTB supplied to the Corporate Debtor………………..” Demand Notice 10 days’ time was to be granted on occurrence of default and in terms of Form-3 of the ‘Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016’, it is mandatory to state that on failure to pay the amount within 10 days’, the ‘Operational Creditor’ ‘shall initiate a corporate insolvency resolution process in respect of the Corporate Debtor’, as evident from Clause 6 of Form 3, as quoted below:

• “6. The undersigned request you to unconditionally repay the unpaid operational debt (in default) in full within ten days from the receipt of this letter failing which we shall initiate a corporate insolvency resolution process in respect of [name of corporate debtor].”

# 20. It is clear from Part-IV (Form-5) that the ‘Operational Creditor’ has supplied 45,000 number of Digital Set-Top Box to the ‘Corporate Debtor’ between the period 10th June, 2014 to 22nd August, 2014. The ‘Operational Creditor’ reached 1st Memorandum of Understanding on 22nd November, 2015, much thereafter.

# 21. Section 5(20) defines ‘Operational Creditor’ whereas Section 5(21) defines ‘Operational Debt’ which includes goods or services including employment or a debt in respect of the payment of dues arising under 14 Company Appeal (AT) (Insolvency) No. 1058 of 2019 any law for the time being in force and payable to the Central Government, any State Government or any local authority.

# 22. The statutory dues are payable under law to the Central Government for which the Central Government can claim to be the ‘Operational Creditor’. The 2nd Respondent does not come within the meaning of ‘Operational Creditor’ for the purpose of Custom Duty.

# 23. Section 5(21) makes a provision of payment of statutory dues as ‘operational debt’. however, what is pertinent to mention is “payment” of statutory dues. This by itself indicates that a statutory due is only operational in nature when it is paid to the relevant authority, and not when it is repaid to a party that has paid such statutory authority. In fact, the amendment of Section 5(21), where the word “repayment” in the context of statutory dues was replaced with the word “payment” makes clear the intent of the legislature that a statutory due becomes operational debt only when the same is to be paid to the relevant authority and not otherwise. Consequently, a statutory due de hors of the invoice of the good or service cannot be claimed as an ‘operational debt’ from a party, where the party is not a statutory authority.

# 24. In the circumstances, even if it is accepted that the 2nd Memorandum of Understanding dated 22nd November, 2015 was executed by the parties on the same date though we have doubt in looking to the 2nd Memorandum of Understanding on the same date and it should have been reflected in the 1st Memorandum of Understanding, in such case also, the 2nd Respondent is not entitled to claim the same by filing petition under Section 9.

# 25. So far as the dues payable to the 2nd Respondent for supply of goods, pursuant to the Memorandum of Understanding dated 22nd November, 2015, the amount claimed is Rs.1,66,38,500/-. This Appellate Tribunal on the request of the Appellant allowed the Appellant to pay the amount to the 2nd Respondent with additional amount of Rs.10,00,000/. However, the 2nd Respondent refused to accept the same.

# 26. It is a glaring example that the 2nd Respondent moved an application under Section 9 fraudulently with malicious intent for extracting more amount, not for the liquidation or resolution as covered by Section 65 and as such calls for penal action. The Adjudicating Authority has failed to notice the aforesaid fact.

# 27. For the reasons aforesaid, while we are not passing any penal order under Section 65 on 2nd Respondent, set aside the impugned order dated 4th October, 2019. In the result, the ‘Corporate Debtor’ (company) is released from all the rigours of ‘Corporate Insolvency Resolution Process’ and is allowed to function through its Board of Directors from immediate effect. The ‘Interim Resolution Professional’ will hand over the assets and records to the Board of Directors. The case is remitted to the Adjudicating Authority to determine the fees and costs incurred by the ‘Interim Resolution Professional’ and whatever the amount payable, it will be paid by the 2nd Respondent. The appeal is allowed with aforesaid observations and directions. No costs. (Just

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