V. Umadevi Vs. Kumaran Gin & Pressing Private Limited - The person who had not supplied any goods or provided any services but had paid an advance to receive supply of goods from the Company would not come within the meaning of "Operational Creditor".

 NCLT Chennai-II (28.04.2023) In V. Umadevi  Vs. Kumaran Gin & Pressing Private Limited  [IBA/ 840 (CHE)/ 2020] held that;

• The person who had not supplied any goods or provided any services but had paid  an advance to receive supply of goods from the Company would not come within the  meaning of "Operational Creditor".

Blogger’s Comments; Section 9  application has been rejected by AA on two grounds;

1. Advance paid to CD for goods to be supplied is not operational debt.

2. Threshold under section 4 of the Code.

As far as advance paid to CD for supply of goods is concerned, Hon’ble 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.

Further Hon’ble  Supreme Court (2011.05.11) in Amar Singh vs Union Of India & Ors [Writ Petition(Civil) No.39 of 2006] held that -  the court is supposed to know the law. ;

• # 57. In one of the most celebrated cases upholding this principle, in the Court of Appeal in R. v. Kensington Income Tax Commissioner {1917 (1) K.B.486} Lord Justice Scrutton formulated as under:

• "and it has been for many years the rule of the Court, and one which it is of the greatest importance to maintain, that when an applicant comes to the Court to obtain relief on an ex parte statement he should make a full and fair disclosure of all the material facts- facts, now law. He must not misstate the law if he can help it -  the court is supposed to know the law. But it knows nothing about the facts, and the applicant must state fully and fairly the facts, and the penalty by which the Court enforces that obligation is that if it finds out that the facts have been fully and fairly stated to it, the Court will set aside any action which it has taken on the faith of the imperfect statement."

Excerpts of the order; 

Under consideration is a petition filed by Mr. G. Venkatesh (hereinafter  referred to as 'Operational Creditor') under Section 9 of the Insolvency &  Bankruptcy Code, 2016 (in short, 'I&B Code, 2016') r/w Rule 6 of the IBBI  (Application to Adjudicating Authority) Rules, 2016 against Kumaran Gin &  Pressing Private Limited (hereinafter referred to as 'Corporate Debtor'). The  prayer made is to admit the Application, to initiate Corporate Insolvency   Resolution Process against the Corporate Debtor, declare moratorium and  appoint Interim Resolution Professional (IRP). 

# 2. Part I of the Application sets out about the Operational Creditor,  which states, that the Operational Creditor is a Proprietary concern with its  office address at 47/4, 1st Street Amarjothi Narayanasamy Nagar, Kangayam  Road, Tirupur - 641 604. Part -II brings out the particulars of the Corporate  Debtor, which is a Private Limited Company with CIN-  U17111TZ1995PTC006570 incorporated on 28.09.1995 under the Companies  Act, 1956. The registered office of the Corporate Debtor stated it is situated at  SF No. 33/1 & 33/2S, Kulathu Palayam Pirivu, S. Periapalayam, Uttukuli Main  Road, Tirupur- 641 607, Tamil Nadu. From Part-III of the application, the  applicant has not proposed any name for appointment of "Interim Resolution  Professional" and has left it to the discretion of this Authority to appoint the  same. An affidavit verifying the instant application has been placed between  Pg. no. 7-10 of the typed set filed along with the application. 

# 3. As per Part-IV of the Application, a sum of Rs. 1,10,03,812/- which  includes Principal to the tune of Rs. 91,90,827/- and interest @ 24% to the tune  of Rs. 18,12,985/- till 05.10.2020 is being claimed by the Operational Creditor  along with further interest @ 18% per annum till the date of payment. The date  of default as stated in the application is 05.12.2019. 

# 4. Part-V of the Application, describes the documents/record to prove  the  'Debt & Default' on the part of the Corporate Debtor. The list of documents  attached along with the application is as hereunder, 

• a) Demand Notice in Form -3 dated 08.02.2020 

• b) Copy of Accounts of the Corporate Debtor in the books of the Operational Creditor for the period between 01.04.2019- 31.03.2020. 

• c) Copy of Bank Statement of "Umadevi Cottons" for the period  between 01.04.2019-24.06.2020 

# 5. It is averred by the Ld. Counsel for the Applicant that the Corporate  Debtor herein has incurred "debt" due and payable to the Applicant. The  Applicant herein had advanced a sum of Rs. 1,10,03,812/- for purchase of  multiple quantities of yarn from the Corporate Debtor. The relationship between the parties as averred in the Affidavit filed by the Applicant is as  extracted hereunder, 

• "3. I submit that, M/s. Uma Devi Cottons (Operational Creditor), approached M/s. Kumaran Gin & Pressing (P) Ltd., (Corporate Debtor) for purchasing multiple quantities of yarn for their business and Commercial purpose. As, the Corporate Debtor expressed an interest in catering to the said needs, the Operational Creditor went on to proceed to purchase Yarn. Pursuant to which M/s. Uma Devi Cottons has paid a sum Rs. 91,90,827/- (Rupees Ninety-one lakh ninety thousand eight hundred & twenty-seven only). However, the Corporate Debtor suddenly expressed its inability to cater to the needs and deliver the yarn.”

# 6.  It is averred by the Applicant that the Demand Notice under Form- 3  dated 08.02.2020 is served on the Corporate Debtor, however, no reply for the  same was received by the Applicant. An affidavit to that effect that no notice  of dispute has been given by the Corporate Debtor has been filed with the  application. 

# 7.  The Corporate Debtor by way of its reply vide Sr. No. 3115 dated  29.07.2021 has pleaded that the payments reflected in the statement submitted  by the Applicant is only for the yarn supplied by the Corporate Debtor not  otherwise. The respondent in para 6 of their reply has stated that the  operational creditor has failed to produce any purchase orders specifying the  variety, count, quantity etc., relating to the advances alleged to have been  made towards the supply of yarn. It is that the Operational Creditor has failed  to produce any material documents to prove its claim. The Corporate Debtor  by way of written statement/synopsis vide Sr. No. 1167 dated 21.02.2022 has  also stated that the instant application cannot be maintained as the debt is  lesser than the minimum threshold limit of Rs. 1 crore. 

# 8. The Corporate Debtor emphasised on the following Judgments, 

• ➤ In the matter of CBRE South Asia Private Limited -Vs- Messrs United Concepts and Solutions Private Limited in IB- 797(ND)2021 (National Company Law Tribunal - New Delhi); 

• ➤ In the matter of Hemalatha K. Reddy -Vs- KPN Travels India Limited in IB/788/CHE/2021 (National Company Law Tribunal - Division Bench - I) 

# 9.The Corporate Debtor states that the claim of the Operational Creditor  can be maintained only if the "Operational Debt" crosses the limit of Rs.  1,00,00,000/- as on 24.03.2020, without inclusion of any interest. It is also  stated that the Operational Creditor herein has cleverly waited for a while to  make sure the claim amount is grown above Rs. 1 crore. 

# 10. Heard the submissions made by the Ld. Counsel for the parties and  perused the pleadings and documents placed on record. 

# 11.  Be that as it may, before venturing into the facts & Circumstances of  the instant case, it is prima facie necessary to verify that if the "debt" as  claimed by the applicant is a "qualified debt" under the preview of Section 9  of the code or not. On perusal of the application and the averments made  thereunder by way of affidavit by the applicant, it is manifest that the  Applicant herein is not a "Operational Creditor". Not moving further, and to  make it crystal clear, we refer to the para 3 of the affidavit, 

• "3. I submit that, M/s. Uma Devi Cottons (Operational Creditor), approached M/s. Kumaran Gin & Pressing (P) Ltd., (Corporate Debtor) for purchasing multiple quantities of yarn for their business and Commercial purpose. As, the Corporate Debtor expressed an interest in catering to the said needs, the Operational Creditor went on to proceed to purchase Yarn. Pursuant to which M/s. Uma Devi Cottons has paid a sum Rs. 91,90,827/- (Rupees Ninety-one lakh ninety thousand eight hundred & twenty-seven only). However, the Corporate Debtor suddenly expressed its inability to cater to the needs and deliver the yarn." 

# 12.  From the extract of the Applicant's affidavit, it is crystallised that the  "Operational Creditor" herein cannot be captioned as an "Operational  Creditor" as he is not a provider of any goods or service to the Corporate  Debtor. However, it is the other way round. Thus, in order to trigger a  Corporate Insolvency Resolution Process against a Corporate Debtor under  Sec 9 of the code, it is sine qua non to prove that the applicant is a  "Operational Creditor" as defined under the Sec 5 (20) of the Code r/w Sec 5(21) which defines Operational Debt". At this Juncture, we would like to  place reliance on the order passed by the Hon'ble NCLAT - Delhi in "Kavita  Anil Taneja -Vs- ISMT Ltd., ((2019) ibclaw.in 504 NCLAT) wherein it was held 

• The person who had not supplied any goods or provided any services but had paid  an advance to receive supply of goods from the Company would not come within the  meaning of "Operational Creditor". 

# 13. Thus, we are of the considered view that, the applicant herein is not an  "Operational Creditor" as such the debt due and payable is not an  "Operational Debt" and there is nothing vital to admit the Corporate Debtor  into Corporate Insolvency Resolution Process as prayed by the Applicant. 

# 14. Assuming even for a moment, that the Applicant is an eligible  "Operational Creditor", it is imperative to examine whether the claim of the  "Operational Creditor" makes way across the minimum threshold of Rs. 1  crore which was enhanced vide S.O. 1205(E) dated 24.03.2020, a deemed  prospective amendment in Section 4 of the Code. Admittedly, the instant  application was filed on 10.11.2020, on perusal of Part-IV of the application it  is seen that the Principal amount due & payable by the Corporate Debtor is  to the tune of Rs. 91,90,827/-. The date of default is mentioned as 05.12.2019.  It is reiterated by the Appellate Authority and this Tribunal that, the  applications under Sec. 7 & 9 are summary in nature as such the applicants  are required to satisfy the Adjudicating Authority with the essential  documents in order to show the existence of debt, interest if any and the  default committed on the part of the Corporate Debtor. In the absence of the  same, it would be onerous on the part of this Adjudicating Authority to  determine the debt & default. In the instant matter, it is seen that the  Operational Creditor has not placed any written agreement or material  records to show that she is entitled to claim the debt due & payable along  with interest from the Corporate Debtor. Thus, in the absence of any specific  document to show that the Operational Creditor is entitled to claim interest,  this Adjudicating Authority cannot proceed further as the same cannot be  determine by this Adjudicating Authority. As such be the case, in the event  of not meeting the minimum threshold, the instant application cannot be  maintained even if the applicant is a competent "Operational Creditor". 

# 15. Since, the citations given by the Corporate Debtor are related to  threshold & lack of documents for admission, the same are not applicable in  the present matter as the application is dismissed on other grounds too. 

# 16.  Accordingly, the Application in IBA/840/CHE/2020 is dismissed and  disposed of. No orders as to cost. 

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