x

08 June 2017

Corporate Insolvency Resolution Process – NCLT clarifies scope of ‘operational debt’

Facts:

The National Company Law Tribunal (NCLT) has passed an order on dated 31-3-2017 interpreting the definitions of ‘operational creditor’ and ‘operational debt’ under the Insolvency and Bankruptcy Code, 2016 (Code).

NCLT rejected the application filed under Section 9 of the Code for initiating Corporate Insolvency Resolution Process (CIRP) and held that the remedy lay under the Consumer Protection Act, 1986 and the general law of the land.

The matter arose out of non-payment of refund and the interest amount by Respondent per the builder-buyer agreement between the Applicants and the Respondent.

The Applicants had booked a residential flat in the Respondent’s construction project and made corresponding payments.

The Respondent failed to hand over the possession of the residential flat within the stipulated time period. The Applicant, thus, applied for cancellation of allotment of the residential flat and refund of the deposit with interest.

 

Contentions:

The Applicants contended that the Respondent must be considered as an ‘operational debtor’ while the Applicants should be considered as ‘operational creditors’ within the meaning of Section 9 read with Section 5(20) and Section 5(21) of the Code.

The term ‘operational debt’ should be liberally interpreted to include claims in respect of immovable property. Based on the aforesaid premise, the Applicants contended that they were eligible to initiate CIRP under the Code.

 

Order of the Tribunal:

NCLT cited and upheld the case of Vinod Awasthy v. A.M.R. Infrastructures Limited (AMR case) in the present case.

In the AMR case, the NCLT construed the provisions of Section 9 read with Section 5(20) and Section 5(21) of the Code. Per Section 9(1) of the Code, CIRP can only be initiated by an ‘Operational Creditor’ [see end note 1] against the ‘Corporate Debtor’ when an ‘Operational Debt’ [see end note 2] is owed.

The definition of ‘operational debt’ does not state that it also includes any debt other than ‘Financial Debt’ [see end note 3]. Thus, ‘operational debt’ under the Code only covers 4 (four) categories, that is, goods, services, employment and Government dues.

NCLT observed that in the present case, the debt had neither arisen out of the provision of goods or services, nor out of employment or the dues which are payable under the statute to the Centre/State Government or local body.

The refund and interest sought to be recovered by the Applicants was associated with the delivery of the possession of immovable property, that is, residential flat, which was delayed. The NCLT clarified that the debt, therefore, does not fall within the definition of ‘operational debt’ as defined under Section 5(21) of the Code.

NCLT deliberated whether the Applicants could be regarded as ‘operational creditor’ under Section 5(20) of the Code.

Observing that according to Section 5(20) of Code, ‘operational creditor’ is a person to whom ‘operational debt’ is owed, it was held that since the refund sought does not fall within the ambit of ‘operational debt’, the Applicants cannot be regarded as ‘operational creditor’. 

NCLT held that Section 9 read with Section 5(20) and Section 5(21) of the Code cannot be construed so widely to include within its ambit even the cases where the dues are on account of advance made to purchase the flat or a commercial site from a construction company, especially when remedy under the Consumer Protection Act and the general law of the land is available.

The application for triggering CIRP was dismissed as the Applicants didn’t fall within the meaning of ‘operational creditor’ as defined under Section 5(20) of the IBC, thereby failing to satisfy the criteria laid down under Section 9 of the IBC for triggering CIRP.

 

Analysis:

NCLT has provided clarity in respect of the meaning and scope of ‘operational debt’ and ‘operational creditor’. Further, this ruling provides an insight as to which kind of cases will be subject to the Code.

Failure to refund money for non-delivery of residential flat or commercial site by a construction company will not fall within the scope of the Code. By way of the present ruling, the NCLT has sought to demarcate the scope of the Code vis-à-vis consumer disputes.

 

End Notes

  1. Section 5 (20) of IBC defines "operational creditor" as follows:  
    “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”
  2. Section 5 (21) of IBC defines "operational debt" as follows: 
    “operational debt” means a claim in respect of provision of goods or services including employment or a debt in respect of the repayment 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”
  3. Section 5 (8) of IBC defines "financial debt" as follows:
     “financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—
    (a) money borrowed against the payment of interest;
    (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent;
    (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
    (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
    (e) receivables sold or discounted other than any receivables sold on nonrecourse basis;
    (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
    (h) any counter-indemnity obligation in respect of a guarantee,
    indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
    (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause”

 

}