Supreme Court of India
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LIMITEDversusM/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED
- Citation
- 2022 INSC 150
- Decided
- 4 February 2022
- Disposal
- Appeal(s) allowed
- Bench
- D Y CHANDRACHUD
Holding
The appellant is an operational creditor under Section 5(20) of the IBC, the respondent has taken over the Proprietary Concern as per its unamended MOA, and the Section 9 application is not barred by limitation.
Summary
Consolidated Construction Consortium Ltd (CCCL) entered into a contract with a Proprietary Concern (PC) to supply light fittings for a Chennai Metro Rail Limited (CMRL) project and paid an advance of Rs 50 lakhs, which the PC encashed even after CMRL terminated the project. CCCL later paid back the amount to CMRL and demanded repayment from the PC, which was taken over by Hitro Energy Solutions Pvt Ltd (the respondent) as per its memorandum of association (MOA). CCCL issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code (IBC) and filed an application under Section 9, which the NCLAT dismissed, holding CCCL was not an operational creditor. The Supreme Court held that an operational debt includes claims arising from advance payments for goods or services, that a demand notice need not be accompanied by an invoice, and that the respondent’s MOA, unamended, showed it had taken over the PC, making CCCL an operational creditor. The Court also found that the limitation period had not expired because default occurred only after the project termination and subsequent negotiations. Consequently, the appeal was allowed, setting aside the NCLAT order and confirming the maintainability of the Section 9 application.
Issues considered
- The definition and scope of 'operational creditor' and 'operational debt' under the IBC, particularly whether a purchaser of goods/services can be an operational creditor.
- Whether the respondent, Hitro Energy Solutions Pvt Ltd, had taken over the Proprietary Concern in accordance with its MOA, thereby becoming liable for the debt.
- Whether the application under Section 9 of the IBC is barred by the Limitation Act, 1963.
Legislation cited
- Companies Act, 2013s. 10(1), s. 13, s. 4
- Insolvency and Bankruptcy Code, 2016s. 5(20), s. 5(21), s. 8(1), s. 9
- Limitation Act, 1963s. Article 137
Subjects
operational creditoroperational debtInsolvency and Bankruptcy CodeSection 9 applicationSection 8 noticeMemorandum of AssociationLimitation ActCorporate insolvency resolution processadvance payment
Judgment
212 SUPREME COURT
[2022]REPORTS
2 S.C.R. 212 [2022] 2 S.C.R.
A M/S CONSOLIDATED CONSTRUCTION CONSORTIUM
LIMITED
v.
M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED
B (Civil Appeal No. 2839 of 2020)
FEBRUARY 04, 2022
[DR. DHANANJAYA Y CHANDRACHUD, SURYA KANT
AND VIKRAM NATH, JJ.]
C Insolvency and Bankruptcy Code, 2016: ss.5(20), 5(21), 8(1)
– Operational creditor – Meaning of – Appellant was engaged by
CMRL for a project – For the said project, appellant entered into a
contract for supply of light fittings with a Proprietary Concern (P.C.)
– CMRL, on appellant’s behalf, paid a sum of Rs 50 lakhs to P.C. as
D an advance – However, CMRL terminated its project with the
appellant – The communication of termination was given to P.C.,
however P.C. encashed the cheque for Rs 50 lakhs – Appellant
paid the sum of Rs 50 lakhs to CMRL and requested P.C. to make
the payment – Meanwhile, respondent was incorporated and it took
over P.C. – Appellant sent demand notice under s.8 of the IBC to
E the respondent – Respondent denied that any debt was owed by
them to the appellant – Appellant filed application u/s.9 of IBC r/w
r.6 IBC Rules 2016 which was admitted by NCLT and Interim
Resolution professional appointed – NCLAT set aside the NCLT’s
decision and dismissed the application of appellant – On appeal,
F held: Operational creditors are those whose debt arises from
operational transactions i.e transactions involving goods or services
which are considered necessary for the operational functioning of
an entity – s.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
G
services, without specifying who is to be the supplier or receiver –
s.8(1) of the IBC r/w r.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 – The presence of an invoice is not a
H
212
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 213
ENERGY SOLUTIONS PVT. LTD.
sine qua non, since a demand notice can also be issued on the A
basis of other documents which prove the existence of the debt – 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 – Appellant had sought an operational service
from P.C. when it contracted with them for the supply of light fittings
B
– Enchashment of cheque by P.C., even though the contract was
terminated, gave rise to an operational debt in favor of the appellant
– Hence, the appellant is an operational creditor under s.5(20) of
the IBC.
Companies Act, 2013: Memorandum of Association (MOA) C
– Evidentiary value of – A company’s MOA is its charter and
outlines the purpose for which the company has been created – In
the instant case, the MOA of the respondent unequivocally states
that one of its main objects is to take over a Proprietary Concern
(P.C.) – However, the respondent has produced a resolution
purportedly to not take over P.C. – s.13 of Companies Act, 2013 D
provides the procedure for amendment of MOA – In case of
amending an object clause, it requires the Registrar to register
the Special Resolution filed by the company – However, respondent
provided no proof for the above amendment – MOA of the
respondent still stands. E
Limitation Act, 1963: Maintainability of IBC application –
Limitation does not commence when the debt becomes due but only
when a default occurs – Default is defined under s.3(12) of the
IBC as the non-payment of the debt by the corporate debtor when
it has become due – CMRL issued a cheque of Rs 50 lacs to a F
Proprietary Concern (P.C.) on 7 November 2013 as an advance
payment for the purchase – After termination of contract,
correspondence was exchanged between the appellant and P.C. –
Final letter demanding payment from P.C. was addressed on 27
February 2017 which was refused by appellant on 2 March 2017
– On 1 November 2017, appellant filed an application u/s.9 of G
IBC which is within three years from default – Hence, application
u/s.9 of IBC is not barred by limitation – Insolvency and
Bankruptcy Code, 2016 – s.9.
H
214 SUPREME COURT REPORTS [2022] 2 S.C.R.
A Allowing the appeal, the Court
HELD: 1. 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.
B 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
C 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. Hence, this leaves no doubt that a debt which
arises out of advance payment made to a corporate debt or for
D supply of goods or services would be considered as an operational
debt. 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
E 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
F remains unpaid. Hence, the appellant is an operational creditor
under Section 5(20) of the IBC. [Para 43, 45][245-F-H; 246-D;
247-C-E]
2.1 It is uncontested that the appellant entered into a
contract with the Proprietary Concern and continued
G communications with them till the very end, finally sending its
notice under Section 8(1) of the IBC to the respondent. The
dispute revolves around the MOA of the respondent. Section 4
of the Companies Act 2013defines an MOA. Section 4(1) provides
the relevant information that an MOA shall provide, which
includes, in sub-Clause (c), that it should provide “the objects
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 215
ENERGY SOLUTIONS PVT. LTD.
for which the company is proposed to be incorporated and any A
matter considered necessary in furtherance thereof”. Section 13
provides the requirements for the alteration of an MOA. [Para
47, 49, 52][247-G; 248-C-D; 249-G]
2.2 In the present case, the MOA of the respondent
unequivocally states that one of its main objects is to take over B
the Proprietary Concern. However, the respondent has produced
a resolution dated 1 September 2014 passed by its Board of
Directors, purportedly resolving to not take over the Proprietary
Concern. 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 C
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 D
13(10) of CA 2013, the purported amendment to the MOA would
not have any legal effect. 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 E
Section 9 of the IBC was maintainable. [Para 53, 55, 56][250-D;
251-D-F]
3. In respect of question of limitation, 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 F
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 G
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
H
216 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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. 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
B
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. [Para 60, 61][252-F-G;
253-A-B]
B.K. Educational Services (P) Ltd. v. Parag Gupta &
C Associates (2019) 11 SCC 633:[2018] 12 SCR 794 –
relied on.
Pioneer Urban Land and Infrastructure Ltd. v. Union
of India (2019) 8 SCC 416:[2019] 10 SCR 381;
Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC
D 407:[2017] 8 SCR 33; Mobilox Innovations (P) Ltd. v.
Kirusa Software (P) Ltd. (2018) 1 SCC 353: [2017] 10
SCR 1006; Phoenix ARC (P) Ltd. v. Spade Financial
Services Ltd. (2021) 3 SCC 475 – referred to.
Case Law Reference
E [2019] 10 SCR 381 referred to Para 34
[2017] 8 SCR 33 referred to Para 35
[2017] 10 SCR 1006 referred to Para 36
(2021) 3 SCC 475 referred to Para 44
F [2018] 12 SCR 794 relied on Para 58
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2839
of 2020.
From the Judgment and Order dated 12.12.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
G (Insolvency) No.19 of 2019.
M. P. Parthiban, Adv. for the Appellant.
K. Parameshwar, Ms. A. Sregurupriya, Prasad Hegde, Advs. for
the Respondent.
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 217
ENERGY SOLUTIONS PVT. LTD.
The Judgment of the Court was delivered by A
DR. DHANANJAYA Y CHANDRACHUD, J.
This judgement has been divided into the following sections to
facilitate analysis:
A The Appeal B
B Factual Background
C Submissions of counsel
D Whether the appellant is an operational creditor
D.1 Statutory Provisions C
D.2 Legislative History
D.3 Judicial Precedent
D.4 Analysis
E Evidentiary value of respondent’s MOA D
F Whether the application under Section 9 is barred by
limitation
G Conclusion
E
A The Appeal
1. The present appeal under Section 62 of the Insolvency and
Bankruptcy Code 20161 arises from a judgment and order dated 12
December 2019 of the National Company Law Appellate Tribunal 2 by
which it reversed the decision of the National Company Law Tribunal, F
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 Limited5, under Section 9 of the IBC for the initiation of the
G
1
“IBC”
2
“NCLAT”
3
“NCLT”
4
CP/708/(IB)/CB/2017
5
“Appellant”/“Operational Creditor”
H
218 SUPREME COURT REPORTS [2022] 2 S.C.R.
A Corporate Insolvency Resolution Process6 against the respondent, Hitro
Energy Solutions Private Limited7. While admitting the application, the
NCLT held that the respondent’s Memorandum of Association8, without
evidence to the contrary, proved that it took over a proprietary concern,
Hitro Energy Solutions9, and that the Proprietary Concern did owe the
appellant an outstanding operational debt. Further, the NCLT declared a
B
moratorium under Section 14 of the IBC and appointed an Interim
Resolution Professional10.
3. In appeal11 , the NCLAT set aside the NCLT’s decision,
dismissed the application of the appellant under Section 9 of the IBC
C 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
D 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
E 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’;
F (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.
G
6
“CIRP”
7
“Respondent”/“Corporate Debtor”
8
“MOA”
9
“Proprietary Concern”
10
“IRP”
11
Company Appeal (AT) No 19 of 2019
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 219
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
B Factual Background A
5. The genesis of the appeal arises from a project which was
being executed by the appellant with Chennai Metro Rail Limited12, 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 Limited13, through three B
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 C
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 D
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
E
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.
F
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 G
PURSUED BY COMPANY ON ITS INCORPORATION:
[…]
12
“CMRL”
13
“TLIPL” H
220 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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
B 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
C 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
D 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
E 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
F 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:
G “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.
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 221
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
We would like to inform you that we have not received any letter A
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 B
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 C
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: D
“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. E
• 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 F
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 G
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.” H
222 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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
B 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.”
C 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
D 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.
E 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
F 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
G (Application to Adjudicating Authority) Rules 201614 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
14
“2016 Application Rules”
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 223
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
Section 14 of the IBC and appointed an IRP. The operative parts of the A
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 B
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 C
Soluti9ns 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 D
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 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 E
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 F
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: G
“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’…
[…]
H
224 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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
B
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.
C
C Submissions of counsel
18. Mr M P Parthiban, Counsel appearing on behalf of the appellant
submitted that:
(i) The MOA of the respondent states that one of its four main
D objects is to take over the Proprietary Concern. Thus, the
findings contained in paragraph 7 of the NCLAT’s judgment,
that there is no list noting that the respondent has taken
over the Proprietary Concern, is incorrect;
(ii) The appellant made the payment of Rs 50,00,000 to CMRL,
E and it thus becomes due from the respondent to the appellant;
(iii) The appellant is an operational creditor within the framework
of the IBC since the purchase orders for light fittings were
in relation to the operational requirements of the appellant;
and
F
(iv) The application under Section 9 of the IBC is not barred by
limitation.
19. Mr K Parameshwar, Counsel appearing on behalf of the
respondent submitted that:
G (i) The appellant’s dealings have only been with the Proprietary
Concern and not the respondent. While the respondent’s
MOA may have stated its intention to take over the
Proprietary Concern, the respondent changed its intention
through a subsequent Board resolution. Further, the
Proprietary Concern exists till date and is an entity separate
H
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from the respondent. Thus, the respondent cannot be made A
liable for its debt;
(ii) There is no privity of contract between the appellant and
the respondent, since the appellant’s contract was with the
Proprietary Concern and the payment of the advance to
the Proprietary Concern was made by CMRL; B
(iii) The appellant is not an operational creditor because:
a. The appellant did not provide any goods or services
to the respondent, but only availed of goods or
services from the Proprietary Concern. Hence, the
appellant will not be an operational creditor within C
the meaning of Section 5(20) of the IBC; and
b. In any case, even if the debt exists, it is in the hands
of CMRL, which has not legally transferred it to the
appellant;
D
(iv) The application is barred by limitation since it was filed on
1 November 2017, more than three years after the date of
default, i.e., 7 November 2013; and
(v) The appellant is seeking to misuse the present proceedings
under the IBC for recovering its dues.
E
20. The rival submissions will now be considered.
D Whether the appellant is an operational creditor
21. The primary submission of the respondent, which was accepted
by the NCLAT, is that the appellant is not an operational creditor within
the ambit of the IBC, and therefore its application under Section 9 of the F
IBC was not maintainable. In order to assess this claim, we shall have to
consider the relevant provisions, rules and regulations, the legislative
history of the IBC and precedents of this Court.
D.1 Statutory Provisions
G
22. Section 5(20) of the IBC defines “operational creditor” in the
following terms:
“(20) “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;”
H
226 SUPREME COURT REPORTS [2022] 2 S.C.R.
A Section 5(21) defines the meaning of “operational debt”. Section
5(21), as it stood at the relevant time, was as follows:
“(21) “operational debt” means a claim in respect of the
provision of goods or services including employment or a debt
in respect of the re-payment of dues arising under any law for the
B time being in force and payable to the Central Government, any
State Government or any local authority;”
(emphasis supplied)
An operational debt needs to involve a claim in respect of the
provision of goods or services. The phrase “claim” is defined in Section
C 3(6) of IBC in the following terms:
“(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to
judgment, fixed, disputed, undisputed, legal, equitable, secured or
D unsecured;
(b) right to remedy for breach of contract under any law for the
time being in force, if such breach gives rise to a right to payment,
whether or not such right is reduced to judgment, fixed, matured,
unmatured, disputed, undisputed, secured or unsecured;”
E 23. Section 8 of the IBC explains the steps that the operational
creditor needs to undertake prior to filing a claim of insolvency against
the corporate debtor. At the relevant time, it stood as follows:
“8. Insolvency resolution by operational creditor.—(1) An
operational creditor may, on the occurrence of a default, deliver a
F demand notice of unpaid operational debtor copy of an invoice
demanding payment of the amount involved in the default to the
corporate debtor in such form and manner as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of the
receipt of the demand notice or copy of the invoice mentioned in
G sub-section (1) bring to the notice of the operational creditor—
(a) existence of a dispute, if any, and record of the pendency of
the suit or arbitration proceedings filed before the receipt of such
notice or invoice in relation to such dispute;
(b) the repayment of unpaid operational debt—
H
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(i) by sending an attested copy of the record of electronic transfer A
of the unpaid amount from the bank account of the corporate
debtor; or
(ii) by sending an attested copy of record that the operational
creditor has encashed a cheque issued by the corporate debtor.
Explanation.—For the purposes of this section, a “demand notice” B
means a notice served by an operational creditor to the corporate
debtor demanding repayment of the operational debt in respect of
which the default has occurred.”
In accordance with Section 8(1), an operational creditor can send
a demand notice to the corporate debtor when a default occurs, and in C
the manner which may be prescribed. “Default” has been defined under
Section 3(12) of the IBC, and it stood as follows at the relevant time:
“(12) “default” means non-payment of debt when whole or any
part or instalment of the amount of debt has become due and
payable and is not re-paid by the debtor or the corporate debtor, D
as the case may be;”
When the corporate debtor receives the demand notice, it has
two options available under Section 8(2) of the IBC: (i) to highlight a
pre-existing dispute in relation to the debt under question; or (ii) to prove
that the debt has already been paid. E
24. Rule 5 of the 2016 Application Rules provides the manner in
which the demand notice under Section 8(1) has to be delivered. It
provides thus:
“5. Demand notice by operational creditor.—(1) An
F
operational creditor shall deliver to the corporate debtor, the
following documents, namely.-
(a) a demand notice in Form 3; or
(b) a copy of an invoice attached with a notice in Form 4.
(2) The demand notice or the copy of the invoice demanding G
payment referred to in sub-section (2) of section 8 of the Code,
may be delivered to the corporate debtor,
(a) at the registered office by hand, registered post or speed post
with acknowledgement due; or
H
228 SUPREME COURT REPORTS [2022] 2 S.C.R.
A (b) by electronic mail service to a whole time director or designated
partner or key managerial personnel, if any, of the corporate debtor.
(3) A copy of demand notice or invoice demanding payment served
under this rule by an operational creditor shall also be filed with
an information utility, if any.”
B Thus, under sub-Rule (1) of Rule 5, an operational creditor can
send the demand notice under Section 8(1) of the IBC through two
methods: (i) a demand notice in Form 3; or (ii) a copy of an invoice
attached with a notice in Form 4. Form 3 requires the operational creditor
to provide the following information in relation to the operational debt:
C “2. Please find particulars of the unpaid operational debt below:
D
E
F
G
H ”
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In contrast, Form 4 provides: A
“[Name of operational creditor], hereby provides notice for
repayment of the unpaid amount of INR [insert amount] that is in
default as reflected in the invoice attached to this notice.”
Hence, a demand notice for an operational debt by an operational
creditor does not necessarily need to be accompanied by an invoice, but B
it may be sent where such debt arises under a “provision of law, contract
or other document” and for which documents can be attached along
with the demand notice.
25. The above conclusion is also supported by the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate C
Persons) Regulations 201615. In relation to claims by operational creditors,
Regulation 7, as it stood at the relevant time, provided thus:
“7. Claims by operational creditors.
(1) A person claiming to be an operational creditor, other than D
workman or employee of the corporate debtor, shall submit proof
of claim to the interim resolution professional in person, by post or
by electronic means in Form B of the Schedule:
Provided that such person may submit supplementary documents
or clarifications in support of the claim before the constitution of
E
the committee.
(2) The existence of debt due to the operational creditor under
this Regulation may be proved on the basis of-
(a) the records available with an information utility, if any; or
(b) other relevant documents, including - F
(i) a contract for the supply of goods and services with corporate
debtor;
(ii) an invoice demanding payment for the goods and services
supplied to the corporate debtor; G
(iii) an order of a court or tribunal that has adjudicated upon the
non-payment of a debt, if any; or
(iv) financial accounts.”
15
“CIRP Regulations 2016” H
230 SUPREME COURT REPORTS [2022] 2 S.C.R.
A Under Regulation 7(2), an operational creditor can prove their
claim not only through “an invoice demanding payment for the goods
and services supplied to the corporate debtor” (Regulation 7(2)(ii)) but
also through “a contract for the supply of goods and services with
corporate debtor” (Regulation 7(2)(i)).
B 26. Once the procedures under Section 8 of the IBC are completed
by an operational creditor, it can file an application under Section 9 of
the IBC to initiate the CIRP in relation to the corporate debtor. Section 9
provided as follows, at the relevant time:
“9. Application for initiation of corporate insolvency
C resolution process by operational creditor.—(1) After the
expiry of the period of ten days from the date of delivery of the
notice or invoice demanding payment under sub-section
(1) of Section 8, if the operational creditor does not receive
payment from the corporate debtor or notice of the dispute under
sub-section (2) of Section 8, the operational creditor may file an
D
application before the Adjudicating Authority for initiating a
corporate insolvency resolution process.
(2) The application under sub-section (1) shall be filed in such
form and manner and accompanied with such fee as may be
prescribed.
E
(3) The operational creditor shall, along with the application
furnish—
(a) a copy of the invoice demanding payment or demand notice
delivered by the operational creditor to the corporate debtor;
F (b) an affidavit to the effect that there is no notice given by the
corporate debtor relating to a dispute of the unpaid operational
debt;
(c) a copy of the certificate from the financial institutions
maintaining accounts of the operational creditor confirming that
G there is no payment of an unpaid operational debt by the corporate
debtor; and
(d) such other information as may be prescribed.
(4) An operational creditor initiating a corporate insolvency
resolution process under this section, may propose a resolution
H professional to act as an interim resolution professional.
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(5) The Adjudicating Authority shall, within fourteen days of the A
receipt of the application under sub-section (2), by an order—
(i) admit the application and communicate such decision to the
operational creditor and the corporate debtor if,—
(a) the application made under sub-section (2) is complete;
B
(b) there is no repayment of the unpaid operational debt;
(c) the invoice or notice for payment to the corporate debtor has
been delivered by the operational creditor;
(d) no notice of dispute has been received by the operational creditor
or there is no record of dispute in the information utility; and C
(e) there is no disciplinary proceeding pending against any
resolution professional proposed under sub-section (4), if any.
(ii) reject the application and communicate such decision to the
operational creditor and the corporate debtor, if—
D
(a) the application made under sub-section (2) is incomplete;
(b) there has been repayment of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for payment
to the corporate debtor;
E
(d) notice of dispute has been received by the operational creditor
or there is a record of dispute in the information utility; or
(e) any disciplinary proceeding is pending against any proposed
resolution professional:
Provided that Adjudicating Authority, shall before rejecting an F
application under sub-clause (a) of clause (ii) give a notice to the
applicant to rectify the defect in his application within seven days
of the date of receipt of such notice from the Adjudicating
Authority.
(6) The corporate insolvency resolution process shall commence G
from the date of admission of the application under sub-section
(5) of this section.”
In accordance with Section 9(1), an operational creditor can file
the application under Section 9 after ten days from the date of delivery
of the notice under Section 8, if no payment or notice of an existing H
232 SUPREME COURT REPORTS [2022] 2 S.C.R.
A dispute is received. Section 9(3)(a) requires the application to be
accompanied by a copy of the invoice demanding payment or demand
notice delivered by the operational creditor to the corporate debtor. This
again highlights that it could be either one of the two, i.e., an invoice or
a demand notice.
B 27. Rule 6 of the 2016 Application Rules provides that the
application under Section 9 has to be filed along with the details required
in Form 5. Within Form 5, inter alia, the following details in relation to
the operational debt are required to be provided:
“Part-V
C
D
E
F
G
H ”
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D.2 Legislative History A
28. Unlike other foreign jurisdictions, which usually differentiate
between secured and unsecured creditors only, the IBC is unique because
it provides for two different classes of creditors: operational creditors
and financial creditors. To understand the position of the former within
the framework of the IBC, it is important to understand the distinction B
between these two classes.
29. The primary source is Volume I of the Report of the
Bankruptcy Law Reforms Committee16. It notes that “[e]nterprises have
financial creditors by way of loan and debt contracts as well as operational
creditors such as employees, rental obligations, utilities payments and C
trade credit”17. It provides that a corporate debtor will have financial
and operational liabilities, and explains the difference as follows18:
“Liabilities fall into two broad sets: liabilities based on financial
contracts, and liabilities based on operational contracts. Financial
contracts involve an exchange of funds between the entity and a D
counterparty which is a financial firm or intermediary. This can
cover a broad array of types of liabilities: loan contracts secured
by physical assets that can be centrally registered; loan contracts
secured by floating charge on operational cash flows; loan contracts
that are unsecured; debt securities that are secured by physical
assets, cash flow or are unsecured. Operational contracts E
typically involve an exchange of goods and services for
cash. For an enterprise, the latter includes payables for
purchase of raw-materials, other inputs or services, taxation
and statutory liabilities, and wages and benefits to
employees.” F
(emphasis supplied)
Further, the Report also notes19:
“Here, the Code differentiates between financial creditors and
operational creditors. Financial creditors are those whose
G
16
“BLRC Report”
17
Pg 22, available at <https://www.ibbi.gov.in/uploads/resources/BLRCReportVol1_
04112015.pdf> accessed on 13 January 2022
18
Ibid, Pg 54
19
Ibid, Pg 77 H
234 SUPREME COURT REPORTS [2022] 2 S.C.R.
A relationship with the entity is a pure financial contract, such as a
loan or a debt security. Operational creditors are those whose
liability from the entity comes from a transaction on
operations. Thus, the wholesale vendor of spare parts whose
spark plugs are kept in inventory by the car mechanic and
who gets paid only after the spark plugs are sold is an
B
operational creditor. Similarly, the lessor that the entity rents
out space from is an operational creditor to whom the entity
owes monthly rent on a three- year lease. The Code also
provides for cases where a creditor has both a solely financial
transaction as well as an operational transaction with the entity. In
C such a case, the creditor can be considered a financial creditor to
the extent of the financial debt and an operational creditor to the
extent of the operational debt.”
(emphasis supplied)
30. It is thus clear that operational creditors are those whose debt
D arises from operational transactions, i.e., transactions which are
undertaken in relation to the operation of an enterprise. As the examples
in the BLRC Report suggest, these generally include transactions involving
goods or services which are considered necessary for the operational
functioning of an entity.
E 31. The Joint Parliamentary Committee Report on the IBC
differentiates between financial and operational creditors in the following
terms20:
“Clause 21 appended with the Bill which states as under:- “The
committee has to be composed of members who have the
capability to assess the commercial viability of the corporate
F
debtor and who are willing to modify the terms of the debt
contracts in negotiations between the creditors and the
corporate debtor. Operational creditors are typically not
able to decide on matters relating to commercial viability
of the corporate debtor, nor are they typically willing to
G take the risk of restructuring their debts in order to make
the corporate debtor a going concern. Similarly, financial
creditors who are also operational creditors will be given
20
Pg 14, available at
<https://www.ibbi.gov.in/uploads/resources/16_Joint_Committee_on_Insolvency_and_
H Bankruptcy_Code_2015_1.pdf> accessed on 13 January 2022
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representation on the committee of creditors only to the extent of A
their financial debts. Nevertheless, in order to ensure that the
financial creditors do not treat the operational creditors unfairly,
any resolution plan must ensure that the operational creditors
receive an amount not less than the liquidation value of their debt
(assuming the corporate debtor were to be liquidated).””
B
(emphasis supplied)
32. This makes it clear that another point of difference between
financial and operational creditors would be in the nature of their role in
the Committee of Creditors21, because it is assumed the operational
creditors will be unwilling to take the risk of restructuring their debts in C
order to make the corporate debtor a going concern. Thus, their debt is
not seen as a long-term investment in the going concern status of the
corporate debtor, which would incentivize them to restructure it, but
merely as a one-off transaction with the corporate debtor for certain
goods or services.
D
D.3 Judicial Precedent
33. In Swiss Ribbons (P) Ltd. v. Union of India22 (“Swiss
Ribbons”), the constitutionality of certain provisions of the IBC was
challenged, with the focus being on the difference of rights provided to
the financial and operational creditors. After observing the difference in E
the methods through which financial creditors and operational creditors
trigger a proceeding under the IBC, the two-judge Bench of the Court
noted that there was an intelligible differentia between financial and
operational creditors. The Court held:
“50. According to us, it is clear that most financial creditors, F
particularly banks and financial institutions, are secured creditors
whereas most operational creditors are unsecured, payments for
goods and services as well as payments to workers not being
secured by mortgaged documents and the like. The distinction
between secured and unsecured creditors is a distinction which
has obtained since the earliest of the Companies Acts both in the G
United Kingdom and in this country. Apart from the above, the
nature of loan agreements with financial creditors is different from
21
“CoC”
22
(2019) 4 SCC 17
H
236 SUPREME COURT REPORTS [2022] 2 S.C.R.
A contracts with operational creditors for supplying goods and
services. Financial creditors generally lend finance on a term
loan or for working capital that enables the corporate debtor
to either set up and/or operate its business. On the other
hand, contracts with operational creditors are relatable to
supply of goods and services in the operation of business.
B
Financial contracts generally involve large sums of money.
By way of contrast, operational contracts have dues whose
quantum is generally less. In the running of a business,
operational creditors can be many as opposed to financial
creditors, who lend finance for the set-up or working of
C business. Also, financial creditors have specified repayment
schedules, and defaults entitle financial creditors to recall
a loan in totality. Contracts with operational creditors do
not have any such stipulations. Also, the forum in which
dispute resolution takes place is completely different.
Contracts with operational creditors can and do have
D
arbitration clauses where dispute resolution is done
privately. Operational debts also tend to be recurring in
nature and the possibility of genuine disputes in case of
operational debts is much higher when compared to
financial debts. A simple example will suffice. Goods that
E are supplied may be substandard. Services that are provided
may be substandard. Goods may not have been supplied at
all. All these qua operational debts are matters to be proved
in arbitration or in the courts of law. On the other hand,
financial debts made to banks and financial institutions are
well documented and defaults made are easily verifiable.
F
51. Most importantly, financial creditors are, from the very
beginning, involved with assessing the viability of the corporate
debtor. They can, and therefore do, engage in restructuring of the
loan as well as reorganisation of the corporate debtor’s business
when there is financial stress, which are things operational creditors
G do not and cannot do. Thus, preserving the corporate debtor as a
going concern, while ensuring maximum recovery for all creditors
being the objective of the Code, financial creditors are clearly
different from operational creditors and therefore, there is
obviously an intelligible differentia between the two which has a
H direct relation to the objects sought to be achieved by the Code.
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[…] A
75. Since the financial creditors are in the business of moneylending,
banks and financial institutions are best equipped to assess viability
and feasibility of the business of the corporate debtor. Even at the
time of granting loans, these banks and financial institutions
undertake a detailed market study which includes a techno- B
economic valuation report, evaluation of business, financial
projection, etc. Since this detailed study has already been
undertaken before sanctioning a loan, and since financial creditors
have trained employees to assess viability and feasibility, they are
in a good position to evaluate the contents of a resolution plan.
On the other hand, operational creditors, who provide goods C
and services, are involved only in recovering amounts that
are paid for such goods and services, and are typically
unable to assess viability and feasibility of business. The
BLRC Report, already quoted above, makes this abundantly
clear.” D
(emphasis supplied)
34. In Pioneer Urban Land and Infrastructure Ltd. v. Union
of India23 (“Pioneer Urban”), a three-judge Bench of this Court had
to adjudicate upon a constitutional challenge to the amendments made to
the IBC, through which allottees of real estate projects had been declared E
to be financial creditors. In highlighting the differences between home
buyers and operational creditors, the Court noted that: first, generally
operational creditors are suppliers of goods and services whereas the
home buyer advances money to the developer, so that the debtor is the
supplier (of the flat); second, an operational creditor has no interest in F
or stake in the corporate debtor, unlike a home buyer who is vitally
concerned with the real estate project; and third, in an operational debt,
there is no consideration for the time value of money since the
consideration of the debt is the goods or services that are either sold or
availed of from the operational creditor whereas in real estate projects,
money is raised from the allottee, being raised against consideration for G
the time value of money. The Court held:
“42. It is impossible to say that classifying real estate developers
is not founded upon an intelligible differentia which distinguishes
23
(2019) 8 SCC 416 H
238 SUPREME COURT REPORTS [2022] 2 S.C.R.
A them from other operational creditors, nor is it possible to say that
such classification is palpably arbitrary having no rational relation
to the objects of the Code. It was vehemently argued by the
learned counsel on behalf of the petitioners that if at all real estate
developers were to be brought within the clutches of the Code,
being like operational debtors, at best they could have been brought
B
in under this rubric and not as financial debtors. Here again, what
is unique to real estate developers vis-à-vis operational
debts, is the fact that, in operational debts generally, when
a person supplies goods and services, such person is the
creditor and the person who has to pay for such goods and
C services is the debtor. In the case of real estate developers,
the developer who is the supplier of the flat/apartment is
the debtor inasmuch as the home buyer/allottee funds his
own apartment by paying amounts in advance to the
developer for construction of the building in which his
apartment is to be found. Another vital difference between
D
operational debts and allottees of real estate projects is
that an operational creditor has no interest in or stake in
the corporate debtor, unlike the case of an allottee of a real
estate project, who is vitally concerned with the financial
health of the corporate debtor, for otherwise, the real estate
E project may not be brought to fruition. Also, in such event, no
compensation, nor refund together with interest, which is the other
option, will be recoverable from the corporate debtor. One other
important distinction is that in an operational debt, there is
no consideration for the time value of money—the
consideration of the debt is the goods or services that are
F
either sold or availed of from the operational creditor.
Payments made in advance for goods and services are not
made to fund manufacture of such goods or provision of
such services. Examples given of advance payments being
made for turnkey projects and capital goods, where
G customisation and uniqueness of such goods are important
by reason of which advance payments are made, are wholly
inapposite as examples vis-à-vis advance payments made
by allottees. In real estate projects, money is raised from the
allottee, being raised against consideration for the time value of
money. Even the total consideration agreed at a time when the
H
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flat/apartment is non-existent or incomplete, is significantly less A
than the price the buyer would have to pay for a ready/complete
flat/apartment, and therefore, he gains the time value of money.
Likewise, the developer who benefits from the amounts disbursed
also gains from the time value of money. The fact that the allottee
makes such payments in instalments which are co-terminus with
B
phases of completion of the real estate project does not any the
less make such payments as payments involving “exchange” i.e.
advances paid only in order to obtain a flat/apartment. What is
predominant, insofar as the real estate developer is concerned, is
the fact that such instalment payments are used as a means of
finance qua the real estate project. One other vital difference C
with operational debts is the fact that the documentary
evidence for amounts being due and payable by the real
estate developer is there in the form of the information
provided by the real estate developer compulsorily under
RERA. This information, like the information from
D
information utilities under the Code, makes it easy for
homebuyers/allottees to approach NCLT under Section 7
of the Code to trigger the Code on the real estate
developer’s own information given on its webpage as to
delay in construction, etc. It is these fundamental
differences between the real estate developer and the E
supplier of goods and services that the legislature has
focused upon and included real estate developers as
financial debtors. This being the case, it is clear that there cannot
be said to be any infraction of equal protection of the laws.”
(emphasis supplied) F
24
35. In Innoventive Industries Ltd. v. ICICI Bank , a two
judge Bench of this Court explained the framework of the IBC in relation
to an operational creditor triggering the CIRP. The Court held:
“29. The scheme of Section 7 stands in contrast with the scheme
under Section 8 where an operational creditor is, on the occurrence G
of a default, to first deliver a demand notice of the unpaid debt to
the operational debtor in the manner provided in Section 8(1) of
the Code. Under Section 8(2), the corporate debtor can, within a
24
(2018) 1 SCC 407 H
240 SUPREME COURT REPORTS [2022] 2 S.C.R.
A period of 10 days of receipt of the demand notice or copy of the
invoice mentioned in sub- section (1), bring to the notice of the
operational creditor the existence of a dispute or the record of the
pendency of a suit or arbitration proceedings, which is pre-
existing—i.e. before such notice or invoice was received by the
corporate debtor. The moment there is existence of such a dispute,
B
the operational creditor gets out of the clutches of the Code.”
36. In Mobilox Innovations (P) Ltd. v. Kirusa Software (P)
Ltd.25 (“Mobilox Innovations”), a two-judge Bench of this Court
explained the process for an operational creditor initiating CIRP in respect
of a corporate debtor. The Court held:
C
“33. The scheme under Sections 8 and 9 of the Code, appears to
be that an operational creditor, as defined, may, on the occurrence
of a default (i.e. on non-payment of a debt, any part whereof has
become due and payable and has not been repaid), deliver a
demand notice of such unpaid operational debt or deliver the copy
D
of an invoice demanding payment of such amount to the corporate
debtor in the form set out in Rule 5 of the Insolvency and
Bankruptcy (Application to Adjudicating Authority) Rules, 2016
read with Form 3 or 4, as the case may be [Section 8(1)]. Within
a period of 10 days of the receipt of such demand notice or copy
E of invoice, the corporate debtor must bring to the notice of the
operational creditor the existence of a dispute and/or the record
of the pendency of a suit or arbitration proceeding filed before the
receipt of such notice or invoice in relation to such dispute [Section
8(2)(a)]. What is important is that the existence of the dispute
F and/or the suit or arbitration proceeding must be pre-existing i.e.
it must exist before the receipt of the demand notice or invoice, as
the case may be. In case the unpaid operational debt has been
repaid, the corporate debtor shall within a period of the self-same
10 days send an attested copy of the record of the electronic
transfer of the unpaid amount from the bank account of the
G corporate debtor or send an attested copy of the record that the
operational creditor has encashed a cheque or otherwise received
payment from the corporate debtor [Section 8(2)(b)]. It is only if,
after the expiry of the period of the said 10 days, the operational
25
H (2018) 1 SCC 353
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 241
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
creditor does not either receive payment from the corporate debtor A
or notice of dispute, that the operational creditor may trigger the
insolvency process by filing an application before the adjudicating
authority under Sections 9(1) and 9(2). This application is to be
filed under Rule 6 of the Insolvency and Bankruptcy (Application
to Adjudicating Authority) Rules, 2016 in Form 5, accompanied
B
with documents and records that are required under the said form.
Under Rule 6(2), the applicant is to dispatch by registered post or
speed post, a copy of the application to the registered office of
the corporate debtor. Under Section 9(3), along with the application,
the statutory requirement is to furnish a copy of the invoice or
demand notice, an affidavit to the effect that there is no notice C
given by the corporate debtor relating to a dispute of the unpaid
operational debt and a copy of the certificate from the financial
institution maintaining accounts of the operational creditor
confirming that there is no payment of an unpaid operational debt
by the corporate debtor. Apart from this information, the other
D
information required under Form 5 is also to be given. Once this is
done, the adjudicating authority may either admit the application
or reject it. If the application made under sub-section (2) is
incomplete, the adjudicating authority, under the proviso to sub-
section (5), may give a notice to the applicant to rectify defects
within 7 days of the receipt of the notice from the adjudicating E
authority to make the application complete. Once this is done, and
the adjudicating authority finds that either there is no repayment
of the unpaid operational debt after the invoice [Section 9(5)(i)(b)]
or the invoice or notice of payment to the corporate debtor has
been delivered by the operational creditor [Section 9(5)(i)(c)], or
F
that no notice of dispute has been received by the operational
creditor from the corporate debtor or that there is no record of
such dispute in the information utility [Section 9(5)(i)(d)], or that
there is no disciplinary proceeding pending against any resolution
professional proposed by the operational creditor [Section
9(5)(i)(e)], it shall admit the application within 14 days of the receipt G
of the application, after which the corporate insolvency resolution
process gets triggered. On the other hand, the adjudicating
authority shall, within 14 days of the receipt of an application by
the operational creditor, reject such application if the application
is incomplete and has not been completed within the period of 7
H
242 SUPREME COURT REPORTS [2022] 2 S.C.R.
A days granted by the proviso [Section 9(5)(ii)(a)]. It may also reject
the application where there has been repayment of the operational
debt [Section 9(5)(ii)(b)], or the creditor has not delivered the
invoice or notice for payment to the corporate debtor [Section
9(5)(ii)(c)]. It may also reject the application if the notice of dispute
has been received by the operational creditor or there is a record
B
of dispute in the information utility [Section 9(5)(ii)(d)]. Section
9(5)(ii)(d) refers to the notice of an existing dispute that has so
been received, as it must be read with Section 8(2)(a). Also, if
any disciplinary proceeding is pending against any proposed
resolution professional, the application may be rejected [Section
C 9(5)(ii)(e)].”
It further noted that when a notice is received by a corporate
debtor under Section 8(2), it is enough that a dispute is pending and it is
not necessary that a suit/arbitration also be pending:
“38. It is, thus, clear that so far as an operational creditor is
D
concerned, a demand notice of an unpaid operational debt or copy
of an invoice demanding payment of the amount involved must be
delivered in the prescribed form. The corporate debtor is then
given a period of 10 days from the receipt of the demand notice
or copy of the invoice to bring to the notice of the operational
E creditor the existence of a dispute, if any. We have also seen the
notes on clauses annexed to the Insolvency and Bankruptcy Bill
of 2015, in which “the existence of a dispute” alone is mentioned.
Even otherwise, the word “and” occurring in Section 8(2)(a) must
be read as “or” keeping in mind the legislative intent and the fact
F that an anomalous situation would arise if it is not read as “or”. If
read as “and”, disputes would only stave off the bankruptcy process
if they are already pending in a suit or arbitration proceedings and
not otherwise. This would lead to great hardship; in that a dispute
may arise a few days before triggering of the insolvency process,
in which case, though a dispute may exist, there is no time to
G approach either an Arbitral Tribunal or a court. Further, given the
fact that long limitation periods are allowed, where disputes may
arise and do not reach an Arbitral Tribunal or a court for up to
three years, such persons would be outside the purview of Section
8(2) leading to bankruptcy proceedings commencing against them.
H Such an anomaly cannot possibly have been intended by the
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 243
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
legislature nor has it so been intended. We have also seen that A
one of the objects of the Code qua operational debts is to
ensure that the amount of such debts, which is usually
smaller than that of financial debts, does not enable
operational creditors to put the corporate debtor into the
insolvency resolution process prematurely or initiate the
B
process for extraneous considerations. It is for this reason
that it is enough that a dispute exists between the parties.”
(emphasis supplied)
This observation of the Court led to the amendment of the IBC
through Act 26 of 2018. C
37. The final observation of the Court in Mobilox Innovations
(supra) has also been reiterated by another two-judge Bench of this
Court in Kay Bouvet Engg. Ltd. v. Overseas Infrastructure Alliance
(India) (P) Ltd.26 (“Kay Bouvet”), where the Court observed:
“19. It could thus be seen that this Court has held that one of the D
objects of IBC qua operational debts is to ensure that the amount
of such debts, which is usually smaller than that of financial debts,
does not enable operational creditors to put the corporate debtor
into the insolvency resolution process prematurely or initiate the
process for extraneous considerations. It has been held that it is E
for this reason that it is enough that a dispute exists between the
parties.”
38. The decisions of this Court in Mobilox Innovations (supra)
and Kay Bouvet (supra) highlight its concern that operational creditors
may initiate insolvency proceedings against corporate debtors for miniscule F
amounts of debt, which in turn could jeopardize the financial health of
the corporate debtor. Indeed, in Swiss Ribbons (supra), this Court
observed that the IBC was not akin to a recovery legislation for creditors,
but is a legislation beneficial for the corporate debtor:
“28. It can thus be seen that the primary focus of the legislation is
G
to ensure revival and continuation of the corporate debtor by
protecting the corporate debtor from its own management and
from a corporate death by liquidation. The Code is thus a
beneficial legislation which puts the corporate debtor back
26
(2021) 10 SCC 483 H
244 SUPREME COURT REPORTS [2022] 2 S.C.R.
A on its feet, not being a mere recovery legislation for
creditors. The interests of the corporate debtor have, therefore,
been bifurcated and separated from that of its promoters/those
who are in management. Thus, the resolution process is not
adversarial to the corporate debtor but, in fact, protective of its
interests. The moratorium imposed by Section 14 is in the interest
B
of the corporate debtor itself, thereby preserving the assets of the
corporate debtor during the resolution process. The timelines within
which the resolution process is to take place again protects the
corporate debtor’s assets from further dilution, and also protects
all its creditors and workers by seeing that the resolution process
C goes through as fast as possible so that another management can,
through its entrepreneurial skills, resuscitate the corporate debtor
to achieve all these ends.”
(emphasis supplied)
D.4 Analysis
D
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;
E (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.
40. There is some factual controversy in relation to whether the
appellant promptly informed the Proprietary Concern of the termination
F of its project with CMRL. The appellant alleges that they communicated
it on the very same day (2 January 2014), while the respondent alleges
that the Proprietary Concern only became aware of it through the
appellant’s letter dated 23 July 2016. For the purposes of the present
appeal, it is unnecessary to resolve this dispute. The Proprietary Concern
G has consistently maintained that they would be willing to refund the sum
of Rs 50 lakhs if CMRL approached them directly. Thus, their ostensible
dissatisfaction with the behavior of the appellant plays no part in the
debt arising from the refund.
41. We have to now consider the ‘debt’ in the present appeal.
According to the appellant, it is the advance payment CMRL made on
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 245
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
their behalf to the Proprietary Concern, which was encashed even though A
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
B
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.
C
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 D
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 E
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
F
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 G
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
H
246 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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
B
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]xamples given of advance payments being made for turnkey projects
C 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-à-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.
D
44. In Phoenix ARC (P) Ltd. v. Spade Financial Services
Ltd.27, 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:
E “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
F 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.
[…]
G 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),
27
H (2021) 3 SCC 475
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 247
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
should also be considered as being covered by the exclusion A
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
B
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).
C
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 D
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. E
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 F
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 G
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: H
248 SUPREME COURT REPORTS [2022] 2 S.C.R.
A “(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.”
B
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.
49. We must first consider the relevant statutory provisions. Section
C 4 of the Companies Act 201328 defines an MOA. Section 4(1) provides
the relevant information that an MOA shall provide, which includes, in
sub-Clause (c), that it should provide “the objects for which the company
is proposed to be incorporated and any matter considered necessary in
furtherance thereof”.
D 50. Section 10(1) of CA 2013 elucidates the legal effect of an
MOA in the following terms:
“10. Effect of memorandum and articles.—(1) Subject to the
provisions of this Act, the memorandum and articles shall, when
registered, bind the company and the members thereof to the same
E extent as if they respectively had been signed by the company
and by each member, and contained covenants on its and his part
to observe all the provisions of the memorandum and of the
articles.”
51. Further, Section 13 provides the requirements for the alteration
F of an MOA. The relevant parts of Section 13 are as follows:
“13. Alteration of memorandum.—(1) Save as provided in
Section 61, a company may, by a special resolution and after
complying with the procedure specified in this section, alter the
provisions of its memorandum.
G
[…]
(6) Save as provided in Section 64, a company shall, in relation to
any alteration of its memorandum, file with the Registrar—
28
H “CA 2013”
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 249
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
(a) the special resolution passed by the company under sub- section A
(1);
(b) the approval of the Central Government under sub-section
(2), if the alteration involves any change in the name of the
company.
B
[…]
(9) The Registrar shall register any alteration of the memorandum
with respect to the objects of the company and certify the
registration within a period of thirty days from the date of filing of
the special resolution in accordance with clause (a) of sub-section
C
(6) of this section.
(10) No alteration made under this section shall have any effect
until it has been registered in accordance with the provisions of
this section.
[…]” D
Thus, for the alteration of the MOA of a company in relation to its
objects, a Special Resolution has to be first passed under Section 13(1).
It then has to be filed with the Registrar in accordance with Section
13(6)(a). Further, under Section 13(9), when the alteration is made to
the objects in the MOA, the Registrar shall register it and certify it within E
a period of thirty days from the filing of the Special Resolution in
accordance with Section 13(6)(a). Finally, Section 13(10) provides that
no alteration made under the Section shall have effect unless it is
registered in accordance with the provisions of the Section.
52. A company’s MOA is its charter and outlines the purpose for F
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 G
incorporated and any matter considered necessary for the
furtherance of its objectives
[…]
29
(LexisNexis, 2020) H
250 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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
B
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
C 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.
53. In the present case, the MOA of the respondent unequivocally
states that one of its main objects is to take over the Proprietary Concern.
However, the respondent has produced a resolution dated 1 September
D 2014 passed by its Board of Directors, purportedly resolving to not take
over the Proprietary Concern. The resolution states:
“CERTIFIED TRUE COPY OF THE RESOLUTION PASSED
AT THE MEETING OF BOARD OF DIRECTORS HELD AT
10.00 AM ON 1st SEPTEMBER 2014 AT THE REGISTERED
E OFFICE OF THE COMPANY AT CHENNAI.
“RESOLVED THAT the company do hereby decided not to take
over the Proprietorship concern M/S.HITRO ENERGY
SOLUTIONS as envisaged in clause 4 of main objects of the
Memorandum of Associations of the Company.””
F
In support of the resolution, the respondent has also produced a
certification from the banker of the Proprietary Concern, Indian Bank,
Mylapore Branch, on 10 April 2018 and from the Chartered Accountants
of the Proprietary Concern, K R Sarangapani and Co, on 27 April
2018.
G
54. Admittedly, there was no reference to the resolution in the
counter-statement dated 18 January 2018 and additional counter-
statement dated 9 March 2018 filed by the respondent before the NCLT.
However, in their appeal filed before the NCLAT, the respondent states
that the resolution was, in fact, brought to the notice of the NCLT:
H
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 251
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
“(xii). It is submitted that a Board resolution dt 01.09.2014 of M/ A
s. Hitro Energy Solutions Pvt Ltd coupled with the Auditor
Certificate dated 01.09.2014 was also placed on record and
brought to the attention and Notice of the Learned NCLT Tribunal,
Chennai in which it was resolved that clause 4 of the Memorandum
of Association of the M/s. Hitro Energy Solutions Pvt Ltd i.e to
B
take over the existing proprietorship concern i.e M/s. Hitro Energy
Solutions will not be given effect to and as such the Proprietorship
concern namely M/s. Hitro Energy Solutions will continue. Thus
M/s. Hitro Energy Solutions is continuing its business as a
proprietary concern.”
C
The NCLT in its judgment dated 6 December 2018 made no
mention of this resolution or the auditor’s certificate. The conduct of the
respondent in bringing up this resolution for the first time before the
NCLAT would lead to an adverse inference against them for having
suppressed this document earlier, if at all it was in existence.
D
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 E
(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
F
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
G
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
H
252 SUPREME COURT REPORTS [2022] 2 S.C.R.
A 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 &
Associates31 (“B.K. Educational Services”), a two-judge Bench of
B 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
C 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.”
D
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
E 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,
F 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
G 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
30
“Limitation Act”
H 31
(2019) 11 SCC 633
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO 253
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
if CMRL issued a letter stating that they will not pursue a claim in the A
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, B
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:
C
(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 D
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 E
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.
F
Devika Gujral Appeal allowed.
G
H
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