Operational debt from a service-linked term sheet and crystallised refund obligation supported admission under insolvency law.

A commercial term sheet for redevelopment services was treated as creating operational debt because it contemplated appointment of the claimant for defined project services, with payment linked to that service arrangement. The advance paid under the term sheet was therefore regarded as part of the service transaction, not a standalone financial claim. The term sheet also provided for automatic termination if the development management agreement was not executed within the stipulated time, unless extended in writing. As no valid written extension existed and the parties did not proceed on agreed terms, the refund obligation crystallised and remained unpaid, making the Section 9 application maintainable for admission.

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Issues: (i) Whether the petitioner was an operational creditor and the amount claimed under the term sheet constituted operational debt under the Insolvency and Bankruptcy Code, 2016. (ii) Whether the term sheet stood terminated on failure to execute the development management agreement and whether the resulting refund liability and default justified admission of the application under Section 9.

Issue (i): Whether the petitioner was an operational creditor and the amount claimed under the term sheet constituted operational debt under the Insolvency and Bankruptcy Code, 2016.

Analysis: The term sheet contemplated appointment of the petitioner as project manager for services in relation to the redevelopment project, with defined scope of work, mutual obligations, and payment structure. The advance of Rs. 2.51 crores was treated as part of the commercial arrangement connected with the services to be rendered. On that basis, the claim arose from the provision of services and fell within the definition of operational debt. Consequently, the petitioner answered the description of an operational creditor.

Conclusion: The petitioner was an operational creditor and the claim was an operational debt.

Issue (ii): Whether the term sheet stood terminated on failure to execute the development management agreement and whether the resulting refund liability and default justified admission of the application under Section 9.

Analysis: The term sheet provided that if the development management agreement was not executed within the stipulated period, the arrangement would stand automatically terminated unless mutually extended in writing. The correspondence did not amount to a written mutual extension, and there was no consensus on critical terms. The cancellation draft circulated by the corporate debtor also indicated that the parties had decided not to proceed and that the advance was to be refunded. In these circumstances, the refund obligation under the term sheet became enforceable and the operational debt remained unpaid. The application was complete and the default was established.

Conclusion: The term sheet was terminated, the refund liability crystallised, and the Section 9 application was maintainable for admission.

Final Conclusion: The dispute was held to be a fit case for initiation of corporate insolvency resolution process, and moratorium with ancillary directions followed upon admission of the petition.

Ratio Decidendi: Where a binding commercial arrangement for provision of services contains a stipulated refund obligation upon termination, the unpaid refund may constitute operational debt if the underlying arrangement evidences service-related obligations and default is otherwise proved.

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