TaxTMI 
TaxTMI 
2022 (2) TMI 254
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....e decision of the National Company Law Tribunal, Chennai, "NCLT" dated 6 December 2018. 2 By its judgment and order dated 6 December 2018, the NCLT admitted an application, CP/708/(IB)/CB/2017 filed by the appellant, Consolidated Construction Consortium Limited, "Appellant"/"Operational Creditor", under Section 9 of the IBC for the initiation of the Corporate Insolvency Resolution Process, "CIRP" against the respondent, Hitro Energy Solutions Private Limited, "Respondent"/"Corporate Debtor". While admitting the application, the NCLT held that the respondent's Memorandum of Association, "MOA", without evidence to the contrary, proved that it took over a proprietary concern, Hitro Energy Solutions, "Proprietary Concern", and that the Proprietary Concern did owe the appellant an outstanding operational debt. Further, the NCLT declared a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional, "IRP". 3 In appeal, Company Appeal (AT) No 19 of 2019, the NCLAT set aside the NCLT's decision, dismissed the application of the appellant under Section 9 of the IBC and released the respondent from the ongoing CIRP. In support of its conclusions, it held: (i....
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....ayable 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. 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 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." 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 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 light fittings for....
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....nk 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: "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. • 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 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 from Hitro. • SR asked NSR, that CCCL can pr....
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....nder Section 14 of the IBC and appointed an IRP. The operative parts of the 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 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 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 of Association being the constitutional document of the Corporate Debtor is an authentic documentary proof that the Proprietorship Firm has been taken over or convert....
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....lant; and (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: (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 from the respondent. Thus, the respondent cannot be made liable for its debt; PART D (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; (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 the meaning of Section 5(20) of the IBC; and b. In any c....
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....y 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 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 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- (i) by sending an attested copy of the record of electronic transfer 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....
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..... TOTAL AMOUNT OF DEBT, DETAILS OF TRANSACTIONS ON ACCOUNT OF WHICH DEBT FELL DUE, AND THE DATE FROM WHICH SUCH DEBT FELL DUE 2. AMOUNT CLAIMED TO BE IN DEFAULT AND THE DATE ON WHICH THE DEFAULT OCCURRED (ATTACH THE WORKINGS FOR COMPUTATION OF DEFAULT IN TABULAR FORM) 3. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR. ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS A COMPANY) 4. DETAILS OF RETENTION OF TITLE ARRANGEMENTS (IF ANY) IN RESPECT OF GOODS TO WHICH THE OPERATIONAL DEBT REFERS 5. RECORD OF DEFAULT WITH THE INFORMATION UTILITY (IF ANY) 6. PROVISION OF LAW, CONTRACT OR OTHER DOCUMENT UNDER WHICH DEBT HAS BECOME DUE 7. LIST OF DOCUMENTS ATTACHED TO THIS APPLICATION IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT AND THE AMOUNT IN DEFAULT " In contrast, Form 4 provides: "[Name of operational creditor], hereby provides notice for repayment of the unpaid amount of INR [insert amount] that is in default as reflected in ....
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....ays 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 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. (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; (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 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 credi....
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....orporate debtor. This again highlights that it could be either one of the two, i.e., an invoice or a demand notice. 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 PARTICULARS OF OPERATIONAL DEBT [DOCUMENTS, RECORDS AND EVIDENCE OF DEFAULT] 1. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR. ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS A COMPANY) 2. DETAILS OF RESERVATION/RETENTION OF TITLE ARRANGEMENTS (IF ANY) IN RESPECT OF GOODS TO WHICH THE OPERATIONAL DEBT REFERS 3. PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR ARBITRAL PANEL ADJUDICATING ON THE DEFAULT, IF ANY (ATTACH A COPY OF THE ORDER) 4. RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY (ATTACH A COPY OF SUCH RECORD) 5. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A WILL, OR LETTER OF ADMINISTRATION, OR COURT DECREE (AS M....
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.... "Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose 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 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 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 arises from operational transactions, i.e., transactions which are undertaken in relation to the operation of an enterprise. As the exam....
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....erational creditors. After observing the difference in 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, 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 United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from 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 su....
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....cludes a techno-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 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." (emphasis supplied) 34 In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 ("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 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 t....
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....-the consideration of the debt is the goods or services that are 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 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 flat/apartment is non-existent or incomplete, is significantly less 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 phases of completion of the real estate project does not any the less make such payments as payments....
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.... Court held: "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 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 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 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 repai....
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.... 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 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 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 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 r....
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....ion of the Court led to the amendment of the IBC through Act 26 of 2018. 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., (2021) 10 SCC 483 ("Kay Bouvet"), where the Court observed: "19. It could thus be seen that this Court has held that one of the 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 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 amounts of debt, which in turn could jeopardize the financial health of the corporate debtor. Indeed, in Swiss Ribbons (supra), this Court observe....
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....ern 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 their behalf to the Proprietary Concern, which was encashed even though 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 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. 42 It is then that we come to the core of the dispute - while the appellant has argued ....
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....t 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 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. 44 In Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd., (2021) 3 SCC 475, 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: "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 2....
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....ancellation 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 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: PART E "(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." 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 4 of the Companies Act 2013, "CA 2013" defines an MOA. Section 4(1) provides the relevant....
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....3(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 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 stated, (LexisNexis, 2020): "[s 4.2.3] Objects for which the company is proposed to be incorporated and any matter considered necessary for the furtherance of its objectives [...] 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 company proposes to pursue upon incorporation. He should satisfy himself on this score by verifying the documents/ information provided by the company." ....
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....on 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. 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 (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 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 limitation 57 The respondent urged that the application un....