M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LIMITED versus M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED on 4 February 2022

212

SUPREME COURT REPORTS

[2022] 2 S.C.R.

AM/S CONSOLIDATED CONSTRUCTION CONSORTIUMLIMITED

v.

M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED

B

(Civil Appeal No. 2839 of 2020)

FEBRUARY 04, 2022

[DR. DHANANJAYA Y CHANDRACHUD, SURYA KANTAND VIKRAM NATH, JJ.]

C

Insolvency and Bankruptcy Code, 2016: ss.5(20), 5(21), 8(1)– Operational creditor – Meaning of – Appellant was engaged byCMRL for a project – For the said project, appellant entered into acontract 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. asDan advance – However, CMRL terminated its project with theappellant – The communication of termination was given to P.C.,however P.C. encashed the cheque for Rs 50 lakhs – Appellantpaid the sum of Rs 50 lakhs to CMRL and requested P.C. to makethe payment – Meanwhile, respondent was incorporated and it tookover P.C. – Appellant sent demand notice under s.8 of the IBC toEthe respondent – Respondent denied that any debt was owed bythem to the appellant – Appellant filed application u/s.9 of IBC r/wr.6 IBC Rules 2016 which was admitted by NCLT and InterimResolution professional appointed – NCLAT set aside the NCLT’sdecision and dismissed the application of appellant – On appeal,Fheld: Operational creditors are those whose debt arises fromoperational transactions i.e transactions involving goods or serviceswhich are considered necessary for the operational functioning ofan entity – s.5(21) defines ‘operational debt’ as a “claim in respectof the provision of goods or services – The operative requirement isthat the claim must bear some nexus with a provision of goods orGservices, 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 ApplicationRules makes it abundantly clear that an operational creditor canissue a notice in relation to an operational debt either through ademand notice or an invoice – The presence of an invoice is not a D

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sine qua non, since a demand notice can also be issued on thebasis of other documents which prove the existence of the debt – Adebt which arises out of advance payment made to a corporatedebtor for supply of goods or services would be considered as anoperational debt – Appellant had sought an operational servicefrom P.C. when it contracted with them for the supply of light fittings– Enchashment of cheque by P.C., even though the contract wasterminated, gave rise to an operational debt in favor of the appellant– Hence, the appellant is an operational creditor under s.5(20) ofthe IBC.

Companies Act, 2013: Memorandum of Association (MOA)– Evidentiary value of – A company’s MOA is its charter andoutlines the purpose for which the company has been created – Inthe instant case, the MOA of the respondent unequivocally statesthat one of its main objects is to take over a Proprietary Concern(P.C.) – However, the respondent has produced a resolutionpurportedly to not take over P.C. – s.13 of Companies Act, 2013provides the procedure for amendment of MOA – In case ofamending an object clause, it requires the Registrar to registerthe Special Resolution filed by the company – However, respondentprovided no proof for the above amendment – MOA of therespondent still stands.

Limitation Act, 1963: Maintainability of IBC application –Limitation does not commence when the debt becomes due but onlywhen a default occurs – Default is defined under s.3(12) of theIBC as the non-payment of the debt by the corporate debtor whenit has become due – CMRL issued a cheque of Rs 50 lacs to aProprietary Concern (P.C.) on 7 November 2013 as an advancepayment 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 27February 2017 which was refused by appellant on 2 March 2017– On 1 November 2017, appellant filed an application u/s.9 ofIBC which is within three years from default – Hence, applicationu/s.9 of IBC is not barred by limitation – Insolvency andBankruptcy Code, 2016 – s.9.

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214SUPREME COURT REPORTS

AAllowing the appeal, the Court

HELD: 1. Section 8(1) of the IBC read with Rule 5(1) andForm 3 of the 2016 Application Rules makes it abundantly clearthat an operational creditor can issue a notice in relation to anoperational debt either through a demand notice or an invoice.BAs such, the presence of an invoice (for having supplied goodsor services) is not a sine qua non, since a demand notice can alsobe issued on the basis of other documents which prove theexistence of the debt. This is made even more clear by Regulation7(2)(b)(i) and (ii) of the CIRP Regulations 2016 which providesan operational creditor, seeking to claim an operational debt in aCCIRP, an option between relying on a contract for the supply ofgoods and services with the corporate debtor or an invoicedemanding payment for the goods and services supplied to thecorporate debtor. Hence, this leaves no doubt that a debt whicharises out of advance payment made to a corporate debt or forDsupply of goods or services would be considered as an operationaldebt. Similarly, in the present case, the phrase “in respect of” inSection 5(21) has to be interpreted in a broad and purposivemanner in order to include all those who provide or receiveoperational services from the corporate debtor, which ultimatelylead to an operational debt. In the present case, the appellantEclearly sought an operational service from the Proprietary Concernwhen it contracted with them for the supply of light fittings. Further,when the contract was terminated but the Proprietary Concernnonetheless encashed the cheque for advance payment, it gaverise to an operational debt in favor of the appellant, which nowFremains unpaid. Hence, the appellant is an operational creditorunder 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 acontract with the Proprietary Concern and continuedGcommunications with them till the very end, finally sending itsnotice under Section 8(1) of the IBC to the respondent. Thedispute revolves around the MOA of the respondent. Section 4of the Companies Act 2013defines an MOA. Section 4(1) providesthe relevant information that an MOA shall provide, whichincludes, in sub-Clause (c), that it should provide “the objectsH

for which the company is proposed to be incorporated and anymatter considered necessary in furtherance thereof”. Section 13provides the requirements for the alteration of an MOA. [Para47, 49, 52][247-G; 248-C-D; 249-G]

2.2 In the present case, the MOA of the respondentunequivocally states that one of its main objects is to take overthe Proprietary Concern. However, the respondent has produceda resolution dated 1 September 2014 passed by its Board ofDirectors, purportedly resolving to not take over the ProprietaryConcern. In any case, Section 13 of CA 2013 provides for theprocedure which has to be followed when the MOA is to beamended. In cases where the object clause is amended, it requiresthe Registrar to register the Special Resolution filed by thecompany. However, the respondent has provided no proof that:(i) the purported resolution dated 1 September 2014 was a SpecialResolution; (ii) it was filed before the Registrar; and (iii) that theRegistrar ultimately did register it. Thus, in terms of Section13(10) of CA 2013, the purported amendment to the MOA wouldnot have any legal effect. Consequently, the MOA of therespondent still stands and the presumption will continue to bein favor of the appellant. Thus, it can be concluded that therespondent took over the Proprietary Concern and was liable tore-pay the debt to the appellant. Hence, the application underSection 9 of the IBC was maintainable. [Para 53, 55, 56][250-D;251-D-F]

3. In respect of question of limitation, CMRL issued thecheque of Rs 50,00,000 to the Proprietary Concern on 7November 2013. However, at that time, it was issued as anadvance payment for the purchase order of the appellant. It wasonly on 2 January 2014 that CMRL terminated its project withthe appellant, and it was after this that the Proprietary Concernencashed the cheque. Subsequently, correspondence wasexchanged between the appellant and the Proprietary Concernin July 2016 in relation to the re-payment of the amount.Thereafter, a joint meeting was also held on 4 August 2016. Tillthis point in time, both the parties were in negotiation in relationto the re-payment and the minutes of meeting show that the A

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AProprietary Concern was willing to make the re-payment if CMRLissued a letter stating that they will not pursue a claim in thefuture or if the appellant provided a bank guarantee for theamount. A final letter was addressed by the appellant to theProprietary Concern on 27 February 2017, demanding thepayment on or before 4 March 2017. The Proprietary ConcernBreplied to this letter on 2 March 2017, finally refusing to makere-payment to the appellant. Consequently, the application underSection 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 &CAssociates (2019) 11 SCC 633:[2018] 12 SCR 794 –relied on.

Pioneer Urban Land and Infrastructure Ltd. v. Unionof India (2019) 8 SCC 416:[2019] 10 SCR 381;Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCCD407:[2017] 8 SCR 33; Mobilox Innovations (P) Ltd. v.Kirusa Software (P) Ltd. (2018) 1 SCC 353: [2017] 10SCR 1006; Phoenix ARC (P) Ltd. v. Spade FinancialServices Ltd. (2021) 3 SCC 475 – referred to.

Case Law Reference

From the Judgment and Order dated 12.12.2019 of the NationalCompany 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. forthe Respondent.

H

The Judgment of the Court was delivered by DR. DHANANJAYA Y CHANDRACHUD, J.

This judgement has been divided into the following sections tofacilitate analysis:

AThe Appeal

BFactual Background

CSubmissions of counsel

DWhether the appellant is an operational creditor D.1Statutory Provisions D.2Legislative History D.3Judicial Precedent D.4Analysis EEvidentiary value of respondent’s MOA

FWhether the application under Section 9 is barred bylimitation GConclusion A The Appeal

1. The present appeal under Section 62 of the Insolvency andBankruptcy Code 2016[1] arises from a judgment and order dated 12December 2019 of the National Company Law Appellate Tribunal[2] bywhich it reversed the decision of the National Company Law Tribunal,Chennai[3] dated 6 December 2018.

2. By its judgment and order dated 6 December 2018, the NCLTadmitted an application[4] filed by the appellant, Consolidated ConstructionConsortium Limited[5], under Section 9 of the IBC for the initiation of the 1 “IBC”

2 “NCLAT”

3 “NCLT”

4 CP/708/(IB)/CB/2017

5 “Appellant”/“Operational Creditor”

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ACorporate Insolvency Resolution Process[6] against the respondent, HitroEnergy Solutions Private Limited[7]. While admitting the application, theNCLT held that the respondent’s Memorandum of Association[8], withoutevidence to the contrary, proved that it took over a proprietary concern,Hitro Energy Solutions[9], and that the Proprietary Concern did owe theappellant an outstanding operational debt. Further, the NCLT declared aBmoratorium under Section 14 of the IBC and appointed an InterimResolution Professional[10].

3. In appeal[11] , the NCLAT set aside the NCLT’s decision,dismissed the application of the appellant under Section 9 of the IBCCand released the respondent from the ongoing CIRP. In support of itsconclusions, it held: (i) the appellant was a ‘purchaser’, and thus did notcome under the definition of ‘operational creditor’ under the IBC sinceit did not supply any goods or services to the Proprietary Concern/respondent; (ii) there is nothing on record to suggest that the respondenthas taken over the Proprietary Concern; and (iii) in any case, the appellantDcannot move an application under Sections 7 or 9 of the IBC since allpurchase orders were issued on 24 June 2013 and advance chequeswere issued subsequently.

4. While issuing notice by its order dated 18 November 2020, thisCourt stayed the operation of NCLAT’s judgment and order dated 12EDecember 2019. The following issues now arise before this Court in thepresent appeal:

(i) Whether the appellant is an operational creditor under theIBC even though it was a ‘purchaser’; F(ii)Whether the respondent took over the debt from theProprietary Concern; and

(iii) Whether the application under Section 9 of the IBC is barredby limitation.

G

6 “CIRP”

7 “Respondent”/“Corporate Debtor”

8 “MOA”

9 “Proprietary Concern”

10 “IRP”

11 Company Appeal (AT) No 19 of 2019H

B Factual Background

5. The genesis of the appeal arises from a project which wasbeing executed by the appellant with Chennai Metro Rail Limited[12], inthe course of which the latter placed an order for supply of light fittings.In turn, the appellant placed orders with the Proprietary Concern, whichwas the supplier of Thorn Lighting India Private Limited[13], through threepurchase orders dated 24 June 2013. It was noted in these purchaseorders that the delivery of the light fittings would strictly be in accordancewith the schedule provided by the appellant.

6. The Proprietary Concern requested the appellant for an advancepayment of Rs 50,00,000. CMRL issued a cheque of Rs 50,00,000 infavor of the respondent, with the condition that the delivery of the lightfittings should be in compliance with the schedule provided by theappellant.

7. On 2 January 2014, CMRL informed the appellant that theproject they had been working on stood terminated. According to theappellant, this information was communicated to the Proprietary Concernon the same day. However, this has been denied by the respondent.

8. Thereafter, the Proprietary Concern deposited the cheque issuedby CMRL and withdrew the amount of Rs 50,00,000. Since the projecthad been terminated, CMRL informed the appellant that the amountwould be deducted from the dues payable to it unless the amount wasreturned. The appellant paid the amount of Rs 50,00,000 to CMRL andintimated this to the Proprietary Concern and requested them to makethe payment.

9. In the interim, the respondent was incorporated on 28 January2014, 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 theProprietary Concern. It reads as follows:

“(A) THE MAIN OBJECTS OF THE COMPANY TO BEPURSUED BY COMPANY ON ITS INCORPORATION:

[…]

12 “CMRL”

13 “TLIPL”

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A4. To take over the existing Proprietorship firm Viz. M/S. HitroEnergy Solutions having its registered office at Chennai.”

10. By its letter dated 23 July 2016, the appellant requested theProprietary Concern to refund the amount of Rs 50,00,000 since thecontract had been terminated and the amount had been returned by theBappellant to CMRL. It noted that once the amount was released by theProprietary Concern, it would indemnify them against any future claimfrom 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 ofClight fittings for our CMRL project. The advance amount of Rs.50.00Lakhs paid to you was directly released by our client, the CMRL atour request and the amount has already been debited to your accountHowever, the contract with CMRL was terminated by us and itwas intimated to you not to proceed with the supply or materialsordered under the aforesaid purchase orders. We, therefore, requestDyou to pay the advance amount of Rs.50,00,000/- to M/s. ThomLighting India Pvt Ltd as agreed by you.

We once again wish to state that the amounts paid to you by theCMRL have already been recovered from our payments andtherefore, we assure that no liability shall be cast on you towardsEthe same. Upon release of the aforesaid payment to M/s. ThomLight/rig Ind/a Pvt Ltd as agreed by you, the CCCL shall indemnifyyou against any claim from the CMRL towards the advancesdirectly paid to you.”

11. In its reply dated 25 July 2016, the Proprietary Concern statedFthat it would return the amount directly to CMRL, if it was insisted uponby them. It further noted that till date it had not received any letter fromthe appellant informing them that the contract had been terminated withCMRL, and that it had never agreed to return the amount. The letternotes:G“This has reference your letter dt.23[rd] July 2016 wherein you areasking us to pay the amount of Rs.50,00,000/- which we hadreceived from Chennai Metro Rail Limited (CMRL), to M/S.ThornLighting India Pvt. Ltd. Since, the amount has been received byus directly from CMRL, the said amount will be returned only toCMRL if they claim the same.H

We would like to inform you that we have not received any letterof communication from your organisation till date mentioning thatthe contract with CMRL is cancelled and it has never been agreedat any point of time to give the amount to M/s.Thron LightingIndia Pvt. Ltd.”

12. A joint meeting was held between the appellant, the ProprietaryConcern and TLIPL on 4 August 2016, where the appellant requestedthat the amount of Rs 50,00,000 be returned to TLIPL. To assuage theconcerns of the Proprietary Concern, that CMRL may also try to recoverthe amount from them at a later date, the representatives of the appellantagreed to provide an indemnity to the Proprietary Concern for the amount.However, this was refused by the Proprietary Concern, which insteadasked for a bank guarantee of the same amount, which was refused bythe appellant. Finally, the Proprietary Concern noted that the appellantshould obtain a letter from CMRL stating that the advance paid by themto the Proprietary Concern belongs to the appellant, and will not beclaimed 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 directpayment from CMRL to vendors of CCCL.

•RSK requested NSR to return the advance paid to HitroEnergy to Thom Light.

•NSR refused the same since the payment had been receivedfrom CMRL through cheque and can be returned to CMRLonly if CMRL claim the same.

•RSK explained that, CCCL requested CMRL to releasethis advance to Hitro and the amount already been deductedin CCCL payables by CMRL, hence this amount belongs toCCCL and can be returned.

•NSR refused the same and asked CCCL to get a letterfrom CMRL stating that, the advance paid to Hitro belongsto CCCL and CMRL does not claim the same in futurefrom Hitro.

•SR asked NSR, that CCCL can provide a Indemnity Bondto Hitro to return the Advance, and NSR refused and askedBG For the same amount to return the Advance, CCCLrefused the same.”

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A13. Thereafter, the appellant obtained a letter dated 27 December2016 from CMRL where it noted that it had issued the cheque for Rs50,00,000 only on the request of the appellant. The letter reads as follows:

“With reference to your letter under reference above, it is to confirmthat CMRL had issued a cheque of Rs.50,00,000/- (Rupees fiftyBlakhs only) bearing no. 991712 dt. 7.11.2013, based on the requestof M/s. Consolidated Construction Consortium Ltd., to M/s. HitroEnergy Solutions, as a part of Special Advance to M/s. CCCLunder EAS 04, EAS 05 & EAS 06 contracts duly debiting CCCL’saccount.”

CThis 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 on27 February 2017 and it demanded the return of the amount of Rs50,00,000, along with interest calculated at 18 per cent per annum fromD4 November 2013, on or before 4 March 2017. In its reply dated 2March 2017, the Proprietary Concern refused and noted that they onlybecame aware of the termination of the contract with CMRL by theappellant’s letter dated 23 July 2016. The light fittings were stated to belying in their warehouse since then because they could not be re-sold asthey had been made on customized specifications, leading to a loss.EFurther, it noted that CMRL’s letter dated 27 December 2016 did notprovide that it will not attempt to recover the amount from the ProprietaryConcern in the future.

15. On 18 July 2017, the appellant sent a Form-3 Demand Noticeunder Section 8 of the IBC to the respondent, where the amount of theFdebt is noted as Rs 83,13,973, inclusive of interest calculated at 18 percent per annum from 7 November 2013. In its response dated 28 July2017, the respondent denied that any debt was owed by them to theappellant. Thereafter, the appellant filed its application under Section 9of the IBC read with Rule 6 of the Insolvency and BankruptcyG(Application to Adjudicating Authority) Rules 2016[14] on 1 November2017 along with the supporting affidavits.

16. By its judgment dated 6 December 2018, the NCLT admittedthe application under Section 9 of the IBC, declared a moratorium under H14 “2016 Application Rules”

Section 14 of the IBC and appointed an IRP. The operative parts of theorder are extracted below:

“11. It has also been noted by this Authority that the Memorandumof Association being the constitutional document of the CorporateDebtor is not rebutted by other documentary evidence. In view ofit, the objection raised by the Counsel for the Corporate Debtorstands rejected.

12. It has been submitted by the Counsel for the Corporate Debtorthat till date, the Proprietorship Firm is paying the income tax andalso carrying on the business which is contrary to the Memorandumof Association of the Corporate Debtor viz., M/s. Hitro EnergySoluti9ns Private Limited. It seems that the Director of theCorporate Debtor viz., N. S. Rangachari may be makingcommunications on behalf of Proprietorship Firm for the purposeof dubious transactions or Tax benefits but as per the Memorandumof Association, the same has been taken over by the CorporateDebtor of which there is no doubt at all. Thus, the Memorandumof Association being the constitutional document of the CorporateDebtor is an authentic documentary proof that the ProprietorshipFirm has been taken over or converted into corporate entity.

13. It has been submitted by the Counsel for the Corporate Debtorthat in case the CMRL could have given a certificate that theywould not claim Rs.50 Lakhs from M/s Hitro Energy Solutionsthen, the amount could have been paid by the Corporate Debtorto the Operational Creditor, to which the Counsel for theOperational Creditor has submitted that his client has always beenready and willing to give indemnity bond against any claim madeby the CMRL, but the Counsel for Corporate Debtor did not anyresponse with regard to the security offered.”

17. The order of the NCLT was set aside by the NCLAT on 12December 2019.

The order notes:

“7. However, there is nothing on the record to suggest that by anylist prepared ‘M/s. Hitro Energy Solutions Private Limited’ hastaken over ‘M/s. Hitro Energy Solutions’…

[…]

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A9. 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 EnergyBSolutions’ all ‘Purchase Orders’ having issued on 24th June, 2013and advance cheques have been issued for subsequently suchorders, ‘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 appellantsubmitted that:

(i) The MOA of the respondent states that one of its four mainDobjects is to take over the Proprietary Concern. Thus, thefindings contained in paragraph 7 of the NCLAT’s judgment,that there is no list noting that the respondent has takenover the Proprietary Concern, is incorrect;

(ii) The appellant made the payment of Rs 50,00,000 to CMRL,Eand it thus becomes due from the respondent to the appellant;

(iii) The appellant is an operational creditor within the frameworkof the IBC since the purchase orders for light fittings werein relation to the operational requirements of the appellant;andF

(iv) The application under Section 9 of the IBC is not barred bylimitation.

19. Mr K Parameshwar, Counsel appearing on behalf of therespondent submitted that:G(i)The appellant’s dealings have only been with the ProprietaryConcern and not the respondent. While the respondent’sMOA may have stated its intention to take over theProprietary Concern, the respondent changed its intentionthrough a subsequent Board resolution. Further, theProprietary Concern exists till date and is an entity separateH

from the respondent. Thus, the respondent cannot be madeliable for its debt; A

(ii) There is no privity of contract between the appellant andthe respondent, since the appellant’s contract was with theProprietary Concern and the payment of the advance tothe 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 servicesto the respondent, but only availed of goods orservices from the Proprietary Concern. Hence, theCappellant will not be an operational creditor withinthe meaning of Section 5(20) of the IBC; and b.In any case, even if the debt exists, it is in the handsof CMRL, which has not legally transferred it to theappellant; D

(iv) The application is barred by limitation since it was filed on1 November 2017, more than three years after the date ofdefault, i.e., 7 November 2013; and

(v) The appellant is seeking to misuse the present proceedingsunder 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 acceptedby the NCLAT, is that the appellant is not an operational creditor withinthe ambit of the IBC, and therefore its application under Section 9 of theIBC was not maintainable. In order to assess this claim, we shall have toconsider the relevant provisions, rules and regulations, the legislativehistory of the IBC and precedents of this Court.

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D.1 Statutory Provisions

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22. Section 5(20) of the IBC defines “operational creditor” in thefollowing terms:

“(20) “operational creditor” means a person to whom an operationaldebt is owed and includes any person to whom such debt hasbeen legally assigned or transferred;”

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ASection 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 theprovision of goods or services including employment or a debtin respect of the re-payment of dues arising under any law for theBtime being in force and payable to the Central Government, anyState Government or any local authority;”

An operational debt needs to involve a claim in respect oftheprovision of goods or services. The phrase “claim” is defined in SectionC3(6) of IBC in the following terms:

“(6) “claim” means—

(a) a right to payment, whether or not such right is reduced tojudgment, fixed, disputed, undisputed, legal, equitable, secured orunsecured; D

(b) right to remedy for breach of contract under any law for thetime 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;”

23. Section 8 of the IBC explains the steps that the operationalcreditor needs to undertake prior to filing a claim of insolvency againstthe corporate debtor. At the relevant time, it stood as follows:

E

“8. Insolvency resolution by operational creditor.—(1) Anoperational creditor may, on the occurrence of a default, deliver ademand notice of unpaid operational debtor copy of an invoicedemanding payment of the amount involved in the default to thecorporate debtor in such form and manner as may be prescribed.

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(2) The corporate debtor shall, within a period of ten days of thereceipt of the demand notice or copy of the invoice mentioned insub-section (1) bring to the notice of the operational creditor—

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(a) existence of a dispute, if any, and record of the pendency ofthe suit or arbitration proceedings filed before the receipt of suchnotice or invoice in relation to such dispute; (b) the repayment of unpaid operational debt—

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(i) by sending an attested copy of the record of electronic transferof the unpaid amount from the bank account of the corporatedebtor; or

(ii) by sending an attested copy of record that the operationalcreditor has encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a “demand notice”means a notice served by an operational creditor to the corporatedebtor demanding repayment of the operational debt in respect ofwhich the default has occurred.”

In accordance with Section 8(1), an operational creditor can senda demand notice to the corporate debtor when a default occurs, and inthe manner which may be prescribed. “Default” has been defined underSection 3(12) of the IBC, and it stood as follows at the relevant time:

“(12) “default” means non-payment of debt when whole or anypart or instalment of the amount of debt has become due andpayable and is not re-paid by the debtor or the corporate debtor,as the case may be;”

When the corporate debtor receives the demand notice, it hastwo options available under Section 8(2) of the IBC: (i) to highlight apre-existing dispute in relation to the debt under question; or (ii) to provethat the debt has already been paid.

24. Rule 5 of the 2016 Application Rules provides the manner inwhich the demand notice under Section 8(1) has to be delivered. Itprovides thus:

“5. Demand notice by operational creditor.—(1) Anoperational creditor shall deliver to the corporate debtor, thefollowing 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 demandingpayment 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 postwith acknowledgement due; or A

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A(b) by electronic mail service to a whole time director or designatedpartner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment servedunder this rule by an operational creditor shall also be filed withan information utility, if any.”

BThus, under sub-Rule (1) of Rule 5, an operational creditor cansend the demand notice under Section 8(1) of the IBC through twomethods: (i) a demand notice in Form 3; or (ii) a copy of an invoiceattached with a notice in Form 4. Form 3 requires the operational creditorto provide the following information in relation to the operational debt:

C“2. Please find particulars of the unpaid operational debt below:

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”

In contrast, Form 4 provides:

“[Name of operational creditor], hereby provides notice forrepayment of the unpaid amount of INR [insert amount] that is indefault as reflected in the invoice attached to this notice.”

Hence, a demand notice for an operational debt by an operationalcreditor does not necessarily need to be accompanied by an invoice, butit may be sent where such debt arises under a “provision of law, contractor other document” and for which documents can be attached alongwith the demand notice.

25. The above conclusion is also supported by the Insolvency andBankruptcy Board of India (Insolvency Resolution Process for CorporatePersons) Regulations 2016[15]. 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 thanworkman or employee of the corporate debtor, shall submit proofof claim to the interim resolution professional in person, by post orby electronic means in Form B of the Schedule:

Provided that such person may submit supplementary documentsor clarifications in support of the claim before the constitution ofthe committee.

(2) The existence of debt due to the operational creditor underthis Regulation may be proved on the basis of- (a) the records available with an information utility, if any; or (b) other relevant documents, including -

(i) a contract for the supply of goods and services with corporatedebtor;

(ii) an invoice demanding payment for the goods and servicessupplied to the corporate debtor;

(iii) an order of a court or tribunal that has adjudicated upon thenon-payment of a debt, if any; or

(iv) financial accounts.”

15 “CIRP Regulations 2016”

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AUnder Regulation 7(2), an operational creditor can prove theirclaim not only through “an invoice demanding payment for the goodsand services supplied to the corporate debtor” (Regulation 7(2)(ii)) butalso through “a contract for the supply of goods and services withcorporate debtor” (Regulation 7(2)(i)).

B26. Once the procedures under Section 8 of the IBC are completedby an operational creditor, it can file an application under Section 9 ofthe IBC to initiate the CIRP in relation to the corporate debtor. Section 9provided as follows, at the relevant time:

“9. Application for initiation of corporate insolvencyCresolution process by operational creditor.—(1) After theexpiry of the period of ten days from the date of delivery of thenotice or invoice demanding payment under sub-section

(1) of Section 8, if the operational creditor does not receivepayment from the corporate debtor or notice of the dispute undersub-section (2) of Section 8, the operational creditor may file anDapplication before the Adjudicating Authority for initiating acorporate insolvency resolution process.

(2) The application under sub-section (1) shall be filed in suchform and manner and accompanied with such fee as may beprescribed.

E(3) The operational creditor shall, along with the applicationfurnish—

(a) a copy of the invoice demanding payment or demand noticedelivered by the operational creditor to the corporate debtor; F(b) an affidavit to the effect that there is no notice given by thecorporate debtor relating to a dispute of the unpaid operationaldebt;

(c) a copy of the certificate from the financial institutionsmaintaining accounts of the operational creditor confirming thatGthere is no payment of an unpaid operational debt by the corporatedebtor; and (d) such other information as may be prescribed.

(4) An operational creditor initiating a corporate insolvencyresolution process under this section, may propose a resolutionprofessional to act as an interim resolution professional.

H

(5) The Adjudicating Authority shall, within fourteen days of thereceipt of the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to theoperational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete; (b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor hasbeen delivered by the operational creditor; (d) no notice of dispute has been received by the operational creditoror there is no record of dispute in the information utility; and (e) there is no disciplinary proceeding pending against anyresolution professional proposed under sub-section (4), if any.

(ii) reject the application and communicate such decision to theoperational creditor and the corporate debtor, if—

(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 paymentto the corporate debtor; (d) notice of dispute has been received by the operational creditoror there is a record of dispute in the information utility; or (e) any disciplinary proceeding is pending against any proposedresolution professional:

Provided that Adjudicating Authority, shall before rejecting anapplication under sub-clause (a) of clause (ii) give a notice to theapplicant to rectify the defect in his application within seven daysof the date of receipt of such notice from the AdjudicatingAuthority.

(6) The corporate insolvency resolution process shall commencefrom the date of admission of the application under sub-section(5) of this section.”

In accordance with Section 9(1), an operational creditor can filethe application under Section 9 after ten days from the date of deliveryof the notice under Section 8, if no payment or notice of an existing A

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Adispute is received. Section 9(3)(a) requires the application to beaccompanied by a copy of the invoice demanding payment or demandnotice delivered by the operational creditor to the corporate debtor. Thisagain highlights that it could be either one of the two, i.e., an invoice ora demand notice.

B27. Rule 6 of the 2016 Application Rules provides that theapplication under Section 9 has to be filed along with the details requiredin Form 5. Within Form 5, inter alia, the following details in relation tothe operational debt are required to be provided:

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D.2 Legislative History

28. Unlike other foreign jurisdictions, which usually differentiatebetween secured and unsecured creditors only, the IBC is unique becauseit provides for two different classes of creditors: operational creditorsand financial creditors. To understand the position of the former withinthe framework of the IBC, it is important to understand the distinctionbetween these two classes.

29. The primary source is Volume I of the Report of theBankruptcy Law Reforms Committee[16]. It notes that “[e]nterprises havefinancial creditors by way of loan and debt contracts as well as operationalcreditors such as employees, rental obligations, utilities payments andtrade credit”[17]. It provides that a corporate debtor will have financialand operational liabilities, and explains the difference as follows[18]:

“Liabilities fall into two broad sets: liabilities based on financialcontracts, and liabilities based on operational contracts. Financialcontracts involve an exchange of funds between the entity and acounterparty which is a financial firm or intermediary. This cancover a broad array of types of liabilities: loan contracts securedby physical assets that can be centrally registered; loan contractssecured by floating charge on operational cash flows; loan contractsthat are unsecured; debt securities that are secured by physicalassets, cash flow or are unsecured. Operational contractstypically involve an exchange of goods and services forcash. For an enterprise, the latter includes payables forpurchase of raw-materials, other inputs or services, taxationand statutory liabilities, and wages and benefits toemployees.”

Further, the Report also notes[19]:

“Here, the Code differentiates between financial creditors andoperational creditors. Financial creditors are those whose 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

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Arelationship with the entity is a pure financial contract, such as aloan or a debt security. Operational creditors are those whoseliability from the entity comes from a transaction onoperations. Thus, the wholesale vendor of spare parts whosespark plugs are kept in inventory by the car mechanic andwho gets paid only after the spark plugs are sold is anBoperational creditor. Similarly, the lessor that the entity rentsout space from is an operational creditor to whom the entityowes monthly rent on a three- year lease. The Code alsoprovides for cases where a creditor has both a solely financialtransaction as well as an operational transaction with the entity. InCsuch a case, the creditor can be considered a financial creditor tothe extent of the financial debt and an operational creditor to theextent of the operational debt.”

30. It is thus clear that operational creditors are those whose debtDarises from operational transactions, i.e., transactions which areundertaken in relation to the operation of an enterprise. As the examplesin the BLRC Report suggest, these generally include transactions involvinggoods or services which are considered necessary for the operationalfunctioning of an entity.

E31. The Joint Parliamentary Committee Report on the IBCdifferentiates between financial and operational creditors in the followingterms[20]:

“Clause 21 appended with the Bill which states as under:- “Thecommittee has to be composed of members who have thecapability to assess the commercial viability of the corporateFdebtor and who are willing to modify the terms of the debtcontracts in negotiations between the creditors and thecorporate debtor. Operational creditors are typically notable to decide on matters relating to commercial viabilityof the corporate debtor, nor are they typically willing toGtake the risk of restructuring their debts in order to makethe corporate debtor a going concern. Similarly, financialcreditors 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_HBankruptcy_Code_2015_1.pdf> accessed on 13 January 2022

representation on the committee of creditors only to the extent oftheir financial debts. Nevertheless, in order to ensure that thefinancial creditors do not treat the operational creditors unfairly,any resolution plan must ensure that the operational creditorsreceive an amount not less than the liquidation value of their debt(assuming the corporate debtor were to be liquidated).””

(emphasis supplied)

32. This makes it clear that another point of difference betweenfinancial and operational creditors would be in the nature of their role inthe Committee of Creditors[21], because it is assumed the operationalcreditors will be unwilling to take the risk of restructuring their debts inorder to make the corporate debtor a going concern. Thus, their debt isnot seen as a long-term investment in the going concern status of thecorporate debtor, which would incentivize them to restructure it, butmerely as a one-off transaction with the corporate debtor for certaingoods or services.

D.3 Judicial Precedent

33. In Swiss Ribbons (P) Ltd. v. Union of India[22] (“SwissRibbons”), the constitutionality of certain provisions of the IBC waschallenged, with the focus being on the difference of rights provided tothe financial and operational creditors. After observing the difference inthe methods through which financial creditors and operational creditorstrigger a proceeding under the IBC, the two-judge Bench of the Courtnoted that there was an intelligible differentia between financial andoperational creditors. The Court held:

“50. According to us, it is clear that most financial creditors,particularly banks and financial institutions, are secured creditorswhereas most operational creditors are unsecured, payments forgoods and services as well as payments to workers not beingsecured by mortgaged documents and the like. The distinctionbetween secured and unsecured creditors is a distinction whichhas obtained since the earliest of the Companies Acts both in theUnited Kingdom and in this country. Apart from the above, thenature of loan agreements with financial creditors is different from 21 “CoC”

22 (2019) 4 SCC 17

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contracts with operational creditors for supplying goods andservices. Financial creditors generally lend finance on a termloan or for working capital that enables the corporate debtorto either set up and/or operate its business. On the otherhand, contracts with operational creditors are relatable tosupply of goods and services in the operation of business.Financial contracts generally involve large sums of money.By way of contrast, operational contracts have dues whosequantum is generally less. In the running of a business,operational creditors can be many as opposed to financialcreditors, who lend finance for the set-up or working ofbusiness. Also, financial creditors have specified repaymentschedules, and defaults entitle financial creditors to recalla loan in totality. Contracts with operational creditors donot have any such stipulations. Also, the forum in whichdispute resolution takes place is completely different.Contracts with operational creditors can and do havearbitration clauses where dispute resolution is doneprivately. Operational debts also tend to be recurring innature and the possibility of genuine disputes in case ofoperational debts is much higher when compared tofinancial debts. A simple example will suffice. Goods thatare supplied may be substandard. Services that are providedmay be substandard. Goods may not have been supplied atall. All these qua operational debts are matters to be provedin arbitration or in the courts of law. On the other hand,financial debts made to banks and financial institutions arewell documented and defaults made are easily verifiable.

51. Most importantly, financial creditors are, from the verybeginning, involved with assessing the viability of the corporatedebtor. They can, and therefore do, engage in restructuring of theloan as well as reorganisation of the corporate debtor’s businesswhen there is financial stress, which are things operational creditorsdo not and cannot do. Thus, preserving the corporate debtor as agoing concern, while ensuring maximum recovery for all creditorsbeing the objective of the Code, financial creditors are clearlydifferent from operational creditors and therefore, there isobviously an intelligible differentia between the two which has adirect relation to the objects sought to be achieved by the Code.

[…]

75. Since the financial creditors are in the business of moneylending,banks and financial institutions are best equipped to assess viabilityand feasibility of the business of the corporate debtor. Even at thetime of granting loans, these banks and financial institutionsundertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financialprojection, etc. Since this detailed study has already beenundertaken before sanctioning a loan, and since financial creditorshave trained employees to assess viability and feasibility, they arein a good position to evaluate the contents of a resolution plan.On the other hand, operational creditors, who provide goodsand services, are involved only in recovering amounts thatare paid for such goods and services, and are typicallyunable to assess viability and feasibility of business. TheBLRC Report, already quoted above, makes this abundantlyclear.”

34. In Pioneer Urban Land and Infrastructure Ltd. v. Unionof India[23] (“Pioneer Urban”), a three-judge Bench of this Court hadto adjudicate upon a constitutional challenge to the amendments made tothe IBC, through which allottees of real estate projects had been declaredto be financial creditors. In highlighting the differences between homebuyers and operational creditors, the Court noted that: first, generallyoperational creditors are suppliers of goods and services whereas thehome buyer advances money to the developer, so that the debtor is thesupplier (of the flat); second, an operational creditor has no interest inor stake in the corporate debtor, unlike a home buyer who is vitallyconcerned with the real estate project; and third, in an operational debt,there is no consideration for the time value of money since theconsideration of the debt is the goods or services that are either sold oravailed of from the operational creditor whereas in real estate projects,money is raised from the allottee, being raised against consideration forthe time value of money. The Court held:

“42. It is impossible to say that classifying real estate developersis not founded upon an intelligible differentia which distinguishes A

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them from other operational creditors, nor is it possible to say thatsuch classification is palpably arbitrary having no rational relationto the objects of the Code. It was vehemently argued by thelearned counsel on behalf of the petitioners that if at all real estatedevelopers were to be brought within the clutches of the Code,being like operational debtors, at best they could have been broughtin under this rubric and not as financial debtors. Here again, whatis unique to real estate developers vis-à-vis operationaldebts, is the fact that, in operational debts generally, whena person supplies goods and services, such person is thecreditor and the person who has to pay for such goods andservices is the debtor. In the case of real estate developers,the developer who is the supplier of the flat/apartment isthe debtor inasmuch as the home buyer/allottee funds hisown apartment by paying amounts in advance to thedeveloper for construction of the building in which hisapartment is to be found. Another vital difference betweenoperational debts and allottees of real estate projects isthat an operational creditor has no interest in or stake inthe corporate debtor, unlike the case of an allottee of a realestate project, who is vitally concerned with the financialhealth of the corporate debtor, for otherwise, the real estateproject may not be brought to fruition. Also, in such event, nocompensation, nor refund together with interest, which is the otheroption, will be recoverable from the corporate debtor. One otherimportant distinction is that in an operational debt, there isno consideration for the time value of money—theconsideration of the debt is the goods or services that areeither sold or availed of from the operational creditor.Payments made in advance for goods and services are notmade to fund manufacture of such goods or provision ofsuch services. Examples given of advance payments beingmade for turnkey projects and capital goods, wherecustomisation and uniqueness of such goods are importantby reason of which advance payments are made, are whollyinapposite as examples vis-à-vis advance payments madeby allottees. In real estate projects, money is raised from theallottee, being raised against consideration for the time value ofmoney. Even the total consideration agreed at a time when the

flat/apartment is non-existent or incomplete, is significantly lessthan the price the buyer would have to pay for a ready/completeflat/apartment, and therefore, he gains the time value of money.Likewise, the developer who benefits from the amounts disbursedalso gains from the time value of money. The fact that the allotteemakes such payments in instalments which are co-terminus withphases of completion of the real estate project does not any theless make such payments as payments involving “exchange” i.e.advances paid only in order to obtain a flat/apartment. What ispredominant, insofar as the real estate developer is concerned, isthe fact that such instalment payments are used as a means offinance qua the real estate project. One other vital differencewith operational debts is the fact that the documentaryevidence for amounts being due and payable by the realestate developer is there in the form of the informationprovided by the real estate developer compulsorily underRERA. This information, like the information frominformation utilities under the Code, makes it easy forhomebuyers/allottees to approach NCLT under Section 7of the Code to trigger the Code on the real estatedeveloper’s own information given on its webpage as todelay in construction, etc. It is these fundamentaldifferences between the real estate developer and thesupplier of goods and services that the legislature hasfocused upon and included real estate developers asfinancial debtors. This being the case, it is clear that there cannotbe said to be any infraction of equal protection of the laws.”

35. In Innoventive Industries Ltd. v. ICICI Bank[24], a twojudge Bench of this Court explained the framework of the IBC in relationto an operational creditor triggering the CIRP. The Court held:

“29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on the occurrenceof a default, to first deliver a demand notice of the unpaid debt tothe operational debtor in the manner provided in Section 8(1) ofthe Code. Under Section 8(2), the corporate debtor can, within a A

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period of 10 days of receipt of the demand notice or copy of theinvoice mentioned in sub- section (1), bring to the notice of theoperational creditor the existence of a dispute or the record of thependency of a suit or arbitration proceedings, which is pre-existing—i.e. before such notice or invoice was received by thecorporate debtor. The moment there is existence of such a dispute,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 Courtexplained the process for an operational creditor initiating CIRP in respectof a corporate debtor. The Court held:

“33. The scheme under Sections 8 and 9 of the Code, appears tobe that an operational creditor, as defined, may, on the occurrenceof a default (i.e. on non-payment of a debt, any part whereof hasbecome due and payable and has not been repaid), deliver ademand notice of such unpaid operational debt or deliver the copyof an invoice demanding payment of such amount to the corporatedebtor in the form set out in Rule 5 of the Insolvency andBankruptcy (Application to Adjudicating Authority) Rules, 2016read with Form 3 or 4, as the case may be [Section 8(1)]. Withina period of 10 days of the receipt of such demand notice or copyof invoice, the corporate debtor must bring to the notice of theoperational creditor the existence of a dispute and/or the recordof the pendency of a suit or arbitration proceeding filed before thereceipt of such notice or invoice in relation to such dispute [Section8(2)(a)]. What is important is that the existence of the disputeand/or the suit or arbitration proceeding must be pre-existing i.e.it must exist before the receipt of the demand notice or invoice, asthe case may be. In case the unpaid operational debt has beenrepaid, the corporate debtor shall within a period of the self-same10 days send an attested copy of the record of the electronictransfer of the unpaid amount from the bank account of thecorporate debtor or send an attested copy of the record that theoperational creditor has encashed a cheque or otherwise receivedpayment 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

creditor does not either receive payment from the corporate debtoror notice of dispute, that the operational creditor may trigger theinsolvency process by filing an application before the adjudicatingauthority under Sections 9(1) and 9(2). This application is to befiled under Rule 6 of the Insolvency and Bankruptcy (Applicationto Adjudicating Authority) Rules, 2016 in Form 5, accompaniedwith documents and records that are required under the said form.Under Rule 6(2), the applicant is to dispatch by registered post orspeed post, a copy of the application to the registered office ofthe corporate debtor. Under Section 9(3), along with the application,the statutory requirement is to furnish a copy of the invoice ordemand notice, an affidavit to the effect that there is no noticegiven by the corporate debtor relating to a dispute of the unpaidoperational debt and a copy of the certificate from the financialinstitution maintaining accounts of the operational creditorconfirming that there is no payment of an unpaid operational debtby the corporate debtor. Apart from this information, the otherinformation required under Form 5 is also to be given. Once this isdone, the adjudicating authority may either admit the applicationor reject it. If the application made under sub-section (2) isincomplete, the adjudicating authority, under the proviso to sub-section (5), may give a notice to the applicant to rectify defectswithin 7 days of the receipt of the notice from the adjudicatingauthority to make the application complete. Once this is done, andthe adjudicating authority finds that either there is no repaymentof the unpaid operational debt after the invoice [Section 9(5)(i)(b)]or the invoice or notice of payment to the corporate debtor hasbeen delivered by the operational creditor [Section 9(5)(i)(c)], orthat no notice of dispute has been received by the operationalcreditor from the corporate debtor or that there is no record ofsuch dispute in the information utility [Section 9(5)(i)(d)], or thatthere is no disciplinary proceeding pending against any resolutionprofessional proposed by the operational creditor [Section9(5)(i)(e)], it shall admit the application within 14 days of the receiptof the application, after which the corporate insolvency resolutionprocess gets triggered. On the other hand, the adjudicatingauthority shall, within 14 days of the receipt of an application bythe operational creditor, reject such application if the applicationis incomplete and has not been completed within the period of 7

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days granted by the proviso [Section 9(5)(ii)(a)]. It may also rejectthe application where there has been repayment of the operationaldebt [Section 9(5)(ii)(b)], or the creditor has not delivered theinvoice or notice for payment to the corporate debtor [Section9(5)(ii)(c)]. It may also reject the application if the notice of disputehas been received by the operational creditor or there is a recordof dispute in the information utility [Section 9(5)(ii)(d)]. Section9(5)(ii)(d) refers to the notice of an existing dispute that has sobeen received, as it must be read with Section 8(2)(a). Also, ifany disciplinary proceeding is pending against any proposedresolution professional, the application may be rejected [Section9(5)(ii)(e)].”

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It further noted that when a notice is received by a corporatedebtor under Section 8(2), it is enough that a dispute is pending and it isnot necessary that a suit/arbitration also be pending:

“38. It is, thus, clear that so far as an operational creditor isDconcerned, a demand notice of an unpaid operational debt or copyof an invoice demanding payment of the amount involved must bedelivered in the prescribed form. The corporate debtor is thengiven a period of 10 days from the receipt of the demand noticeor copy of the invoice to bring to the notice of the operationalEcreditor the existence of a dispute, if any. We have also seen thenotes on clauses annexed to the Insolvency and Bankruptcy Billof 2015, in which “the existence of a dispute” alone is mentioned.Even otherwise, the word “and” occurring in Section 8(2)(a) mustbe read as “or” keeping in mind the legislative intent and the factthat an anomalous situation would arise if it is not read as “or”. IfFread as “and”, disputes would only stave off the bankruptcy processif they are already pending in a suit or arbitration proceedings andnot otherwise. This would lead to great hardship; in that a disputemay arise a few days before triggering of the insolvency process,in which case, though a dispute may exist, there is no time toGapproach either an Arbitral Tribunal or a court. Further, given thefact that long limitation periods are allowed, where disputes mayarise and do not reach an Arbitral Tribunal or a court for up tothree years, such persons would be outside the purview of Section8(2) leading to bankruptcy proceedings commencing against them.HSuch an anomaly cannot possibly have been intended by the D

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legislature nor has it so been intended. We have also seen thatone of the objects of the Code qua operational debts is toensure that the amount of such debts, which is usuallysmaller than that of financial debts, does not enableoperational creditors to put the corporate debtor into theinsolvency resolution process prematurely or initiate theprocess for extraneous considerations. It is for this reasonthat it is enough that a dispute exists between the parties.”

This observation of the Court led to the amendment of the IBCthrough 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 thisCourt 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 theobjects of IBC qua operational debts is to ensure that the amountof such debts, which is usually smaller than that of financial debts,does not enable operational creditors to put the corporate debtorinto the insolvency resolution process prematurely or initiate theprocess for extraneous considerations. It has been held that it isfor this reason that it is enough that a dispute exists between theparties.”

38. The decisions of this Court in Mobilox Innovations (supra)and Kay Bouvet (supra) highlight its concern that operational creditorsmay initiate insolvency proceedings against corporate debtors for minisculeamounts of debt, which in turn could jeopardize the financial health ofthe corporate debtor. Indeed, in Swiss Ribbons (supra), this Courtobserved 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 isto ensure revival and continuation of the corporate debtor byprotecting the corporate debtor from its own management andfrom a corporate death by liquidation. The Code is thus abeneficial legislation which puts the corporate debtor back A

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Aon its feet, not being a mere recovery legislation forcreditors. The interests of the corporate debtor have, therefore,been bifurcated and separated from that of its promoters/thosewho are in management. Thus, the resolution process is notadversarial to the corporate debtor but, in fact, protective of itsinterests. The moratorium imposed by Section 14 is in the interestBof the corporate debtor itself, thereby preserving the assets of thecorporate debtor during the resolution process. The timelines withinwhich the resolution process is to take place again protects thecorporate debtor’s assets from further dilution, and also protectsall its creditors and workers by seeing that the resolution processCgoes through as fast as possible so that another management can,through its entrepreneurial skills, resuscitate the corporate debtorto achieve all these ends.”

D.4 AnalysisD

39. In the present case, there are few undisputed facts: (i) theappellant and the Proprietary Concern entered into a contract for supplyof light fittings, since the appellant had been engaged for a project byCMRL; (ii) CMRL, on the appellant’s behalf, paid a sum of Rs 50 lakhsto the Proprietary Concern as an advance on its order with the appellant;E(iii) CMRL cancelled its project with the appellant; (iv) the ProprietaryConcern encashed the cheque for Rs 50 lakhs anyways; and (v) theappellant paid the sum of Rs 50 lakhs to CMRL.

40. There is some factual controversy in relation to whether theappellant promptly informed the Proprietary Concern of the terminationFof its project with CMRL. The appellant alleges that they communicatedit on the very same day (2 January 2014), while the respondent allegesthat the Proprietary Concern only became aware of it through theappellant’s letter dated 23 July 2016. For the purposes of the presentappeal, it is unnecessary to resolve this dispute. The Proprietary ConcernGhas consistently maintained that they would be willing to refund the sumof Rs 50 lakhs if CMRL approached them directly. Thus, their ostensibledissatisfaction with the behavior of the appellant plays no part in thedebt 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 onH

their behalf to the Proprietary Concern, which was encashed even thoughthe project between CMRL and the appellant was terminated. On theother hand, the respondent has attempted to urge that there was noprivity of contract between the appellant and the respondent, and thatCMRL had not transferred the debt to the appellant. We reject boththese submissions. It is amply clear from the facts that the debt arisesfrom purchase orders between the appellant and the Proprietary Concern(which is the underlying contract), regardless of whether CMRL mayhave made the payment on behalf of the appellant. Thus, the ultimatedispute 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 theappellant has argued that the debt is in the nature of an operational debtwhich makes them an operational creditor, the respondent has opposedthis submission. The respondent’s submission, which was accepted bythe NCLAT, seeks to narrowly define operational debt and operationalcreditors under the IBC to only include those who supply goods or servicesto a corporate debtor and exclude those who receive goods or servicesfrom the corporate debtor. For reasons which shall follow, we reject thisargument.

43 First, Section 5(21) defines ‘operational debt’ as a “claim inrespect ofthe provision of goods or services”. The operative requirementis that the claim must bear some nexus with a provision of goods orservices, without specifying who is to be the supplier or receiver. Suchan interpretation is also supported by the observations in the BLRCReport, which specifies that operational debt is in relation to operationalrequirements of an entity. Second, Section 8(1) of the IBC read withRule 5(1) and Form 3 of the 2016 Application Rules makes it abundantlyclear that an operational creditor can issue a notice in relation to anoperational debt either through a demand notice or an invoice. As such,the presence of an invoice (for having suppliedgoods or services) is nota sine qua non, since a demand notice can also be issued on the basisof other documents which prove the existence of the debt. This is madeeven more clear by Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations2016 which provides an operational creditor, seeking to claim anoperational debt in a CIRP, an option between relying on a contract forthe supply of goods and services with the corporate debtor or an invoicedemanding payment for the goods and services supplied to the corporate AB

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Adebtor. While the latter indicates that the operational creditor shouldhave supplied goods or services to the corporate debtor, the former isbroad enough to include all forms of contracts for the supply of goodsand services between the operational creditor and corporate debtor,including ones where the operational creditor may have been the receiverof goods or services from the corporate debtor. Finally, the judgment ofBthis Court in Pioneer Urban (supra), in comparing allottees in real estateprojects to operational creditors, has noted that the latter do not receiveany time value for their money as consideration but only provide it inexchange for goods or services. Indeed, the decision notes that“[e]xamples given of advance payments being made for turnkey projectsCand capital goods, where customisation and uniqueness of such goodsare important by reason of which advance payments are made, are whollyinapposite as examples vis-à-vis advance payments made by allottees”.Hence, this leaves no doubt that a debt which arises out of advancepayment made to a corporate debtor for supply of goods or serviceswould be considered as an operational debt.D44. In Phoenix ARC (P) Ltd. v. Spade Financial ServicesLtd.[27], a three-judge Bench of this Court purposively interpreted Section21(2) of the IBC in order to understand who should be excluded fromthe CoC due to their being a “related party”. The Court held:

E“99. Accepting the submission of Mr Viswanathan would allowthe statutory provision to be defeated by a related party of acorporate debtor creating commercial contrivances which havethe effect of denuding its status as a related party, by the time thatthe CIRP is initiated. The true test for determining whether theexclusion in the first proviso to Section 21(2) applies must beFformulated in a manner which would advance the object andpurpose of the statute and not lead to its provisions being defeatedby disingenuous strategies.

[…]

G104. Hence, while the default rule under the first proviso to Section21(2) is that only those financial creditors that are related partiesin praesenti would be debarred from the CoC, those related partyfinancial creditors that cease to be related parties in order tocircumvent the exclusion under the first proviso to Section 21(2), H27 (2021) 3 SCC 475

should also be considered as being covered by the exclusionthereunder. Mr Kaul has argued, correctly in our opinion, that ifthis interpretation is not given to the first proviso of Section 21(2),then a related party financial creditor can devise a mechanism toremove its label of a “related party” before the corporate debtorundergoes CIRP, so as to be able to enter the CoC and influenceits decision making at the cost of other financial creditors.”

Thus, the Court struck a balance between the text of the statuteand the purpose which it sought to achieve by excluding those relatedparty financial creditors who ceased to be related parties only in order tocircumvent the exclusion under the first proviso to Section 21(2).

45. Similarly, in the present case, the phrase “in respect of” inSection 5(21) has to be interpreted in a broad and purposive manner inorder to include all those who provide or receive operational servicesfrom the corporate debtor, which ultimately lead to an operational debt.In the present case, the appellant clearly sought an operational servicefrom the Proprietary Concern when it contracted with them for the supplyof light fittings. Further, when the contract was terminated but theProprietary Concern nonetheless encashed the cheque for advancepayment, it gave rise to an operational debt in favor of the appellant,which now remains unpaid. Hence, the appellant is an operational creditorunder Section 5(20) of the IBC.

46. In doing so, we are cognizant of the observations of this Courtin judgments such as Swiss Ribbons (supra), that IBC proceedingsshould not become recovery proceedings. However, in the present case,the dispute is not in relation to the quality of the services provided by theProprietary Concern but is entirely about the repayment of the advanceamount 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 actuallybe realized from the respondent. In the present case, it is uncontestedthat the appellant entered into a contract with the Proprietary Concernand continued communications with them till the very end, finally sendingits notice under Section 8(1) of the IBC to the respondent.

48. The dispute revolves around the MOA of the respondent, dated24 January 2014, which states:

AB

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248SUPREME COURT REPORTS

A“(A) THE MAIN OBJECTS OF THE COMPANY TO BEPURSUED BY COMPANY ON ITS INCORPORATION:

[…]

4. To take over the existing Proprietorship firm Viz. M/S. HitroEnergy Solutions having its registered office at Chennai.”B

The NCLT understood this to be undeniable proof that therespondent had taken over the business and liabilities of the ProprietaryConcern, while the NCLAT took a different position.

49. We must first consider the relevant statutory provisions. SectionC4 of the Companies Act 2013[28] defines an MOA. Section 4(1) providesthe relevant information that an MOA shall provide, which includes, insub-Clause (c), that it should provide “the objects for which the companyis proposed to be incorporated and any matter considered necessary infurtherance thereof”.

D50. Section 10(1) of CA 2013 elucidates the legal effect of anMOA in the following terms:

“10. Effect of memorandum and articles.—(1) Subject to theprovisions of this Act, the memorandum and articles shall, whenregistered, bind the company and the members thereof to the sameEextent as if they respectively had been signed by the companyand by each member, and contained covenants on its and his partto observe all the provisions of the memorandum and of thearticles.”

51. Further, Section 13 provides the requirements for the alterationFof an MOA. The relevant parts of Section 13 are as follows:

“13. Alteration of memorandum.—(1) Save as provided inSection 61, a company may, by a special resolution and aftercomplying with the procedure specified in this section, alter theprovisions of its memorandum.

G[…]

(6) Save as provided in Section 64, a company shall, in relation toany alteration of its memorandum, file with the Registrar—

(a) the special resolution passed by the company under sub- section(1); (b) the approval of the Central Government under sub-section(2), if the alteration involves any change in the name of thecompany.

[…]

(9) The Registrar shall register any alteration of the memorandumwith respect to the objects of the company and certify theregistration within a period of thirty days from the date of filing ofthe special resolution in accordance with clause (a) of sub-section(6) of this section.

(10) No alteration made under this section shall have any effectuntil it has been registered in accordance with the provisions ofthis section.

[…]”

Thus, for the alteration of the MOA of a company in relation to itsobjects, a Special Resolution has to be first passed under Section 13(1).It then has to be filed with the Registrar in accordance with Section13(6)(a). Further, under Section 13(9), when the alteration is made tothe objects in the MOA, the Registrar shall register it and certify it withina period of thirty days from the filing of the Special Resolution inaccordance with Section 13(6)(a). Finally, Section 13(10) provides thatno alteration made under the Section shall have effect unless it isregistered in accordance with the provisions of the Section.

52. A company’s MOA is its charter and outlines the purpose forwhich the company has been created. Some of those purposes/objectshave to then be placed in the MOA, in accordance with Section 4(1)(c)of the CA 2013. In the 19[th] edition of A Ramaiya’s Guide to theCompanies Act, it has been stated[29]:

“[s 4.2.3] Objects for which the company is proposed to beincorporated and any matter considered necessary for thefurtherance of its objectives […]

29 (LexisNexis, 2020)

A

B

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AIt is pertinent to note that section 4(1)(c) speaks about ‘the objectsfor which the company is proposed to be incorporated’. This impliesthat the company contemplates to pursue its objects eitherimmediately after incorporation or within a reasonable period oftime. It is the duty of the registrar to verify whether the objectsincluded in the draft memorandum are indeed the ones which theBcompany proposes to pursue upon incorporation. He should satisfyhimself on this score by verifying the documents/ informationprovided by the company.”

A

The object clause in an MOA is considered to be representativeCof the purpose of a company and it is expected that the company willfulfill/attempt to fulfill the objects it has laid out in its MOA.

53. In the present case, the MOA of the respondent unequivocallystates that one of its main objects is to take over the Proprietary Concern.However, the respondent has produced a resolution dated 1 SeptemberD2014 passed by its Board of Directors, purportedly resolving to not takeover the Proprietary Concern. The resolution states:

“CERTIFIED TRUE COPY OF THE RESOLUTION PASSEDAT THE MEETING OF BOARD OF DIRECTORS HELD AT10.00 AM ON 1[st] SEPTEMBER 2014 AT THE REGISTEREDEOFFICE OF THE COMPANY AT CHENNAI.

“RESOLVED THAT the company do hereby decided not to takeover the Proprietorship concern M/S.HITRO ENERGYSOLUTIONS as envisaged in clause 4 of main objects of theMemorandum of Associations of the Company.””

F

In support of the resolution, the respondent has also produced acertification from the banker of the Proprietary Concern, Indian Bank,Mylapore Branch, on 10 April 2018 and from the Chartered Accountantsof the Proprietary Concern, K R Sarangapani and Co, on 27 April2018.

G

54. Admittedly, there was no reference to the resolution in thecounter-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 statesthat the resolution was, in fact, brought to the notice of the NCLT:

H

“(xii). It is submitted that a Board resolution dt 01.09.2014 of M/s. Hitro Energy Solutions Pvt Ltd coupled with the AuditorCertificate dated 01.09.2014 was also placed on record andbrought to the attention and Notice of the Learned NCLT Tribunal,Chennai in which it was resolved that clause 4 of the Memorandumof Association of the M/s. Hitro Energy Solutions Pvt Ltd i.e totake over the existing proprietorship concern i.e M/s. Hitro EnergySolutions will not be given effect to and as such the Proprietorshipconcern namely M/s. Hitro Energy Solutions will continue. ThusM/s. Hitro Energy Solutions is continuing its business as aproprietary concern.”

The NCLT in its judgment dated 6 December 2018 made nomention of this resolution or the auditor’s certificate. The conduct of therespondent in bringing up this resolution for the first time before theNCLAT would lead to an adverse inference against them for havingsuppressed this document earlier, if at all it was in existence.

55. In any case, Section 13 of CA 2013 provides for the procedurewhich has to be followed when the MOA is to be amended. In caseswhere the object clause is amended, it requires the Registrar to registerthe Special Resolution filed by the company. However, the respondenthas provided no proof that: (i) the purported resolution dated 1 September2014 was a Special Resolution; (ii) it was filed before the Registrar; and(iii) that the Registrar ultimately did register it. Thus, in terms of Section13(10) of CA 2013, the purported amendment to the MOA would nothave any legal effect.

56. Consequently, the MOA of the respondent still stands and thepresumption will continue to be in favor of the appellant. Thus, it can beconcluded that the respondent took over the Proprietary Concern andwas liable to re-pay the debt to the appellant. Hence, the applicationunder Section 9 of the IBC was maintainable.

F Whether the application under Section 9 is barred bylimitation

57. The respondent urged that the application under Section 9 isbarred by limitation. The respondent has argued that the date of defaultmentioned by the appellant is 7 November 2013, when the cheque wasissued by CMRL to the Proprietary Concern. As such, the submission A

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Ais that the limitation of three years under Article 137 of the LimitationAct 1963[30] would expire on 7 November 2016, while the applicationunder Section 9 was only filed on 1 November 2017.

58. In B.K. Educational Services (P) Ltd. v. Parag Gupta &Associates[31] (“B.K. Educational Services”), a two-judge Bench ofBthis Court held that the Limitation Act would apply to applications filedunder Sections 7 and 9 of the IBC. The Court held:

“42. It is thus clear that since the Limitation Act is applicable toapplications filed under Sections 7 and 9 of the Code from theinception of the Code, Article 137 of the Limitation Act getsCattracted. “The right to sue”, therefore, accrues when a defaultoccurs. If the default has occurred over three years prior to thedate of filing of the application, the application would be barredunder Article 137 of the Limitation Act, save and except in thosecases where, in the facts of the case, Section 5 of the LimitationAct may be applied to condone the delay in filing such application.”D

59. The respondent’s submission that limitation commences from7 November 2013 has to be rejected. In its application under Section 9,the appellant has mentioned this as the date on which the debt becamedue. However, as noted in B.K. Educational Services (supra), limitationdoes not commence when the debt becomes due but only when a defaultEoccurs. As noted earlier in the judgment, default is defined under Section3(12) of the IBC as the non-payment of the debt by the corporate debtorwhen it has become due.

60. In the present case, CMRL issued the cheque of Rs 50,00,000to the Proprietary Concern on 7 November 2013. However, at that time,Fit was issued as an advance payment for the purchase order of theappellant. It was only on 2 January 2014 that CMRL terminated its projectwith the appellant, and it was after this that the Proprietary Concernencashed the cheque. Subsequently, correspondence was exchangedbetween the appellant and the Proprietary Concern in July 2016 in relationGto the re-payment of the amount. Thereafter, a joint meeting was alsoheld on 4 August 2016. Till this point in time, both the parties were innegotiation in relation to the re-payment and the minutes of meetingshow that the Proprietary Concern was willing to make the re-payment 30 “Limitation Act”H31 (2019) 11 SCC 633

if CMRL issued a letter stating that they will not pursue a claim in thefuture or if the appellant provided a bank guarantee for the amount.

A

61. A final letter was addressed by the appellant to the ProprietaryConcern on 27 February 2017, demanding the payment on or before 4March 2017. The Proprietary Concern replied to this letter on 2 March2017, finally refusing to make re-payment to the appellant. Consequently,Bthe application under Section 9 will not be barred by limitation.

G Conclusion

62. Therefore, we answer the three issues formulated earlier inthe following terms:

C

(i) The appellant is an operational creditor under the IBC, sincean ‘operational debt’ will include a debt arising from acontract in relation to the supply of goods or services fromthe corporate debtor;

(ii) The respondent will be considered to have taken over theProprietary Concern in accordance with its MOA; and D

(iii) The application under Section 9 of the IBC is not barred bylimitation.

63. The appeal is allowed by setting aside the impugned judgmentand order of the NCLAT dated 12 December 2019. Since the CIRP inrespect of the respondent is ongoing due to this Court’s order dated 18November 2020, no further directions are required.

E

64. Pending application(s), if any, stand disposed of.

Devika Gujral

Appeal allowed.

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