JUDGEMENT SUMMARY:
M/S Consolidated Construction ... vs M/S Hitro Energy Solutions
DATE OF JUDGEMENT:
4th February 2022
JUDGES:
D.Y. Chandrachud, J.
S. Kant, J.
V. Nath, J
PARTIES:
M/s Consolidated Construction Consortium Limited (Appellant)
M/s Hitro Energy Solutions Private Limited (Respondent)
SUBJECT
The limitation does not commence when the debt becomes due but only when a default occurs. In the present case, the respondent had not paid the debt which it owed to the appellant. Thus, the appellant initiated the CIRP against the respondent under Section 9 of IBC and the Court held Limitation Act does not bar it even after the expiry of 3 years.
AN OVERVIEW
1. The Appellant along with Chennai Metro Rail Limited (CMRL) had ordered for the supply of light fittings from Proprietary Concern through purchase order dating 2013. Advanced payments were made by CMRL with the condition of the light fitting being delivered in compliance with the schedule provided by the appellants.
2. The project of Appellant was terminated and the same was communicated to the Respondents, supposedly. The appellants had paid back the advance payment amount to CMRL and asked the same amount to be returned to it.
3. The Appellant had initiated a corporate insolvency resolution process (CIRP) against the Respondent under Section 9 of IBC. In 2018, the National Company Law Tribunal (NCLT) had held that the respondent’s Memorandum of Association (MoA) had proved that it had taken over Proprietary Concern who owed the appellant an outstanding operational debt and therefore, under Section 14 of IBC had declared a moratorium along with the appointment of an Interim Resolution Professional
4. However, the National Company Law Appellate Tribunal (NCLAT) in 2019 had set aside the decision of NCLT and had dismissed Appellant’s application releasing the respondent from the then ongoing CIRP based on the following grounds:
a. The appellant was just a purchaser and not an operational creditor as per the definition under IBC as it had not supplied goods or services to either Proprietary Concern or Respondent
b. No records had suggested that the Respondents had taken over Proprietary Concern.
c. Since the purchase orders dated 2013 and subsequently were the advance cheques,the Appellants could not have moved application under Section 7 or 9 of IBC.
IMPORTANT PROVISIONS
Insolvency and Bankruptcy Code 2016:
- Section 3(6)- Defines the phrase ‘claim’
- Section 3(12)- Defines the phrase ‘default’
- Section 5 (20)- Provides definition of operational creditor.
- Section 5(21)- Defines operational debt.
- Section 8- Outlines the steps that an operational creditor shall follow while filing the claim of insolvency against the corporate debtor.
- Section 9- Provides for the application for corporate insolvency resolution process’ initiation by the operational creditor.
- Section 14-Outlines a Moratorium.
- Section 62- Outline for aggrieved person to the appeal to Supreme assailing the decision of NCLT.
Insolvency And Bankruptcy Board Of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 (CIPR Regulation):
- Section 7- Provides for the claims by an operation creditor
Companies Act (CA) 2013:
- Section 4- Outlines the Memorandum of a company.
- Section 10- The effect of Memorandum and articles are legally binding.
- Section 13- The procedure of alteration of Memorandum is outline
ISSUES
The issue that arose were:
- Whether or not the appellant was the operation creditor under IBC?
- Whether the respondent had taken over the debt from the Proprietary Concern?
- Whether application under Section 9 of IBC was barred by limitation?
ANALYSIS OF THE JUDGEMENT
1. The debt had arisen from the purchase orders between the appellant and the Proprietary Concern and the ultimate dispute remained between these two parties. As per Section 5(20) of IBC, a person to whom operational debt, even the ones legally assigned, was owed was an operational creditor. Under section 7(2) of CIRP Regulation, the claim of operational creditor could be proved by:
a. An invoice which demanded the payment
b. Acontract that provided for the supply of goods and services
3. Section 7(2)(b)(i) and (ii) of the CIRP Regulations provided that the operational creditor who sought an operational debt in a CIRP could rely on a contract for the supply which included the receiver of goods or services from the corporate debtor within the ambit of the definition of ‘operational creditor’. In Pioneer Urban Land and Infrastructure Ltd. v. Union of India, it was stated that the consideration of debt was the e goods or services either sold or availed of from the operational creditor. Therefore, a debt that arose out of an advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.
4. The appellant had entered into a contract with the Proprietary Concern and the communication had continued till the end. The appellant had sent a notice to Respondent under Section 8 (1) of IBC as the MOA of the respondent stated its main objective was to take over Proprietary Concern.’
5. As per Section 4 of the CA,MoA of a company was a charter which outlined the company’s purpose. Further Section 10(1) of CA expounded that the MoA was legally binding on the company. Therefore, it could be concluded that the respondent had taken over the business and liabilities of the Proprietary Concern.
6. The altered MoA that the Respondents had produced before the Court had stated the company’s decision to not take over the Proprietary Concern. However, this MoA was not amended in accordance to the Section 13 of CA as there were no proofs that:
a. It was a Special Resolution,
b. It was filed before the Registrar, and
c. The Registrar had registered it.
Therefore, the same did not have any legal effect.
7. Article 137 of First Schedule of Limitation Act provided for the limitation of three years and for this case it would have expired in 2016. In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, the Supreme Court had held that the Limitation Act was applicable to applications which were filed under Section 7 and 9 of IBC. When the default has occurred, the application could be filed within three years.
8. However, in this case, it could be filed under Section 5 of IBC condoning the fact that there was a delay in filing the application. The appellant in the application had mentioned that the debt had become due. Further the Supreme Court had held that the limitation did not commence when the debt was due rather when the default had occurred. The debt in this case had become due going by the definition under Section 3(12) of IBC.
CONCLUSION
The Supreme Court allowed the appeal and had set aside the impugned judgement of NCLAT. The ongoing CIRP relating to the respondent was allowed to proceed. The Supreme Court clarified an essential principle in this case by holding that debt commence from the date of default.
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