Case title:
M/s Consolidated Construction Consortium Limited versus M/s Hitro Energy Solutions Private Limited
Date of Order:
February 04, 2022
Bench:
Justice Dr. Dhananjaya Y Chandrachud, Justice Surya Kant, Justice Vikram Nath
Parties:
Appellant - M/s Consolidated Construction Consortium Limited
Respondent - M/s Hitro Energy Solutions Private Limited
SUBJECT
The present case dealt with two major aspects of The Insolvency and Bankruptcy Code, 2016, and the Companies Act, 2013. The issues for contemplation before the court were twofold. One is concerned with the question of whether the appellant can be considered an operational creditor. Two, whether the amendment to the MOA is legally effective and thus maintainable?
As per the Insolvency and Bankruptcy Code (IBC), an operational creditor is defined as a person to whom a corporate debtor owes an operational debt. Operational debt is a claim for the provision of goods or services, including employment or contractual rights. This claim arises out of the corporate debtor's ordinary course of business. Examples of operational creditors include suppliers of goods and services, employees, government authorities for unpaid taxes, etc.
The MOA is a legal document that outlines the company's purpose and objectives, as well as the powers and duties of directors and shareholders. It also defines the scope of the company's activities and its members' rights and liabilities. The IBC contains provisions for a Memorandum of Association (MOA) to be filed with the National Company Law Tribunal (NCLT) when a company is registered.
IMPORTANT PROVISIONS
Insolvency and Bankruptcy Code 2016
- Section 8
- Section 9
- Section 5(20)
- Section 5(21)
- Section 62
Companies Act, 2013
- Section 13
OVERVIEW
- The appellant had executed a project with Chennai Metro Rail Limited for the supply of light fittings.
- Later, the appellant placed orders with the Proprietary Concern for the supply of light fittings, and an advance payment of Rs 50,00,000 was requested from the appellant.
- A cheque for the requested amount was issued by CMRL under the condition that the supply should follow the schedule provided by the appellant.
- The CMRL later notified the appellant that the project had been terminated. The appellant claims this was communicated to the Proprietary Concern, but the respondent denies it.
- Accordingly, the appellant paid Rs 50,00,000 to CMRL and requested payment from the Proprietary Concern.
- The appellant issued a letter requesting the Proprietary Concern to refund Rs 50,00,000. It was made clear that the payment of the amount would indemnify the Proprietary Concern against any future claim from CMRL.
- In response, the Proprietary Concern stated that the amount would be given directly to CMRL. They also stated that they had never been informed of the termination of the contract.
- After a joint meeting was held between the appellant, the Proprietary Concern, and TLIPL, the proprietary concern asked the appellant for a letter from the CMRL. This letter should state that the advance money belongs to the appellant, and will not be claimed in the future.
- There was no payment made after the letter was obtained and sent to the Proprietary Concern.
- A letter was sent to the Proprietary Concern asking for the return of Rs 50,00,000 along with interest. Proprietary Concern refused this demand.
- Subsequently, a demand notice was sent by the appellant under section 8 of the IBC where the debt amount was calculated as Rs 83,13,973. This was denied by the proprietary concern.
- The present application was filed under section 9 of the IBC and Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 and was admitted by the NCLT.
- However, the petition was dismissed by the NCLAT on appeal and it reversed the NCLT decision.
- The appellant filed the present appeal before the Supreme Court of India, aggrieved by the NCLAT decision.
ISSUES RAISED
- Whether the appellant is an operational creditor under the IBC even though it was a ‘purchaser’
- Whether the respondent took over the debt from the Proprietary Concern
- Whether the application under Section 9 of the IBC is barred by limitation.
ARGUMENTS ADVANCED BY THE APPELLANT
- Mr. M P Parthiban represented the appellant in this case.
- The counsel submitted that since the payment of Rs 50,00,000 was made to CMRL, it becomes due from the respondent to the appellant.
- It was asserted that the respondent's MOA clearly states taking over the Proprietary Concern as one of its main objectives. Thus the findings of the NCLAT’s judgment, that there is no list noting that the respondent has taken over the Proprietary Concern, are incorrect.
- Counsel contended that the application under Section 9 of the IBC is not barred by limitation. In addition, the appellant can be classified as an operational director under the IBC since the purchase orders for light fittings concern the appellant's operational requirements.
ARGUMENTS ADVANCED BY THE RESPONDENT
- Mr. K Parameshwar represented the respondents in the present case.
- The counsel contended that the respondent changed its intention from the ones given in the MOA, through a subsequent Board resolution.
- It was submitted that the respondent couldn't be held liable for the debt since they're a separate entity from the proprietary concern.
- It was urged that the appellant is not an operational creditor under Section 5(20) of the IBC since he did not provide any goods or services to the respondent, but only received goods or services from the Proprietary Concern.
- It was further submitted that the application was filed three years after the default was made and hence barred by limitation.
JUDGEMENT ANALYSIS
- The Supreme Court of India set aside the NCLAT order and allowed the appeal.
- The court viewed that it doesn't matter whether CMRL paid for the appellant on its behalf. It is thus the Proprietary Concern and the appellant that have the ultimate dispute, which subsequently leads to the debt.
- The court interpreted the meaning of an operational debt under Section 5(21). By referring to the case, Pioneer Urban Land and Infrastructure Ltd. v. Union of India [(2019) 8 SCC 416], the court concluded that any debt arising out of a payment made to a corporate debtor for the supply of goods or services would be considered an operational debt.
- The court ruled that the appellant is an operational creditor under Section 5(20) of the IBC since they sought an operational service from the Proprietary Concern, and advance payment was made for the same.
- It was held that the respondent had not provided any evidence that it followed the procedure given under Section 13 of CA, 2013 when the amendment to the MOA was made. As a result, it was determined that the MOA still stands and that the application under Section 9 of the IBC was maintainable.
- The bench consisting of Justice Dr. Dhananjaya Y Chandrachud, Justice Surya Kant, and Justice Vikram Nath finally stated that the application under Section 9 would not be barred by limitation. Reliance was placed on the case B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633].
CONCLUSION
The present case marked cardinal clarifications regarding who can be considered an operational debtor within the meaning of Section 5(20) of the IBC. The division bench analyzed the scope of the term “operational creditor” under the ambit of Section 5(20) of the Code. It ruled that even purchasers of goods and services can be operational creditors, not just suppliers or service providers. The court also observed that an amendment to the MOA wouldn’t have any legal effect unless it is done as per Section 13 of the Companies Act, 2013.
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