NCLT: CIRP under IBC can be Initiated only Against 'Operational Debts'

NCLT: CIRP under IBC can be Initiated only Against 'Operational Debts'

The National Company Law Tribunal (NCLT), Kochi Bench in the case titled M/s Kripa Cashew Exports (Appellants/Operational Creditors) v. M/s Royals International Trade & Allied (Respondents/Corporate Debtors) held that process u/s 9 of Insolvency and Bankruptcy Code (IBC) can only be initiated against debts that are covered under the definition of 'Operational Debt'.

The NCLT coram consisting of the Judicial Member Ashok Kumar Borah stated that any amount claimed as due by a person representing as 'Operational Creditor' should demonstrate that the said amount in default falls within the definition of 'claim' as defined in Section 3(6).

It was further clarified by the adjudicating authority that "Such a claim, should be capable of being treated as a 'debt' as defined under Section 3(11) of IBC and finally the 'debt' should fall within the confines of Section 5(21) of IBC (i.e.) it should be capable of being treated as an 'Operational Debt' and such an operational debt must be owed by the Corporate Debtor to a creditor who can then be considered as an Operational Creditor as defined under Section 5(20) of IBC."

As to the facts of the case, the appellant who is the 'Operational Creditor' filed an application under Section 9 of IBC read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules) for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent who is a 'Corporate Debtor.

On behalf of the Corporate Debtor, the maintainability of the application under Section 9 of the IBC was challenged. It was argued that the Operational Debt as defined in the IBC u/s 5 (21) refers to "a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority."

It was further argued by the respondent that as per Section 3(11) of the IBC "Debt" refers to a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

Issue before the NCLT

Whether the debt falls within the purview of Operational Debt under Section 5 (21) of the IBC?

To arrive at a decision, the Tribunal referred to the judgment of the National Company Law Appellate Tribunal (NCLAT) in the case titled Jindal Steel and Power Limited v. DCM International Limited, Company Appeal (AT) (Insolvency) No. 288 of 2017, wherein it held "The Appellant tenant does not come within the meaning of 'Operational Creditor' as defined under sub-section (20) read with sub-section 21 of Section 5 of the IBC for triggering Insolvency and Bankruptcy Process under Section 9 of the IBC."

The Tribunal analyzed the instant issue and clarified that any amount claimed as due by a person representing as 'Operational Creditor' should demonstrate-

- That the said amount in default falls within the definition of 'claim' as defined in Section 3(6).

- Such a claim should be capable of being treated as a 'debt' as defined under Section 3(11) of IBC.

- The 'debt' should fall within the confines of Section 5(21) of IBC it should be capable of being treated as an 'Operational Debt' and such an operational debt must be owed by the Corporate Debtor to a creditor who can then be considered as an Operational Creditor as defined under Section 5(20) of IBC.

The NCLT dismissed the application filed regarding the Resolution Process against the Corporate Debtor and it noted that the claim of the Operational Creditor is not based on an operational debt, because no goods/services were to be rendered by the Corporate Debtor.

The Tribunal noted that in the instant matter the 'Operational Creditor' is not regarding the goods/services including employment or the debt in respect of the repayment of the dues, but it is related to non-payment of the advance money paid to the Corporate Debtor.

It concluded that it is beyond the purview of the "Operational Debt" as per Section 5(21) of the IBC. It held that only those debts which come under the definition of Operational Debt as in the IBC alone can start a Section 9 petition.