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DEFENDING AGAINST CLAIMS ASSERTING OPERATIONAL DEBT

Insolvency and Bankruptcy Code, 2016 is evaluated as one of the greatest insolvency reforms in the history of India's economy. The enactment of the Act was for reorganization and insolvency resolution of partnership firms, corporate persons, and individuals in a time-bound system to maximise the asset's value of such persons. IBC proposed a paradigm shift from the existing 'Debtor in possession' to a 'Creditor in control' regime. The Code aimed to resolve insolvencies in a strict time-bound manner - the evaluation and viability determination must be completed within 180 days. This was considered to tackle the bad loan problems that were affecting the banking system. Few years of the IBC have escalated in a huge measure to prevent corporates from defaulting on their loans.

The process of IBC has changed the creditor and the debtor's relationship. There are a number of major cases that have been resolved in a few years, while some others are in advanced stages of resolution. Challenges and complexities inevitably hit it in its interpretation and implementation like any other law in its nascent stage. 

With a number of trend-setting decisions delivered by the judiciary coupled with timely and effective amendments to the Code, many of IBC's teething issues have been eliminated. The IBC has initiated new and distinct concepts of 'Financial Creditor' and 'Operational Creditor'. Unlike the Companies Act, 2013, which entirely introduced the term 'creditor', without any classification. To discover if a person is a financial creditor, the debt owed to such a person must fall within the scope a 'Financial Debt' under Section 5(8) of the IBC.

To discover whether a person would fall under the definition of an operational creditor, there has to be light upon the debt owed to such a person must fall within the ambit of definition of an operational debt as stated under Section 5(21) of the IBC. An operational debt is defined under section 5(21) of the IBC to mean: "a claim in respect of the provisions 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".

The Bankruptcy Law Reforms Committee has drawn a difference between a financial creditor and operational creditor.  Financial creditors whose relationship with the organization is a pure financial contract, such as a loan or debt security. Operational creditors are the ones whose liabilities from the organization comes from a transaction on operations.

The Code also highlights the cases where a creditor has both a solely financial transaction and an operational transaction with the organization. In those cases, the creditor can be examined of a financial creditor falling under the financial debt. Similarly, an operational creditor shall fall to the extent of the operational debt. The lawmakers have erased out different meanings of  'operational creditor' and 'financial creditor' and are not to be elucidated as inclusive or exclusive.

As per Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with Application for initiation of (CIRP) that is; corporate insolvency resolution process by operational creditor. It spells out that after ten days have passed from the date of delivery of notice or invoice that demands payment under section 8 of IBC if the operational creditor does not receive the payment from the corporate debtor or notice of the dispute under Section 8(2), the operational creditor files an application before the Adjudicating Authority for commencing a corporate insolvency resolution process.

Section 9 read with section 8 also lays down the procedure and formalities of filing the Application. It states that the Application must contain the relevant information and must be accompanied by the prescribed fee. An operational creditor usually initiates a corporate insolvency resolution process under section 9 of insolvency and bankruptcy code may propose a resolution professional to act as an interim resolution professional.

The section 9 of IBC code 2016 mandates that within 14 days of the Application's receipt, the Adjudicating Authority shall admit the application and communicate such decision to the operational creditor and the corporate debtor.

Supreme Court, NCLT and NCALT in various cases also have given some essential elements of Section 9 of IBC to proceed with the case, and those elements are as follows: 

• Existence of dispute

• The occurrence of a default

• Delivery of the demand notice of unpaid operational debt or 

• Invoice demanding for payment of the amount involved; and the fact that the operational creditor had not received any payment from the end of the corporate debtor within ten days of a period, the copy of an invoice demanding payment or receipt of the demand notice or a receiving of the revert from the corporate debtor which does not showcase the marking of a pre-existing dispute or repayment of any unpaid operational debt.

While hearing appeals against National Company Appellate Law Tribunal's orders, Supreme Court has clarified that Section 9(3)(c) of insolvency and bankruptcy code is a directory in nature and not mandatory.

In Kirusa Software Private Limited versus Mobilox Innovations Private Limited, an important question in front of the Hon'ble National Company Law Appellate Tribunal ("NCLAT")  was the definition and interpretation of the expression 'dispute' for the purposes under section 9 of the IBC.

Meanwhile, the adjudicating authority is not competent to verify the adequacy of the 'dispute', a 'dispute' highlighting the colour of a genuine dispute or illusory dispute (raised for the first time) cannot be a medium to reject the Application for initiating the corporate insolvency resolution process.

In the said landmark judgment, the Supreme court has enlarged the dispute's scope and made it an inclusive definition. Therefore, at the time of interpretation of the dispute, the principles of the ejusdem generis must be applied. It includes the correspondence amongst the parties presenting a dispute regarding operational debt being considered a dispute.

There exists a balance between the rights of the operational creditor and the remedies available to the debtor.

References:

1. Section 5(7), Insolvency & Bankruptcy Code, 2016.
2. Section 5(20), Insolvency & Bankruptcy code, 2016.
3. Insolvency & Bankruptcy Code,2016
4. M/s Uttam Galva Steel Ltd. v. M/s DF Deutsche Forfait AG and Misr Bank Europe GmbH
5. Urban Infrastructure Trustee Ltd v. Neelkanth Township and Construction Pvt Limited
6. Vinod Awasthy v. AMR Infrastructure Ltd