Operational Debt And Creditors under IBC

Author - Santosh Pandey

The Insolvency and Bankruptcy Code, 2016 (IBC) is amongst dynamic legislations, being interpreted by courts to expand its ambit and possibly would provide maximum benefit to both the financial and operational creditors having long outstanding dues. NCLAT has upheld that statutory dues are now included within the definition of 'operational debts'

Operational debt refers to a claim against the provision of goods or services including employment or debt in respect of payment arising under any law and is payable to the Central or State Government or any other local authority;

In a recent judgement passed on March 20, 2019, in Pr. Director-General of Income Tax (Admn. & TPS) vs M/s. Synergies Dooray Automotive Ltd. & Ors. case, NCLAT held, the statutory dues such as sales tax, income tax, VAT and various other taxes fall in the definition of 'operational debt' and the statutory authorities claiming these dues will be considered as operational creditors. 

Operational Creditor and its eligibility

An operational creditor has been defined under Section 5(20) of Insolvency and Bankruptcy Code, 2016. The amount of debt has been either legally assigned or transferred to them for providing goods or services. Employees, vendors and suppliers, government etc. are examples of operational creditors. It would include money receivable by an employee or a worker of the company as wages or salary. It would also include a claim of statutory authority on account of money receivable pursuant to an imposition by a statute. They have been provided with certain rights for demanding their dues.

Case laws– 

1. Whether a trade union could be said to be an operational creditor:

Supreme Court in the matter of JK Jute Mill Mazdoor Morcha Vs. Juggilal Kamlapat Jute Mills Company Ltd. Through Its Director & Ors. held that the trade union represents its members who are workers, to whom dues may be owed by the employer, which are certain debts owed for services rendered by each individual workman, who are collectively represented by the trade union. Equally, to state that for each workman there will be a separate cause of action, a separate claim, and a separate date of default would ignore the fact that a joint petition could be filed under Rule 6 read with Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, with authority from several workmen to one of them to file such petition on behalf of all.

2. Whether the recovery of arrears of rent can be claimed as operational debt within the meaning of section 3(11) of the Code?:

NCLT, Kolkata Bench in the matter of Sarla Tantia V/s Nadia Health Care (P) Ltd. [CP(IB) No. 108/KB/2018 and CA(IB) No. 119/KB/2018, dated 05.10.2018] held that receiving any consideration by way of rent, lease from time to time, license fees for letting out the premises would fall under the purview of providing services and the consideration that is receivable becomes operational debt.

Rights of the operational creditors

IBC gives several rights to the creditors in the resolution process. From the submission of resolution requests to liquidation, there are various steps and procedures

 a)   Operational creditors and the right to initiate the process of resolution

Operational creditors hold the right to submit a resolution application. As per IBC, any operational creditor can make an application to NCLT or DRT, in case of a default, for initiating the Insolvency Resolution Programme. 

b)   Operational creditor’s right in Committee of Creditors (CoC)

Notice of the meeting shall be given to the operational creditors having aggregate dues of at least 10% of the total debt. But this does not provide them with voting rights. Their only right is to sit in the CoC, provided they have the threshold credit.

c)   Rights in asset distribution in the case of liquidation

The liquidation process allows the CoC to appoint an official liquidator, who is required to sell the assets of the corporate debtor. The money so procured should be divided among all the creditors. In such a situation, the Unsecured Financial Creditors and the Operational Creditors are given equal treatment but Secured Financial Creditors’ obligations are to be paid first.

The process through which an operational creditor can demand payment of debts through filing an application with the adjudicating authority is called as Corporate Insolvency Resolution Process.

Corporate Insolvency Resolution Process

Corporate Insolvency Resolution Process is new hope in the market as the Adjudicating Authority i.e. NCLT emphasizes on it for the speedy recovery of debts. The trend is soon catching up and it seems that if this continues, then most of the pending insolvency and winding-up cases will be quickly resolved thus making the economy free of bad debts.

The process of making an application, for initiation of Corporate Insolvency Resolution Process against debtors has to be done in a prescribed manner. The application shall accompany the following:

• Fees as prescribed;
• A copy of demand notice or the invoice demanding payment which is delivered by the operational creditor to the corporate debtor
• An affidavit to specify that there has been no notice given by the corporate debtor relating to the dispute of unpaid operational debt;
• A certificate copy from financial institutions/banks maintaining accounts of the operational creditor, which confirms that there has been no payment of the unpaid operational debt by the corporate debtor;
• Any other information as may be specified.

Rules 6 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires an operational creditor, to make an application for initiation of the corporate insolvency resolution process under section 9 of IBC in Form 5, along with the required documents and records and as specified in Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The applicant or the operational creditor shall dispatch a copy of the application filed with Adjudicating Authority, by speed post or registered post to the registered office of the corporate debtor.

Once satisfied with the above, the Tribunal may accept or reject the application of the creditor within 14 days. The creditor will be provided with an opportunity to cure the defects in the application and file the same again.

Process of making an application to the Adjudicating Authority

(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

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

(3) The operational creditor shall, along with the application furnish—

1. A copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
2. An affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
3. A copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor by the corporate debtor, if available; and
4. Such other information as may be specified.
5. A copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and
6. Any other proof confirming that there is no payment of an unpaid operational debt by the corporate debtor or such other information, as may be prescribed.

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

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

• Admit the application and communicate such decision to the operational creditor and the corporate debtor if,—
  • the application made under sub-section (2) is complete;
  • there is no repayment payment of the unpaid operational debt;
  • the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor;
  • no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and
  • there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4) if any.
• Reject the application and communicate such decision to the operational creditor and the corporate debtor, if—
  • the application made under sub-section (2) is incomplete;
  • there has been repayment payment of the unpaid operational debt;
  • the creditor has not delivered the invoice or notice for payment to the corporate debtor;
  • notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or
  • any disciplinary proceeding is pending against any proposed resolution professional

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

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

CONCLUSION

Operational creditors are also eligible to raise their request to the NCLT by means of the corporate resolution process which is a fine way of dealing with bad debts especially when there are a lot of stressed assets hampering the growth of the economy. The sections have clearly defined the complete procedure and requirement of filing a case before NCLT under IBC for speedy disposal of recovery and winding-up cases.