IBC | ADVANCE AS AN OPERATIONAL DEBT | CONTRADICTORY RULINGS

The National Company Law Tribunal, Kolkata Bench (NCLT), in SHRM Biotechnologies Private Limited vs VAB Commercial Private Limited, recently passed an order in which it was held that in the absence of provision of goods or services, a claim towards refund of advance money would not fall within the meaning of an `operational debt`.

FACTS OF THE CASE:

• SHRM Biotechnologies Private Limited (SHRM), the applicant, was seeking investors to expand its business. In this regard, SHRM approached VAB Commercials Private Limited (VAB) for arranging an investor.
  
  
• SHRM issued a mandate letter to VAB on 7 September 2016 and paid a sum of Rs 3 lacs by way of an advance. It was agreed between SHRM and VAB that in the event VAB was unable to arrange a deal with a potential investor for SHRM, VAB would refund the entire advance to SHRM. VAB, however, neither arranged an investor nor refunded the advance of Rs 3 lacs to SHRM.
  
  
• On 2 January 2018, SHRM sent a demand notice under the Insolvency and Bankruptcy Code, 2016 (IBC) to VAB claiming refund of the advance of Rs 3 lacs with interest at 18% pa compounded annually, aggregating to a sum of Rs 3,63,122/-. Since VAB did not respond to the demand notice, SHRM filed an application under the IBC to commence the corporate insolvency resolution process against VAB for non-payment of an operational debt.
  
  
• The main issue before the NCLT was whether a claim for repayment of an advance, in terms of the mandate letter signed by SHRM and VAB, comes under the ambit of `operational debt` for the purpose of section 9 of the IBC.

DECISION OF NCLT

• NCLT examined the definition of ``debt``, ``operational creditor`` and ``operational debt`` under the IBC to come to the conclusion that an operational debt which does not involve the Government or an employment claim must involve the provision of goods or services.
  
  
• In this regard, the NCLT cited the decision of Sajive Kanwar v AMR Infrastructure wherein the definition of ``operational debt`` was discussed in detail. It was observed in that judgement that ``operational debt`` did not cover all forms of debt other than “financial debt” and the elements of ``operational debt`` must be met for an applicant’s claim to merit admission.
  
  
• Based on the above findings, the NCLT was of the view that since the advance was paid without the provision of any goods or services the advance would not fall within the definition of ``operational debt`` and SHRM could not be considered an ``operational creditor``. The application was, therefore, dismissed.
  
  

MHCO Comment: NCLT in this case has strictly interpreted the provisions of the IBC dealing with ``operational debt`` and ``operational creditors``. An advance against the provision of services, which is liable to be refunded, could be construed as an ``operational debt`` since it involves services even though the person making the advance does not provide the service. Such an interpretation would ensure that an advance which is a debt is adequately covered under the IBC. There is a dichotomy in relation to decisions taken on this issue by various benches of NCLT. The Mumbai Bench of NCLT in Auspice Trading Private Limited vs M/s Global Proserv Limited, held that an advance paid for the supply of goods and services would be an operational debt without giving reasons for such an interpretation.

It remains to be seen whether the National Company Law Appellate Tribunal or the Supreme Court are seized of this issue to lay rest to the position of an advance as operational debt.

This update was released on 17 December 2018.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.   

IBC | Binani Cement Case Update | NCLAT approves Ultratech’s bid

 

The National Company Law Appellate Tribunal (NCLAT) recently passed an order approving the resolution plan made by Ultratech Cement Limited (Ultratech) in the case of Binani Cement Limited (Company) while holding that the resolution plan submitted by Rajputana Properties Limited (Dalmia Group) is discriminatory and defeats the purpose of the Insolvency and Bankruptcy Code, 2016 (Code or IBC).

Factual Background:

• The resolution professional of the Company filed an application before the National Company Law Tribunal (NCLT), Kolkata, for approval of the resolution plan submitted by the Dalmia Group in respect of the Company. The resolution plan had been approved by the Company`s Committee of Creditors (CoC) on 14 March 2018. However, some creditors filed objections to the same, stating that they had been coerced into approving the plan and they had not been dealt with equitably compared to the financial creditors of the Company who were also beneficiaries of corporate guarantees.
  
  
• NCLT also noticed that the CoC had failed to consider the resolution plan submitted by Ultratech, including a revised plan submitted by it on 8 March 2018. While holding that the plan submitted by the Dalmia Group was discriminatory, the NCLT directed the CoC to consider other resolution plans, including the one submitted by Ultratech. NCLT also allowed the Dalmia Group to submit a revised resolution plan and directed the CoC to consider both plans.
  
  
• Aggrieved by the decision of the NCLT, the Dalmia Group approached the NCLAT which passed an interim order, upholding the order of the NCLT. Thereafter, the Dalmia Group moved the Supreme Court seeking a stay on the NCLAT`s order. However, on 2 July 2018, the Supreme Court directed the NCLAT to decide all issues related to the present case, including the eligibility criteria of Ultratech to file a revised bid, pursuant to which the present order was passed by the NCLAT.
  
  
• Meanwhile, pursuant to the decision of the NCLT, the CoC held a meeting on 28 May 2018 where it considered the revised plan submitted by Ultratech and unanimously voted in favour of it.

Issues Examined by the NCLAT

• The NCLAT examined various provisions of IBC and held that the objective of the Code is to promote resolution of an insolvent company over liquidation and to maximize value for all its stakeholders. NCLAT also referred to the decision of the Supreme Court in Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta and Ors where it was held that every effort must be made to run the Corporate Debtor as a going concern, if there is a resolution applicant who can continue to do so.
  
  
• NCLAT also held, that although the CoC comprises only of financial creditors, an approved resolution plan must ensure that the dues of operational creditors are also addressed.
  
  
• The resolution plan submitted by the Dalmia Group, provided for 100% payment of the verified claims to certain financial creditors such as the State Bank of India and Bank of Baroda while other similarly placed financial creditors, such as the Export Import Bank of India, and State Bank of India (Hong Kong) were to be repaid only a portion of their claims. In the case of operational creditors, unrelated parties (other than workmen) would only be paid 35% of their verified claims, while no repayment would be made to related parties
  
  
• The grounds put forth by the Dalmia Group in support of these distinctions were not accepted by the Tribunal which held that the Code does not prescribe differential treatment between the similarly situated operational creditors` or the financial creditors` on one or other grounds.
  
  
• In contrast to the plan submitted by the Dalmia Group, the plan submitted by Ultratech provided for 100% repayment of the verified claims of all financial and operational creditors, except for related parties. Ultratech has also made a provision for payment of interest to financial creditors during the subsistence of the resolution period. NCLAT also held that the revised resolution plan submitted by Ultratech was in consonance with the provisions of the Code.
  
  
• NCLAT also held that there is no time limit prescribed by the Code, for the CoC to negotiate with the resolution applicant and modify the resolution plan with its approval, subject to the resolution process being completed within the time frame mandated by the Code.

Appeal

• The Dalmia Group filed an appeal against the present order of the NCLAT before the Supreme Court, which passed an Order on 19 November 2018 dismissing the appeal filed by Dalmia and stating that there is no infirmity in the order of the NCLAT.

MHCO Comment: This is a landmark ruling by NCLAT and will have repercussions on which resolution plans are acceptable under the Code, where the focus shall now be on running the Company as a going concern and maximizing value for all sets of stakeholders. Further, the resolution plan cannot discriminate against similarly placed creditors and must also ensure that the claims of operational creditors are adequately addressed. This is in line with the objectives of the Code.


The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.