17 December 2018

      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.

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