Only Debts covered under definition of ‘Operational Debt’ can file application under Section 9 of Insolvency and Bankruptcy Code: NCLT

The National Company Law Tribunal (NCLT), Kochi Bench ruled that only debts covered under the definition of ‘Operational Debt’ can file an application under Section 9 of Insolvency and Bankruptcy Code.

The applicant M/s. Kripa Cashew Exports who is the ‘Operational Creditor’ has filed the application under Section 9 of Insolvency & Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,  2016 to initiate Corporate Insolvency Resolution Process (CIRP) against M/s. Royals International Trade and Allied Products Pvt. Ltd. who is a ‘Corporate Debtor.

The Corporate Debtor while raising the maintainability of the application under Section 9 of the Insolvency & Bankruptcy Code, 2016 argued that the Operational Debt as defined in the Code in Section 5 (21) means “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 is further stated that Section 3(11) of the Code provides that “Debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

The issue that arises is whether the debt falls within the purview of Operational Debt under Section 5 (21) of the Insolvency and Bankruptcy Code, 2016.

The coram of the Judicial Member, Ashok Kumar Borah 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 I&B Code, 2016 and finally the ‘debt’ should fall within the confines of Section 5(21) of I&B Code, 2016 (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, 2016,” the NCLT added.

The Tribunal while dismissing the application for Resolution Process against the Corporate Debtor observed 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 Operational Creditor is not relating to 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 on behalf of M/s. Thankam Cashew Factory. Therefore, the same is not covered under the definition of the “Operational Debt” as provided under Section 5(21) of the Code.

It is noteworthy that generally NCLTs as soon as they see a debt somewhere in the IBA application, kick starts Insolvency proceedings. However, NCLT Kochi decided that only those debts which come under the definition of Operational Debt as in Insolvency and Bankruptcy Code alone can start a Section 9 petition.

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