Latest Judgement by Supreme Court with respect to Insolvency and Bankruptcy code

The Hon’ble Supreme Court in the case of M/s Consolidated Construction Consortium Limited v M/s Hitro Energy Solutions Private Limited, vide its order dated 04.02.2022 has held that operational debt under Insolvency and Bankruptcy Code, 2016 (‘IBC’) includes payment made to a Corporate Debtor for supply of Goods or Services. The Hon’ble Court also held that the limitation under Section 9 of the IBC does not commence when the debt becomes due but only when a default occurs.

In the present case, there were few undisputed facts: (i) the appellant and the Proprietary Concern entered into a contract for supply of light fittings, since the appellant had been engaged for a project by Chennai Metro Rail Limited (“CMRL”); (ii) CMRL, on the appellant’s behalf, paid a sum of Rs 50 lakhs to the Proprietary Concern as an advance on its order with the appellant; (iii) CMRL cancelled its project with the appellant; (iv) the Proprietary Concern encashed the cheque for Rs 50 lakhs anyways; and (v) the appellant paid the sum of Rs 50 lakhs to CMRL

Earlier, the NCLAT set aside the NCLT’s decision, dismissed the application of the appellant under Section 9 of the IBC and released the respondent from the ongoing CIRP. In support of its conclusions, it held: (i) the appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the Proprietary Concern/respondent; and (ii) in any case, the appellant cannot move an application under Sections 7 or 9 of the IBC since all purchase orders were issued on 24 June 2013 and advance cheques were issued subsequently.

The Supreme Court stayed the operation of NCLAT’s judgment and order dated 12 December 2019. The following relevant issues arose before the Supreme Court in the appeal:

 1. Whether the appellant is an operational creditor under the IBC even though it was a ‘purchaser’?

The Court held that the operative requirement is that the claim must bear some nexus with a provision of goods and services, without specifying who is to be the supplier or receiver. The court held, “Hence, this leaves no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.”

The court also observed that the presence of invoice in a demand notice in not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt.

  2.  When the applications under Section 9 of the IBC are barred by limitation?

The Supreme Court held that the Limitation does not commence when the debt becomes due but only when the default occurs. As noted earlier in the judgment, default is defined under section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due.

In this case, the appellant placed orders with the Proprietary Concern, which was the supplier of Thorn Lighting India Private Limited through three purchase orders dated 24 June 2013. The contention raised in this case was the date of default mentioned is 7 November 2013, when the cheque was issued by CMRL to the Proprietary Concern and therefore the limitation of three years under Article 137 of the Limitation Act would expire on 7 November 2016, while the application under section 9 was only filed on 1 November 2017. The Court observed that during the period from 2016 to 2017, there were several meetings held between the parties and the Respondent showed intent of paying the amount and therefore no default had occurred at that point of time. The default only occurred when the Respondent denied the payment categorically in 2017. Consequently, the application was not barred by limitation as observed the Supreme Court.

  This Article has been Compiled by Aditya Raj (Associate). 

  You can direct your queries or comments to the author at aditya@factumlegal.com

  Disclaimer-

  The contents of this article should not be construed as legal opinion. This article is             intended to provide a general guide to the subject matter. Specialist advice should be     sought about your specific circumstances. We expressly disclaim any financial or other   responsibility arising due to any action taken by any person on the basis of this article.