News UpdatesPerson Claiming To Be An Operational Creditor Should Demonstrate Their Claim Can Be Treated As Operational Debt Under The IBC: NCLT Lydia Suzanne Thomas27 March 2021 6:58 AMShare This – xThe Kochi Bench of the National Company Law Tribunal has underscored the importance of examining the nature of debt involved in a transaction before a Corporate Insolvency Resolution Proceeding (CIRP) is instituted upon an application to the effect. Judicial Member Ashok Kumar Borah iterated the following prerequisites for the institution of a CIRP under the Insolvency and Bankruptcy Code (IBC), First, the applicant must demonstrate a claim as defined in Section 3(6) Second, the claim must be capable of being classed as a debt in terms of the IBC, and Third, the debt must arise out of a transaction for goods and services. The Tribunal also made some crucial observations on the need for privity of contract between person claiming to be an operational creditor and the debtor for the former to institute a CIRP against the latter. The Tribunal’s holding came after a concern, Kripa Cashew Exports (Kripa Exports) applied under Section 9 of the IBC to the NCLT seeking the institution of the CIRP against Royals International Trade and Allied Products (Royals). Kripa exports asserted that its sister concern Thankam Cashew Exports (Thankam) had entered a contract with Royals for the supply of raw cashew and that Royals failed to supply cashew on the terms agreed-upon. Accordingly, Royals issued a cheque to Thankam for Rs. 1,16,96,603 in consideration of the cashew that had been short supplied, but the cheque was returned for insufficiency of funds. Explaining its role in the transactions between Thankam and Royals, Kripa Exports informed the Tribunal that it had paid an amount f Rs 1,15,00,000 to Royals when the contract was initially drawn up, because Thankam did not have the necessary funds for the transaction at then. Before the Tribunal, Royals through its counsel Advocates Nebil Nizar and Arun Babu, vehemently contended that Kripa Exports was not party to its contract with Thankam, viz. there was no privity of contract between Kripa Exports and Royals. It was also pointed out that the cheque that had been dishonoured was issued in Thankam’s name, rather than in the name of Kripa Exports. Kripa Exports’ counsel, Advocate Johnson Gomez, however, pointed out that Royals had accepted the payment Kripa Exports made at Thankam’s behest and that, admittedly, the cheque was issued towards the short-supplied quantity of cashew. What the Tribunal ruled Finding from facts, that there was an operational debt which had not been paid, as defined under the IBC, the Tribunal concluded that the debt as between Kripa Exports and Royals was not an operational debt. Since there was no exchange of goods and services between Royals (the corporate debtor) and Kripa Exports (the operational creditor), the debt between them could not be termed an operational debt in terms of the IBC. “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”, the Court stated. Apart from this, Kripa Exports was not party to the main contract, which was one for the supply of goods and services, the Tribunal ruled in effect. “there is no privity of contract between the Operational Creditor and the Corporate Debtor. A stranger to a contract cannot come before a court of Law as held in the matter Dunlop Pneumatic[supra] and that the Applicant Operational Creditor does not come under the definition of Operational Creditor as defined under Section 5(20) of the I&B Code,2016.” After an examination of the steps required to institute a CIRP as declared by the Supreme Court in Mobilox Innovations Pvt. Ltd. Versus Kirusa Software Private Limited; 2018 1 SCC 353, the Tribunal deemed that the case before it was not fit for the institution of a CIRP.The law in Mobilox requires an examination of whether an operational debt was in existence, whether the debt due and payable remained unpaid and whether there was a ‘dispute, an arbitration proceeding or a suit pending between the parties’ prior to commencing CIRP under Section 9 of the IBC. Finding that none of these essentials were available for admission of the Application, the application for the institution of CIRP was dismissed.Click here to download the orderTagsNCLT Kochi NCLT The Insolvency and Bankruptcy Code corporate insolvency resolution process Next Story read more