Consolidated Construction Consortium Limited vs Hitro Energy Solutions Private Limited

Consolidated Construction Consortium Limited vs Hitro Energy Solutions Private Limited

Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No 2839 of 2020
M/s Consolidated Construction Consortium Limited …Appellant
Versus
M/s Hitro Energy Solutions Private Limited …Respondent
2
J U D G M E N T
Dr Justice Dhananjaya Y Chandrachud, J
This judgement has been divided into the following sections to facilitate analysis:
A The Appeal
B Factual Background
C Submissions of counsel
D Whether the appellant is an operational creditor
D.1 Statutory Provisions
D.2 Legislative History
D.3 Judicial Precedent
D.4 Analysis
E Evidentiary value of respondent’s MOA
F Whether the application under Section 9 is barred by limitation
G Conclusion
PART A
3
A The Appeal
1 The present appeal under Section 62 of the Insolvency and Bankruptcy Code
20161 arises from a judgment and order dated 12 December 2019 of the National
Company Law Appellate Tribunal2 by which it reversed the decision of the National
Company Law Tribunal, Chennai3 dated 6 December 2018.
2 By its judgment and order dated 6 December 2018, the NCLT admitted an
application4 filed by the appellant, Consolidated Construction Consortium Limited5
,
under Section 9 of the IBC for the initiation of the Corporate Insolvency Resolution
Process 6 against the respondent, Hitro Energy Solutions Private Limited7
. While
admitting the application, the NCLT held that the respondent’s Memorandum of
Association8
, without evidence to the contrary, proved that it took over a proprietary
concern, Hitro Energy Solutions 9
, and that the Proprietary Concern did owe the
appellant an outstanding operational debt. Further, the NCLT declared a moratorium
under Section 14 of the IBC and appointed an Interim Resolution Professional10.
 1 “IBC” 2 “NCLAT” 3 “NCLT” 4 CP/708/(IB)/CB/2017 5 “Appellant”/“Operational Creditor” 6 “CIRP” 7 “Respondent”/“Corporate Debtor” 8 “MOA” 9 “Proprietary Concern” 10 “IRP”
PART A
4
3 In appeal 11 , 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; (ii) there is nothing on record to suggest that the respondent
has taken over the Proprietary Concern; and (iii) 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.
4 While issuing notice by its order dated 18 November 2020, this Court stayed
the operation of NCLAT’s judgment and order dated 12 December 2019. The
following issues now arise before this Court in the present appeal:
(i) Whether the appellant is an operational creditor under the IBC even though it
was a ‘purchaser’;
(ii) Whether the respondent took over the debt from the Proprietary Concern; and
(iii) Whether the application under Section 9 of the IBC is barred by limitation.
 11 Company Appeal (AT) No 19 of 2019
PART B
5
B Factual Background
5 The genesis of the appeal arises from a project which was being executed by
the appellant with Chennai Metro Rail Limited12, in the course of which the latter
placed an order for supply of light fittings. In turn, the appellant placed orders with
the Proprietary Concern, which was the supplier of Thorn Lighting India Private
Limited13, through three purchase orders dated 24 June 2013. It was noted in these
purchase orders that the delivery of the light fittings would strictly be in accordance
with the schedule provided by the appellant.
6 The Proprietary Concern requested the appellant for an advance payment of
Rs 50,00,000. CMRL issued a cheque of Rs 50,00,000 in favor of the respondent,
with the condition that the delivery of the light fittings should be in compliance with
the schedule provided by the appellant.
7 On 2 January 2014, CMRL informed the appellant that the project they had
been working on stood terminated. According to the appellant, this information was
communicated to the Proprietary Concern on the same day. However, this has been
denied by the respondent.
8 Thereafter, the Proprietary Concern deposited the cheque issued by CMRL
and withdrew the amount of Rs 50,00,000. Since the project had been terminated,
CMRL informed the appellant that the amount would be deducted from the dues
 12 “CMRL” 13 “TLIPL”
PART B
6
payable to it unless the amount was returned. The appellant paid the amount of Rs
50,00,000 to CMRL and intimated this to the Proprietary Concern and requested
them to make the payment.
9 In the interim, the respondent was incorporated on 28 January 2014, on the
basis of an MOA dated 24 January 2014. Under the MOA, one of the four main
objects of the respondent was to take over the Proprietary Concern. It reads as
follows:
“(A) THE MAIN OBJECTS OF THE COMPANY TO BE
PURSUED BY COMPANY ON ITS INCORPORATION:
[…]
4. To take over the existing Proprietorship firm Viz. M/S. Hitro
Energy Solutions having its registered office at Chennai.”
10 By its letter dated 23 July 2016, the appellant requested the Proprietary
Concern to refund the amount of Rs 50,00,000 since the contract had been
terminated and the amount had been returned by the appellant to CMRL. It noted
that once the amount was released by the Proprietary Concern, it would indemnify
them against any future claim from CMRL. The letter reads as follows:
“This is in reference to the purchase order Nos. KH000115,
KH000116, KH000117, dated 24.06.2013 towards the supply
of light fittings for our CMRL project. The advance amount of
Rs.50.00 Lakhs paid to you was directly released by our
client, the CMRL at our request and the amount has already
been debited to your account However, the contract with
CMRL was terminated by us and it was intimated to you not
to proceed with the supply or materials ordered under the
aforesaid purchase orders. We, therefore, request you to pay 
PART B
7
the advance amount of Rs.50,00,000/- to M/s. Thom Lighting
India Pvt Ltd as agreed by you.
We once again wish to state that the amounts paid to you by
the CMRL have already been recovered from our payments
and therefore, we assure that no liability shall be cast on you
towards the same. Upon release of the aforesaid payment to
M/s. Thom Light/rig Ind/a Pvt Ltd as agreed by you, the CCCL
shall indemnify you against any claim from the CMRL towards
the advances directly paid to you.”
11 In its reply dated 25 July 2016, the Proprietary Concern stated that it would
return the amount directly to CMRL, if it was insisted upon by them. It further noted
that till date it had not received any letter from the appellant informing them that the
contract had been terminated with CMRL, and that it had never agreed to return the
amount. The letter notes:
“This has reference your letter dt.23rd July 2016 wherein you
are asking us to pay the amount of Rs.50,00,000/- which we
had received from Chennai Metro Rail Limited (CMRL), to
M/S.Thorn Lighting India Pvt. Ltd. Since, the amount has
been received by us directly from CMRL, the said amount will
be returned only to CMRL if they claim the same.
We would like to inform you that we have not received any
letter of communication from your organisation till date
mentioning that the contract with CMRL is cancelled and it
has never been agreed at any point of time to give the
amount to M/s.Thron Lighting India Pvt. Ltd.”
12 A joint meeting was held between the appellant, the Proprietary Concern and
TLIPL on 4 August 2016, where the appellant requested that the amount of Rs
50,00,000 be returned to TLIPL. To assuage the concerns of the Proprietary
Concern, that CMRL may also try to recover the amount from them at a later date, 
PART B
8
the representatives of the appellant agreed to provide an indemnity to the
Proprietary Concern for the amount. However, this was refused by the Proprietary
Concern, which instead asked for a bank guarantee of the same amount, which was
refused by the appellant. Finally, the Proprietary Concern noted that the appellant
should obtain a letter from CMRL stating that the advance paid by them to the
Proprietary Concern belongs to the appellant, and will not be claimed by them in the
future. The minutes of the meeting state as follows:
“The following points were discussed during the meeting
• RSK explained the reasons and procedure for the direct
payment from CMRL to vendors of CCCL.
• RSK requested NSR to return the advance paid to Hitro
Energy to Thom Light.
• NSR refused the same since the payment had been
received from CMRL through cheque and can be returned
to CMRL only if CMRL claim the same.
• RSK explained that, CCCL requested CMRL to release
this advance to Hitro and the amount already been
deducted in CCCL payables by CMRL, hence this amount
belongs to CCCL and can be returned.
• NSR refused the same and asked CCCL to get a letter
from CMRL stating that, the advance paid to Hitro
belongs to CCCL and CMRL does not claim the same in
future from Hitro.
• SR asked NSR, that CCCL can provide a Indemnity Bond
to Hitro to return the Advance, and NSR refused and
asked BG For the same amount to return the Advance,
CCCL refused the same.”
PART B
9
13 Thereafter, the appellant obtained a letter dated 27 December 2016 from
CMRL where it noted that it had issued the cheque for Rs 50,00,000 only on the
request of the appellant. The letter reads as follows:
“With reference to your letter under reference above, it is to
confirm that CMRL had issued a cheque of Rs.50,00,000/-
(Rupees fifty lakhs only) bearing no. 991712 dt. 7.11.2013,
based on the request of M/s. Consolidated Construction
Consortium Ltd., to M/s. Hitro Energy Solutions, as a part of
Special Advance to M/s. CCCL under EAS 04, EAS 05 & EAS
06 contracts duly debiting CCCL's account.”
This letter was sent by the appellant to the Proprietary Concern, but no payment
was made.
14 The appellant then sent a letter to the Proprietary Concern on 27 February
2017 and it demanded the return of the amount of Rs 50,00,000, along with interest
calculated at 18 per cent per annum from 4 November 2013, on or before 4 March
2017. In its reply dated 2 March 2017, the Proprietary Concern refused and noted
that they only became aware of the termination of the contract with CMRL by the
appellant’s letter dated 23 July 2016. The light fittings were stated to be lying in their
warehouse since then because they could not be re-sold as they had been made on
customized specifications, leading to a loss. Further, it noted that CMRL’s letter
dated 27 December 2016 did not provide that it will not attempt to recover the
amount from the Proprietary Concern in the future.
15 On 18 July 2017, the appellant sent a Form-3 Demand Notice under Section 8
of the IBC to the respondent, where the amount of the debt is noted as Rs
83,13,973, inclusive of interest calculated at 18 per cent per annum from 7 
PART B
10
November 2013. In its response dated 28 July 2017, the respondent denied that any
debt was owed by them to the appellant. Thereafter, the appellant filed its
application under Section 9 of the IBC read with Rule 6 of the Insolvency and
Bankruptcy (Application to Adjudicating Authority) Rules 201614 on 1 November
2017 along with the supporting affidavits.
16 By its judgment dated 6 December 2018, the NCLT admitted the application
under Section 9 of the IBC, declared a moratorium under Section 14 of the IBC and
appointed an IRP. The operative parts of the order are extracted below:
“11. It has also been noted by this Authority that the
Memorandum of Association being the constitutional
document of the Corporate Debtor is not rebutted by other
documentary evidence. In view of it, the objection raised by
the Counsel for the Corporate Debtor stands rejected.
12. It has been submitted by the Counsel for the Corporate
Debtor that till date, the Proprietorship Firm is paying the
income tax and also carrying on the business which is
contrary to the Memorandum of Association of the Corporate
Debtor viz., M/s. Hitro Energy Soluti9ns Private Limited. It
seems that the Director of the Corporate Debtor viz., N. S.
Rangachari may be making communications on behalf of
Proprietorship Firm for the purpose of dubious transactions or
Tax benefits but as per the Memorandum of Association, the
same has been taken over by the Corporate Debtor of which
there is no doubt at all. Thus, the Memorandum of
Association being the constitutional document of the
Corporate Debtor is an authentic documentary proof that the
Proprietorship Firm has been taken over or converted into
corporate entity.
13. It has been submitted by the Counsel for the Corporate
Debtor that in case the CMRL could have given a certificate
that they would not claim Rs.50 Lakhs from M/s Hitro Energy
Solutions then, the amount could have been paid by the
 14 “2016 Application Rules”
PART B
11
Corporate Debtor to the Operational Creditor, to which the
Counsel for the Operational Creditor has submitted that his
client has always been ready and willing to give indemnity
bond against any claim made by the CMRL, but the Counsel
for Corporate Debtor did not any response with regard to the
security offered.”
17 The order of the NCLT was set aside by the NCLAT on 12 December 2019.
The order notes:
“7. However, there is nothing on the record to suggest that by
any list prepared 'M/s. Hitro Energy Solutions Private Limited'
has taken over 'M/s. Hitro Energy Solutions'…
[…]
9. The 'Purchase Orders', which makes it clear that 'M/s.
Consolidated Construction Consortium Limited' is a
'Purchaser' and do not come within the meaning of
'Operational Creditor' having not supplied any goods nor
given any services to ‘M/s. Hitro Energy Solutions Private
Limited'. In any case, whether 'M/s. Hitro Energy Solutions
Private Limited' or 'M/s. Hitro Energy Solutions' all 'Purchase
Orders' having issued on 24th June, 2013 and advance
cheques have been issued for subsequently such orders,
'M/s. Consolidated Construction Consortium Limited' cannot
move application under Sections, 7 or 9 or the 'I&B Code'.”
The appeal arises from the decision of the NCLAT. 
PART C
12
C Submissions of counsel
18 Mr M P Parthiban, Counsel appearing on behalf of the appellant submitted
that:
(i) The MOA of the respondent states that one of its four main objects is to take
over the Proprietary Concern. Thus, the findings contained in paragraph 7 of
the NCLAT’s judgment, that there is no list noting that the respondent has
taken over the Proprietary Concern, is incorrect;
(ii) The appellant made the payment of Rs 50,00,000 to CMRL, and it thus
becomes due from the respondent to the appellant;
(iii) The appellant is an operational creditor within the framework of the IBC since
the purchase orders for light fittings were in relation to the operational
requirements of the appellant; and
(iv) The application under Section 9 of the IBC is not barred by limitation.
19 Mr K Parameshwar, Counsel appearing on behalf of the respondent
submitted that:
(i) The appellant’s dealings have only been with the Proprietary Concern and not
the respondent. While the respondent’s MOA may have stated its intention to
take over the Proprietary Concern, the respondent changed its intention
through a subsequent Board resolution. Further, the Proprietary Concern
exists till date and is an entity separate from the respondent. Thus, the
respondent cannot be made liable for its debt;
PART D
13
(ii) There is no privity of contract between the appellant and the respondent,
since the appellant’s contract was with the Proprietary Concern and the
payment of the advance to the Proprietary Concern was made by CMRL;
(iii) The appellant is not an operational creditor because:
a. The appellant did not provide any goods or services to the respondent, but
only availed of goods or services from the Proprietary Concern. Hence, the
appellant will not be an operational creditor within the meaning of Section
5(20) of the IBC; and
b. In any case, even if the debt exists, it is in the hands of CMRL, which has
not legally transferred it to the appellant;
(iv) The application is barred by limitation since it was filed on 1 November 2017,
more than three years after the date of default, i.e., 7 November 2013; and
(v) The appellant is seeking to misuse the present proceedings under the IBC for
recovering its dues.
20 The rival submissions will now be considered.
D Whether the appellant is an operational creditor
21 The primary submission of the respondent, which was accepted by the
NCLAT, is that the appellant is not an operational creditor within the ambit of the
IBC, and therefore its application under Section 9 of the IBC was not maintainable. 
PART D
14
In order to assess this claim, we shall have to consider the relevant provisions, rules
and regulations, the legislative history of the IBC and precedents of this Court.
D.1 Statutory Provisions
22 Section 5(20) of the IBC defines “operational creditor” in the following terms:
“(20) “operational creditor” means a person to whom an
operational debt is owed and includes any person to whom
such debt has been legally assigned or transferred;”
Section 5(21) defines the meaning of “operational debt”. Section 5(21), as it stood at
the relevant time, was as follows:
“(21) “operational debt” means a claim in respect of the
provision of goods or services including employment or a
debt in respect of the re-payment 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;”
(emphasis supplied)
An operational debt needs to involve a claim in respect of the provision of goods or
services. The phrase “claim” is defined in Section 3(6) of IBC in the following terms:
“(6) “claim” means—
(a) a right to payment, whether or not such right is reduced to
judgment, fixed, disputed, undisputed, legal, equitable,
secured or unsecured;
(b) right to remedy for breach of contract under any law for
the time being in force, if such breach gives rise to a right to
payment, whether or not such right is reduced to judgment, 
PART D
15
fixed, matured, unmatured, disputed, undisputed, secured or
unsecured;”
23 Section 8 of the IBC explains the steps that the operational creditor needs to
undertake prior to filing a claim of insolvency against the corporate debtor. At the
relevant time, it stood as follows:
“8. Insolvency resolution by operational creditor.—(1) An
operational creditor may, on the occurrence of a default,
deliver a demand notice of unpaid operational debtor copy of
an invoice demanding payment of the amount involved in the
default to the corporate debtor in such form and manner as
may be prescribed.
(2) The corporate debtor shall, within a period of ten days of
the receipt of the demand notice or copy of the invoice
mentioned in sub-section (1) bring to the notice of the
operational creditor—
(a) existence of a dispute, if any, and record of the pendency
of the suit or arbitration proceedings filed before the receipt of
such notice or invoice in relation to such dispute;
(b) the repayment of unpaid operational debt—
(i) by sending an attested copy of the record of electronic
transfer of the unpaid amount from the bank account of the
corporate debtor; or
(ii) by sending an attested copy of record that the operational
creditor has encashed a cheque issued by the corporate
debtor.
Explanation.—For the purposes of this section, a “demand
notice” means a notice served by an operational creditor to
the corporate debtor demanding repayment of the operational
debt in respect of which the default has occurred.”
In accordance with Section 8(1), an operational creditor can send a demand notice
to the corporate debtor when a default occurs, and in the manner which may be 
PART D
16
prescribed. “Default” has been defined under Section 3(12) of the IBC, and it stood
as follows at the relevant time:
“(12) “default” means non-payment of debt when whole or any
part or instalment of the amount of debt has become due and
payable and is not re-paid by the debtor or the corporate
debtor, as the case may be;”
When the corporate debtor receives the demand notice, it has two options available
under Section 8(2) of the IBC: (i) to highlight a pre-existing dispute in relation to the
debt under question; or (ii) to prove that the debt has already been paid.
24 Rule 5 of the 2016 Application Rules provides the manner in which the
demand notice under Section 8(1) has to be delivered. It provides thus:
“5. Demand notice by operational creditor.—(1) An
operational creditor shall deliver to the corporate debtor, the
following documents, namely.-
(a) a demand notice in Form 3; or
(b) a copy of an invoice attached with a notice in Form 4.
(2) The demand notice or the copy of the invoice demanding
payment referred to in sub-section (2) of section 8 of the
Code, may be delivered to the corporate debtor,
(a) at the registered office by hand, registered post or speed
post with acknowledgement due; or
(b) by electronic mail service to a whole time director or
designated partner or key managerial personnel, if any, of the
corporate debtor.
(3) A copy of demand notice or invoice demanding payment
served under this rule by an operational creditor shall also be
filed with an information utility, if any.”
PART D
17
Thus, under sub-Rule (1) of Rule 5, an operational creditor can send the demand
notice under Section 8(1) of the IBC through two methods: (i) a demand notice in
Form 3; or (ii) a copy of an invoice attached with a notice in Form 4. Form 3 requires
the operational creditor to provide the following information in relation to the
operational debt:
“2. Please find particulars of the unpaid operational debt
below:
PARTICULARS OF OPERATIONAL DEBT
1. TOTAL AMOUNT OF DEBT, DETAILS OF
TRANSACTIONS ON ACCOUNT OF WHICH
DEBT FELL DUE, AND THE DATE FROM
WHICH SUCH DEBT FELL DUE
2. AMOUNT CLAIMED TO BE IN DEFAULT
AND THE DATE ON WHICH THE DEFAULT
OCCURRED (ATTACH THE WORKINGS
FOR COMPUTATION OF DEFAULT IN
TABULAR FORM)
3. PARTICULARS OF SECURITY HELD, IF
ANY, THE DATE OF ITS CREATION, ITS
ESTIMATED VALUE AS PER THE
CREDITOR.
ATTACH A COPY OF A CERTIFICATE OF
REGISTRATION OF CHARGE ISSUED BY
THE REGISTRAR OF COMPANIES (IF THE
CORPORATE DEBTOR IS A COMPANY)
4. DETAILS OF RETENTION OF TITLE
ARRANGEMENTS (IF ANY) IN RESPECT
OF GOODS TO WHICH THE OPERATIONAL
DEBT REFERS
5. RECORD OF DEFAULT WITH THE
INFORMATION UTILITY (IF ANY)
6. PROVISION OF LAW, CONTRACT OR
OTHER DOCUMENT UNDER WHICH DEBT
HAS BECOME DUE
7. LIST OF DOCUMENTS ATTACHED TO THIS
APPLICATION IN ORDER TO PROVE THE
EXISTENCE OF OPERATIONAL DEBT AND
THE AMOUNT IN DEFAULT
PART D
18
In contrast, Form 4 provides:
“[Name of operational creditor], hereby provides notice for
repayment of the unpaid amount of INR [insert amount] that is
in default as reflected in the invoice attached to this notice.”
Hence, a demand notice for an operational debt by an operational creditor does not
necessarily need to be accompanied by an invoice, but it may be sent where such
debt arises under a “provision of law, contract or other document” and for which
documents can be attached along with the demand notice.
25 The above conclusion is also supported by the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons) Regulations
201615. In relation to claims by operational creditors, Regulation 7, as it stood at the
relevant time, provided thus:
“7. Claims by operational creditors.
(1) A person claiming to be an operational creditor, other than
workman or employee of the corporate debtor, shall submit
proof of claim to the interim resolution professional in person,
by post or by electronic means in Form B of the Schedule:
Provided that such person may submit supplementary
documents or clarifications in support of the claim before the
constitution of the committee.
(2) The existence of debt due to the operational creditor
under this Regulation may be proved on the basis of-
(a) the records available with an information utility, if any; or
(b) other relevant documents, including -
 15 “CIRP Regulations 2016”
PART D
19
(i) a contract for the supply of goods and services with
corporate debtor;
(ii) an invoice demanding payment for the goods and services
supplied to the corporate debtor;
(iii) an order of a court or tribunal that has adjudicated upon
the non-payment of a debt, if any; or
(iv) financial accounts.”
Under Regulation 7(2), an operational creditor can prove their claim not only through
“an invoice demanding payment for the goods and services supplied to the
corporate debtor” (Regulation 7(2)(ii)) but also through “a contract for the supply of
goods and services with corporate debtor” (Regulation 7(2)(i)).
26 Once the procedures under Section 8 of the IBC are completed by an
operational creditor, it can file an application under Section 9 of the IBC to initiate
the CIRP in relation to the corporate debtor. Section 9 provided as follows, at the
relevant time:
“9. Application for initiation of corporate insolvency
resolution process by operational creditor.—(1) After the
expiry of the period of ten days from the date of delivery of
the notice or invoice demanding payment under sub-section
(1) of Section 8, if the operational creditor does not receive
payment from the corporate debtor or notice of the dispute
under sub-section (2) of Section 8, the operational creditor
may file an application before the Adjudicating Authority for
initiating a corporate insolvency resolution process.
(2) The application under sub-section (1) shall be filed in such
form and manner and accompanied with such fee as may be
prescribed.
(3) The operational creditor shall, along with the application
furnish—
PART D
20
(a) a copy of the invoice demanding payment or demand
notice delivered by the operational creditor to the corporate
debtor;
(b) an affidavit to the effect that there is no notice given by the
corporate debtor relating to a dispute of the unpaid
operational debt;
(c) a copy of the certificate from the financial institutions
maintaining accounts of the operational creditor confirming
that there is no payment of an unpaid operational debt by the
corporate debtor; and
(d) such other information as may be prescribed.
(4) An operational creditor initiating a corporate insolvency
resolution process under this section, may propose a
resolution professional to act as an interim resolution
professional.
(5) The Adjudicating Authority shall, within fourteen days of
the receipt of the application under sub-section (2), by an
order—
(i) admit the application and communicate such decision to
the operational creditor and the corporate debtor if,—
(a) the application made under sub-section (2) is complete;
(b) there is no repayment of the unpaid operational debt;
(c) the invoice or notice for payment to the corporate debtor
has been delivered by the operational creditor;
(d) no notice of dispute has been received by the operational
creditor or there is no record of dispute in the information
utility; and
(e) there is no disciplinary proceeding pending against any
resolution professional proposed under sub-section (4), if any.
(ii) reject the application and communicate such decision to
the operational creditor and the corporate debtor, if—
(a) the application made under sub-section (2) is incomplete;
(b) there has been repayment of the unpaid operational debt;
(c) the creditor has not delivered the invoice or notice for
payment to the corporate debtor;
PART D
21
(d) notice of dispute has been received by the operational
creditor or there is a record of dispute in the information utility;
or
(e) any disciplinary proceeding is pending against any
proposed resolution professional:
Provided that Adjudicating Authority, shall before rejecting an
application under sub-clause (a) of clause (ii) give a notice to
the applicant to rectify the defect in his application within
seven days of the date of receipt of such notice from the
Adjudicating Authority.
(6) The corporate insolvency resolution process shall
commence from the date of admission of the application
under sub-section (5) of this section.”
In accordance with Section 9(1), an operational creditor can file the application
under Section 9 after ten days from the date of delivery of the notice under Section
8, if no payment or notice of an existing dispute is received. Section 9(3)(a) requires
the application to be accompanied by a copy of the invoice demanding payment or
demand notice delivered by the operational creditor to the corporate debtor. This
again highlights that it could be either one of the two, i.e., an invoice or a demand
notice.
27 Rule 6 of the 2016 Application Rules provides that the application under
Section 9 has to be filed along with the details required in Form 5. Within Form 5,
inter alia, the following details in relation to the operational debt are required to be
provided:
“Part-V
PARTICULARS OF OPERATIONAL DEBT
[DOCUMENTS, RECORDS AND EVIDENCE OF
DEFAULT]
PART D
22
1. PARTICULARS OF SECURITY HELD, IF ANY, THE
DATE OF ITS CREATION, ITS ESTIMATED VALUE
AS PER THE CREDITOR. ATTACH A COPY OF A
CERTIFICATE OF REGISTRATION OF CHARGE
ISSUED BY THE REGISTRAR OF COMPANIES (IF
THE CORPORATE DEBTOR IS A COMPANY)
2. DETAILS OF RESERVATION/RETENTION OF TITLE
ARRANGEMENTS (IF ANY) IN RESPECT OF
GOODS TO WHICH THE OPERATIONAL DEBT
REFERS
3. PARTICULARS OF AN ORDER OF A COURT,
TRIBUNAL OR ARBITRAL PANEL ADJUDICATING
ON THE DEFAULT, IF ANY (ATTACH A COPY OF
THE ORDER)
4. RECORD OF DEFAULT WITH THE INFORMATION
UTILITY, IF ANY (ATTACH A COPY OF
SUCH RECORD)
5. DETAILS OF SUCCESSION CERTIFICATE, OR
PROBATE OF A WILL, OR LETTER OF
ADMINISTRATION, OR COURT DECREE (AS MAY
BE APPLICABLE), UNDER THE INDIAN
SUCCESSION ACT, 1925 (10 OF 1925) (ATTACH A
COPY)
6. PROVISION OF LAW, CONTRACT OR OTHER
DOCUMENT UNDER WHICH DEBT HAS BECOME
DUE
7. A STATEMENT OF BANK ACCOUNT WHERE
DEPOSITS ARE MADE OR CREDITS RECEIVED
NORMALLY BY THE OPERATIONAL CREDITOR IN
RESPECT OF THE DEBT OF THE CORPORATE
DEBTOR (ATTACH A COPY)
8. LIST OF DOCUMENTS ATTACHED TO THIS
APPLICATION IN ORDER TO PROVE THE
EXISTENCE OF OPERATIONAL DEBT AND THE
AMOUNT IN DEFAULT
D.2 Legislative History
28 Unlike other foreign jurisdictions, which usually differentiate between secured
and unsecured creditors only, the IBC is unique because it provides for two different
classes of creditors: operational creditors and financial creditors. To understand the 
PART D
23
position of the former within the framework of the IBC, it is important to understand
the distinction between these two classes.
29 The primary source is Volume I of the Report of the Bankruptcy Law Reforms
Committee16. It notes that “[e]nterprises have financial creditors by way of loan and
debt contracts as well as operational creditors such as employees, rental
obligations, utilities payments and trade credit”
17. It provides that a corporate debtor
will have financial and operational liabilities, and explains the difference as follows18:
“Liabilities fall into two broad sets: liabilities based on financial
contracts, and liabilities based on operational contracts.
Financial contracts involve an exchange of funds between the
entity and a counterparty which is a financial firm or
intermediary. This can cover a broad array of types of
liabilities: loan contracts secured by physical assets that can
be centrally registered; loan contracts secured by floating
charge on operational cash flows; loan contracts that are
unsecured; debt securities that are secured by physical
assets, cash flow or are unsecured. Operational contracts
typically involve an exchange of goods and services for
cash. For an enterprise, the latter includes payables for
purchase of raw-materials, other inputs or services,
taxation and statutory liabilities, and wages and benefits
to employees.”
(emphasis supplied)
Further, the Report also notes19:
“Here, the Code differentiates between financial creditors and
operational creditors. Financial creditors are those whose
relationship with the entity is a pure financial contract, such as
 16 “BLRC Report” 17 Pg 22, available at <https://www.ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf> accessed on 13
January 2022
18 Ibid, Pg 54 19 Ibid, Pg 77
PART D
24
a loan or a debt security. Operational creditors are those
whose liability from the entity comes from a transaction
on operations. Thus, the wholesale vendor of spare parts
whose spark plugs are kept in inventory by the car
mechanic and who gets paid only after the spark plugs
are sold is an operational creditor. Similarly, the lessor
that the entity rents out space from is an operational
creditor to whom the entity owes monthly rent on a threeyear lease. The Code also provides for cases where a
creditor has both a solely financial transaction as well as an
operational transaction with the entity. In such a case, the
creditor can be considered a financial creditor to the extent of
the financial debt and an operational creditor to the extent of
the operational debt.”
(emphasis supplied)
30 It is thus clear that operational creditors are those whose debt arises from
operational transactions, i.e., transactions which are undertaken in relation to the
operation of an enterprise. As the examples in the BLRC Report suggest, these
generally include transactions involving goods or services which are considered
necessary for the operational functioning of an entity.
31 The Joint Parliamentary Committee Report on the IBC differentiates between
financial and operational creditors in the following terms20:
“Clause 21 appended with the Bill which states as under:-
“The committee has to be composed of members who
have the capability to assess the commercial viability of
the corporate debtor and who are willing to modify the
terms of the debt contracts in negotiations between the
creditors and the corporate debtor. Operational creditors
 20 Pg 14, available at
<https://www.ibbi.gov.in/uploads/resources/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdf
> accessed on 13 January 2022
PART D
25
are typically not able to decide on matters relating to
commercial viability of the corporate debtor, nor are they
typically willing to take the risk of restructuring their
debts in order to make the corporate debtor a going
concern. Similarly, financial creditors who are also
operational creditors will be given representation on the
committee of creditors only to the extent of their financial
debts. Nevertheless, in order to ensure that the financial
creditors do not treat the operational creditors unfairly, any
resolution plan must ensure that the operational creditors
receive an amount not less than the liquidation value of their
debt (assuming the corporate debtor were to be liquidated).””
(emphasis supplied)
32 This makes it clear that another point of difference between financial and
operational creditors would be in the nature of their role in the Committee of
Creditors21, because it is assumed the operational creditors will be unwilling to take
the risk of restructuring their debts in order to make the corporate debtor a going
concern. Thus, their debt is not seen as a long-term investment in the going concern
status of the corporate debtor, which would incentivize them to restructure it, but
merely as a one-off transaction with the corporate debtor for certain goods or
services.
 21 “CoC”
PART D
26
D.3 Judicial Precedent
33 In Swiss Ribbons (P) Ltd. v. Union of India22 (“Swiss Ribbons”), the
constitutionality of certain provisions of the IBC was challenged, with the focus being
on the difference of rights provided to the financial and operational creditors. After
observing the difference in the methods through which financial creditors and
operational creditors trigger a proceeding under the IBC, the two-judge Bench of the
Court noted that there was an intelligible differentia between financial and
operational creditors. The Court held:
“50. According to us, it is clear that most financial creditors,
particularly banks and financial institutions, are secured
creditors whereas most operational creditors are unsecured,
payments for goods and services as well as payments to
workers not being secured by mortgaged documents and the
like. The distinction between secured and unsecured creditors
is a distinction which has obtained since the earliest of the
Companies Acts both in the United Kingdom and in this
country. Apart from the above, the nature of loan agreements
with financial creditors is different from contracts with
operational creditors for supplying goods and services.
Financial creditors generally lend finance on a term loan
or for working capital that enables the corporate debtor
to either set up and/or operate its business. On the other
hand, contracts with operational creditors are relatable to
supply of goods and services in the operation of
business. Financial contracts generally involve large
sums of money. By way of contrast, operational
contracts have dues whose quantum is generally less. In
the running of a business, operational creditors can be
many as opposed to financial creditors, who lend finance
for the set-up or working of business. Also, financial
creditors have specified repayment schedules, and
defaults entitle financial creditors to recall a loan in
totality. Contracts with operational creditors do not have
any such stipulations. Also, the forum in which dispute
 22 (2019) 4 SCC 17
PART D
27
resolution takes place is completely different. Contracts
with operational creditors can and do have arbitration
clauses where dispute resolution is done privately.
Operational debts also tend to be recurring in nature and
the possibility of genuine disputes in case of operational
debts is much higher when compared to financial debts.
A simple example will suffice. Goods that are supplied
may be substandard. Services that are provided may be
substandard. Goods may not have been supplied at all.
All these qua operational debts are matters to be proved
in arbitration or in the courts of law. On the other hand,
financial debts made to banks and financial institutions
are well documented and defaults made are easily
verifiable.
51. Most importantly, financial creditors are, from the very
beginning, involved with assessing the viability of the
corporate debtor. They can, and therefore do, engage in
restructuring of the loan as well as reorganisation of the
corporate debtor's business when there is financial stress,
which are things operational creditors do not and cannot do.
Thus, preserving the corporate debtor as a going concern,
while ensuring maximum recovery for all creditors being the
objective of the Code, financial creditors are clearly different
from operational creditors and therefore, there is obviously an
intelligible differentia between the two which has a direct
relation to the objects sought to be achieved by the Code.
[…]
75. Since the financial creditors are in the business of
moneylending, banks and financial institutions are best
equipped to assess viability and feasibility of the business of
the corporate debtor. Even at the time of granting loans,
these banks and financial institutions undertake a detailed
market study which includes a techno-economic valuation
report, evaluation of business, financial projection, etc. Since
this detailed study has already been undertaken before
sanctioning a loan, and since financial creditors have trained
employees to assess viability and feasibility, they are in a
good position to evaluate the contents of a resolution plan.
On the other hand, operational creditors, who provide
goods and services, are involved only in recovering
amounts that are paid for such goods and services, and
are typically unable to assess viability and feasibility of 
PART D
28
business. The BLRC Report, already quoted above, makes
this abundantly clear.”
(emphasis supplied)
34 In Pioneer Urban Land and Infrastructure Ltd. v. Union of India 23
(“Pioneer Urban”), a three-judge Bench of this Court had to adjudicate upon a
constitutional challenge to the amendments made to the IBC, through which
allottees of real estate projects had been declared to be financial creditors. In
highlighting the differences between home buyers and operational creditors, the
Court noted that: first, generally operational creditors are suppliers of goods and
services whereas the home buyer advances money to the developer, so that the
debtor is the supplier (of the flat); second, an operational creditor has no interest in
or stake in the corporate debtor, unlike a home buyer who is vitally concerned with
the real estate project; and third, in an operational debt, there is no consideration for
the time value of money since the consideration of the debt is the goods or services
that are either sold or availed of from the operational creditor whereas in real estate
projects, money is raised from the allottee, being raised against consideration for the
time value of money. The Court held:
“42. It is impossible to say that classifying real estate
developers is not founded upon an intelligible differentia
which distinguishes them from other operational creditors, nor
is it possible to say that such classification is palpably
arbitrary having no rational relation to the objects of the Code.
It was vehemently argued by the learned counsel on behalf of
the petitioners that if at all real estate developers were to be
brought within the clutches of the Code, being like operational
 23 (2019) 8 SCC 416
PART D
29
debtors, at best they could have been brought in under this
rubric and not as financial debtors. Here again, what is
unique to real estate developers vis-à-vis operational
debts, is the fact that, in operational debts generally,
when a person supplies goods and services, such
person is the creditor and the person who has to pay for
such goods and services is the debtor. In the case of real
estate developers, the developer who is the supplier of
the flat/apartment is the debtor inasmuch as the home
buyer/allottee funds his own apartment by paying
amounts in advance to the developer for construction of
the building in which his apartment is to be found.
Another vital difference between operational debts and
allottees of real estate projects is that an operational
creditor has no interest in or stake in the corporate
debtor, unlike the case of an allottee of a real estate
project, who is vitally concerned with the financial health
of the corporate debtor, for otherwise, the real estate
project may not be brought to fruition. Also, in such event,
no compensation, nor refund together with interest, which is
the other option, will be recoverable from the corporate
debtor. One other important distinction is that in an
operational debt, there is no consideration for the time
value of money—the consideration of the debt is the
goods or services that are either sold or availed of from
the operational creditor. Payments made in advance for
goods and services are not made to fund manufacture of
such goods or provision of such services. Examples
given of advance payments being made for turnkey
projects and capital goods, where customisation and
uniqueness of such goods are important by reason of
which advance payments are made, are wholly
inapposite as examples vis-à-vis advance payments
made by allottees. In real estate projects, money is raised
from the allottee, being raised against consideration for the
time value of money. Even the total consideration agreed at a
time when the flat/apartment is non-existent or incomplete, is
significantly less than the price the buyer would have to pay
for a ready/complete flat/apartment, and therefore, he gains
the time value of money. Likewise, the developer who
benefits from the amounts disbursed also gains from the time
value of money. The fact that the allottee makes such
payments in instalments which are co-terminus with phases
of completion of the real estate project does not any the less
make such payments as payments involving “exchange” i.e.
advances paid only in order to obtain a flat/apartment. What 
PART D
30
is predominant, insofar as the real estate developer is
concerned, is the fact that such instalment payments are
used as a means of finance qua the real estate project. One
other vital difference with operational debts is the fact
that the documentary evidence for amounts being due
and payable by the real estate developer is there in the
form of the information provided by the real estate
developer compulsorily under RERA. This information,
like the information from information utilities under the
Code, makes it easy for homebuyers/allottees to
approach NCLT under Section 7 of the Code to trigger
the Code on the real estate developer's own information
given on its webpage as to delay in construction, etc. It is
these fundamental differences between the real estate
developer and the supplier of goods and services that
the legislature has focused upon and included real estate
developers as financial debtors. This being the case, it is
clear that there cannot be said to be any infraction of equal
protection of the laws.”
(emphasis supplied)
35 In Innoventive Industries Ltd. v. ICICI Bank24, a two judge Bench of this
Court explained the framework of the IBC in relation to an operational creditor
triggering the CIRP. The Court held:
“29. The scheme of Section 7 stands in contrast with the
scheme under Section 8 where an operational creditor is, on
the occurrence of a default, to first deliver a demand notice of
the unpaid debt to the operational debtor in the manner
provided in Section 8(1) of the Code. Under Section 8(2), the
corporate debtor can, within a period of 10 days of receipt of
the demand notice or copy of the invoice mentioned in subsection (1), bring to the notice of the operational creditor the
existence of a dispute or the record of the pendency of a suit
or arbitration proceedings, which is pre-existing—i.e. before
such notice or invoice was received by the corporate debtor.
The moment there is existence of such a dispute, the
operational creditor gets out of the clutches of the Code.”
 24 (2018) 1 SCC 407
PART D
31
36 In Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.25 (“Mobilox
Innovations”), a two-judge Bench of this Court explained the process for an
operational creditor initiating CIRP in respect of a corporate debtor. The Court held:
“33. The scheme under Sections 8 and 9 of the Code,
appears to be that an operational creditor, as defined, may,
on the occurrence of a default (i.e. on non-payment of a debt,
any part whereof has become due and payable and has not
been repaid), deliver a demand notice of such unpaid
operational debt or deliver the copy of an invoice demanding
payment of such amount to the corporate debtor in the form
set out in Rule 5 of the Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016 read with
Form 3 or 4, as the case may be [Section 8(1)]. Within a
period of 10 days of the receipt of such demand notice or
copy of invoice, the corporate debtor must bring to the notice
of the operational creditor the existence of a dispute and/or
the record of the pendency of a suit or arbitration proceeding
filed before the receipt of such notice or invoice in relation to
such dispute [Section 8(2)(a)]. What is important is that the
existence of the dispute and/or the suit or arbitration
proceeding must be pre-existing i.e. it must exist before the
receipt of the demand notice or invoice, as the case may be.
In case the unpaid operational debt has been repaid, the
corporate debtor shall within a period of the self-same 10
days send an attested copy of the record of the electronic
transfer of the unpaid amount from the bank account of the
corporate debtor or send an attested copy of the record that
the operational creditor has encashed a cheque or otherwise
received payment from the corporate debtor [Section 8(2)(b)].
It is only if, after the expiry of the period of the said 10 days,
the operational creditor does not either receive payment from
the corporate debtor or notice of dispute, that the operational
creditor may trigger the insolvency process by filing an
application before the adjudicating authority under Sections
9(1) and 9(2). This application is to be filed under Rule 6 of
the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016 in Form 5, accompanied with
documents and records that are required under the said form.
 25 (2018) 1 SCC 353
PART D
32
Under Rule 6(2), the applicant is to dispatch by registered
post or speed post, a copy of the application to the registered
office of the corporate debtor. Under Section 9(3), along with
the application, the statutory requirement is to furnish a copy
of the invoice or demand notice, an affidavit to the effect that
there is no notice given by the corporate debtor relating to a
dispute of the unpaid operational debt and a copy of the
certificate from the financial institution maintaining accounts
of the operational creditor confirming that there is no payment
of an unpaid operational debt by the corporate debtor. Apart
from this information, the other information required under
Form 5 is also to be given. Once this is done, the adjudicating
authority may either admit the application or reject it. If the
application made under sub-section (2) is incomplete, the
adjudicating authority, under the proviso to sub-section (5),
may give a notice to the applicant to rectify defects within 7
days of the receipt of the notice from the adjudicating
authority to make the application complete. Once this is done,
and the adjudicating authority finds that either there is no
repayment of the unpaid operational debt after the invoice
[Section 9(5)(i)(b)] or the invoice or notice of payment to the
corporate debtor has been delivered by the operational
creditor [Section 9(5)(i)(c)], or that no notice of dispute has
been received by the operational creditor from the corporate
debtor or that there is no record of such dispute in the
information utility [Section 9(5)(i)(d)], or that there is no
disciplinary proceeding pending against any resolution
professional proposed by the operational creditor [Section
9(5)(i)(e)], it shall admit the application within 14 days of the
receipt of the application, after which the corporate insolvency
resolution process gets triggered. On the other hand, the
adjudicating authority shall, within 14 days of the receipt of an
application by the operational creditor, reject such application
if the application is incomplete and has not been completed
within the period of 7 days granted by the proviso [Section
9(5)(ii)(a)]. It may also reject the application where there has
been repayment of the operational debt [Section 9(5)(ii)(b)],
or the creditor has not delivered the invoice or notice for
payment to the corporate debtor [Section 9(5)(ii)(c)]. It may
also reject the application if the notice of dispute has been
received by the operational creditor or there is a record of
dispute in the information utility [Section 9(5)(ii)(d)]. Section
9(5)(ii)(d) refers to the notice of an existing dispute that has
so been received, as it must be read with Section 8(2)(a).
Also, if any disciplinary proceeding is pending against any 
PART D
33
proposed resolution professional, the application may be
rejected [Section 9(5)(ii)(e)].”
It further noted that when a notice is received by a corporate debtor under Section
8(2), it is enough that a dispute is pending and it is not necessary that a
suit/arbitration also be pending:
“38. It is, thus, clear that so far as an operational creditor is
concerned, a demand notice of an unpaid operational debt or
copy of an invoice demanding payment of the amount
involved must be delivered in the prescribed form. The
corporate debtor is then given a period of 10 days from the
receipt of the demand notice or copy of the invoice to bring to
the notice of the operational creditor the existence of a
dispute, if any. We have also seen the notes on clauses
annexed to the Insolvency and Bankruptcy Bill of 2015, in
which “the existence of a dispute” alone is mentioned. Even
otherwise, the word “and” occurring in Section 8(2)(a) must
be read as “or” keeping in mind the legislative intent and the
fact that an anomalous situation would arise if it is not read as
“or”. If read as “and”, disputes would only stave off the
bankruptcy process if they are already pending in a suit or
arbitration proceedings and not otherwise. This would lead to
great hardship; in that a dispute may arise a few days before
triggering of the insolvency process, in which case, though a
dispute may exist, there is no time to approach either an
Arbitral Tribunal or a court. Further, given the fact that long
limitation periods are allowed, where disputes may arise and
do not reach an Arbitral Tribunal or a court for up to three
years, such persons would be outside the purview of Section
8(2) leading to bankruptcy proceedings commencing against
them. Such an anomaly cannot possibly have been intended
by the legislature nor has it so been intended. We have also
seen that one of the objects of the Code qua operational
debts is to ensure that the amount of such debts, which
is usually smaller than that of financial debts, does not
enable operational creditors to put the corporate debtor
into the insolvency resolution process prematurely or
initiate the process for extraneous considerations. It is 
PART D
34
for this reason that it is enough that a dispute exists
between the parties.”
(emphasis supplied)
This observation of the Court led to the amendment of the IBC through Act 26 of
2018.
37 The final observation of the Court in Mobilox Innovations (supra) has also
been reiterated by another two-judge Bench of this Court in Kay Bouvet Engg. Ltd.
v. Overseas Infrastructure Alliance (India) (P) Ltd.26 (“Kay Bouvet”), where the
Court observed:
“19. It could thus be seen that this Court has held that one of
the objects of IBC qua operational debts is to ensure that the
amount of such debts, which is usually smaller than that of
financial debts, does not enable operational creditors to put
the corporate debtor into the insolvency resolution process
prematurely or initiate the process for extraneous
considerations. It has been held that it is for this reason that it
is enough that a dispute exists between the parties.”
38 The decisions of this Court in Mobilox Innovations (supra) and Kay Bouvet
(supra) highlight its concern that operational creditors may initiate insolvency
proceedings against corporate debtors for miniscule amounts of debt, which in turn
could jeopardize the financial health of the corporate debtor. Indeed, in Swiss
Ribbons (supra), this Court observed that the IBC was not akin to a recovery
legislation for creditors, but is a legislation beneficial for the corporate debtor:
 26 (2021) 10 SCC 483
PART D
35
“28. It can thus be seen that the primary focus of the
legislation is to ensure revival and continuation of the
corporate debtor by protecting the corporate debtor from its
own management and from a corporate death by liquidation.
The Code is thus a beneficial legislation which puts the
corporate debtor back on its feet, not being a mere
recovery legislation for creditors. The interests of the
corporate debtor have, therefore, been bifurcated and
separated from that of its promoters/those who are in
management. Thus, the resolution process is not adversarial
to the corporate debtor but, in fact, protective of its interests.
The moratorium imposed by Section 14 is in the interest of
the corporate debtor itself, thereby preserving the assets of
the corporate debtor during the resolution process. The
timelines within which the resolution process is to take place
again protects the corporate debtor's assets from further
dilution, and also protects all its creditors and workers by
seeing that the resolution process goes through as fast as
possible so that another management can, through its
entrepreneurial skills, resuscitate the corporate debtor to
achieve all these ends.”
(emphasis supplied)
D.4 Analysis
39 In the present case, there are 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 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.
PART D
36
40 There is some factual controversy in relation to whether the appellant
promptly informed the Proprietary Concern of the termination of its project with
CMRL. The appellant alleges that they communicated it on the very same day (2
January 2014), while the respondent alleges that the Proprietary Concern only
became aware of it through the appellant’s letter dated 23 July 2016. For the
purposes of the present appeal, it is unnecessary to resolve this dispute. The
Proprietary Concern has consistently maintained that they would be willing to refund
the sum of Rs 50 lakhs if CMRL approached them directly. Thus, their ostensible
dissatisfaction with the behavior of the appellant plays no part in the debt arising
from the refund.
41 We have to now consider the ‘debt’ in the present appeal. According to the
appellant, it is the advance payment CMRL made on their behalf to the Proprietary
Concern, which was encashed even though the project between CMRL and the
appellant was terminated. On the other hand, the respondent has attempted to urge
that there was no privity of contract between the appellant and the respondent, and
that CMRL had not transferred the debt to the appellant. We reject both these
submissions. It is amply clear from the facts that the debt arises from purchase
orders between the appellant and the Proprietary Concern (which is the underlying
contract), regardless of whether CMRL may have made the payment on behalf of
the appellant. Thus, the ultimate dispute still remains between the appellant and the
Proprietary Concern, and the debt arises from that.
PART D
37
42 It is then that we come to the core of the dispute – while the appellant has
argued that the debt is in the nature of an operational debt which makes them an
operational creditor, the respondent has opposed this submission. The respondent’s
submission, which was accepted by the NCLAT, seeks to narrowly define
operational debt and operational creditors under the IBC to only include those
who supply goods or services to a corporate debtor and exclude those who receive
goods or services from the corporate debtor. For reasons which shall follow, we
reject this argument.
43 First, Section 5(21) defines ‘operational debt’ as a “claim in respect of the
provision of goods or services”. The operative requirement is that the claim must
bear some nexus with a provision of goods or services, without specifying who is to
be the supplier or receiver. Such an interpretation is also supported by the
observations in the BLRC Report, which specifies that operational debt is in relation
to operational requirements of an entity. Second, Section 8(1) of the IBC read with
Rule 5(1) and Form 3 of the 2016 Application Rules makes it abundantly clear that
an operational creditor can issue a notice in relation to an operational debt either
through a demand notice or an invoice. As such, the presence of an invoice (for
having supplied goods or services) is 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. This is made even more clear by Regulation 7(2)(b)(i) and (ii) of the CIRP
Regulations 2016 which provides an operational creditor, seeking to claim an
operational debt in a CIRP, an option between relying on a contract for the supply of 
PART D
38
goods and services with the corporate debtor or an invoice demanding payment for
the goods and services supplied to the corporate debtor. While the latter indicates
that the operational creditor should have supplied goods or services to the corporate
debtor, the former is broad enough to include all forms of contracts for the supply of
goods and services between the operational creditor and corporate debtor, including
ones where the operational creditor may have been the receiver of goods or
services from the corporate debtor. Finally, the judgment of this Court in Pioneer
Urban (supra), in comparing allottees in real estate projects to operational creditors,
has noted that the latter do not receive any time value for their money as
consideration but only provide it in exchange for goods or services. Indeed, the
decision notes that “[e]xamples given of advance payments being made for turnkey
projects and capital goods, where customisation and uniqueness of such goods are
important by reason of which advance payments are made, are wholly inapposite as
examples vis-à-vis advance payments made by allottees”. 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.
44 In Phoenix ARC (P) Ltd. v. Spade Financial Services Ltd.27, a three-judge
Bench of this Court purposively interpreted Section 21(2) of the IBC in order to
understand who should be excluded from the CoC due to their being a “related
party”. The Court held:
 27 (2021) 3 SCC 475
PART D
39
“99. Accepting the submission of Mr Viswanathan would allow
the statutory provision to be defeated by a related party of a
corporate debtor creating commercial contrivances which
have the effect of denuding its status as a related party, by
the time that the CIRP is initiated. The true test for
determining whether the exclusion in the first proviso to
Section 21(2) applies must be formulated in a manner which
would advance the object and purpose of the statute and not
lead to its provisions being defeated by disingenuous
strategies.
[…]
104. Hence, while the default rule under the first proviso to
Section 21(2) is that only those financial creditors that are
related parties in praesenti would be debarred from the CoC,
those related party financial creditors that cease to be related
parties in order to circumvent the exclusion under the first
proviso to Section 21(2), should also be considered as being
covered by the exclusion thereunder. Mr Kaul has argued,
correctly in our opinion, that if this interpretation is not given
to the first proviso of Section 21(2), then a related party
financial creditor can devise a mechanism to remove its label
of a “related party” before the corporate debtor undergoes
CIRP, so as to be able to enter the CoC and influence its
decision making at the cost of other financial creditors.”
Thus, the Court struck a balance between the text of the statute and the purpose
which it sought to achieve by excluding those related party financial creditors who
ceased to be related parties only in order to circumvent the exclusion under the first
proviso to Section 21(2).
45 Similarly, in the present case, the phrase “in respect of” in Section 5(21) has
to be interpreted in a broad and purposive manner in order to include all those who
provide or receive operational services from the corporate debtor, which ultimately
lead to an operational debt. In the present case, the appellant clearly sought an
operational service from the Proprietary Concern when it contracted with them for
PART E
40
the supply of light fittings. Further, when the contract was terminated but the
Proprietary Concern nonetheless encashed the cheque for advance payment, it
gave rise to an operational debt in favor of the appellant, which now remains unpaid.
Hence, the appellant is an operational creditor under Section 5(20) of the IBC.
46 In doing so, we are cognizant of the observations of this Court in judgments
such as Swiss Ribbons (supra), that IBC proceedings should not become recovery
proceedings. However, in the present case, the dispute is not in relation to the
quality of the services provided by the Proprietary Concern but is entirely about the
repayment of the advance amount paid to them, upon the cancellation of the
underlying project.
E Evidentiary value of respondent’s MOA
47 Having established that the appellant is an operational creditor, we must now
analyze whether the debt owed to the appellant can actually be realized from the
respondent. In the present case, it is uncontested that the appellant entered into a
contract with the Proprietary Concern and continued communications with them till
the very end, finally sending its notice under Section 8(1) of the IBC to the
respondent.
48 The dispute revolves around the MOA of the respondent, dated 24 January
2014, which states:
PART E
41
“(A) THE MAIN OBJECTS OF THE COMPANY TO BE
PURSUED BY COMPANY ON ITS INCORPORATION:
[…]
4. To take over the existing Proprietorship firm Viz. M/S. Hitro
Energy Solutions having its registered office at Chennai.”
The NCLT understood this to be undeniable proof that the respondent had taken
over the business and liabilities of the Proprietary Concern, while the NCLAT took a
different position.
49 We must first consider the relevant statutory provisions. Section 4 of the
Companies Act 2013 28 defines an MOA. Section 4(1) provides the relevant
information that an MOA shall provide, which includes, in sub-Clause (c), that it
should provide “the objects for which the company is proposed to be incorporated
and any matter considered necessary in furtherance thereof”.
50 Section 10(1) of CA 2013 elucidates the legal effect of an MOA in the
following terms:
“10. Effect of memorandum and articles.—(1) Subject to
the provisions of this Act, the memorandum and articles shall,
when registered, bind the company and the members thereof
to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants
on its and his part to observe all the provisions of the
memorandum and of the articles.”
 28 “CA 2013”
PART E
42
51 Further, Section 13 provides the requirements for the alteration of an MOA.
The relevant parts of Section 13 are as follows:
“13. Alteration of memorandum.—(1) Save as provided in
Section 61, a company may, by a special resolution and after
complying with the procedure specified in this section, alter
the provisions of its memorandum.
[…]
(6) Save as provided in Section 64, a company shall, in
relation to any alteration of its memorandum, file with the
Registrar—
(a) the special resolution passed by the company under subsection (1);
(b) the approval of the Central Government under sub-section
(2), if the alteration involves any change in the name of the
company.
[…]
(9) The Registrar shall register any alteration of the
memorandum with respect to the objects of the company and
certify the registration within a period of thirty days from the
date of filing of the special resolution in accordance with
clause (a) of sub-section (6) of this section.
(10) No alteration made under this section shall have any
effect until it has been registered in accordance with the
provisions of this section.
[…]”
Thus, for the alteration of the MOA of a company in relation to its objects, a Special
Resolution has to be first passed under Section 13(1). It then has to be filed with the
Registrar in accordance with Section 13(6)(a). Further, under Section 13(9), when
the alteration is made to the objects in the MOA, the Registrar shall register it and
certify it within a period of thirty days from the filing of the Special Resolution in 
PART E
43
accordance with Section 13(6)(a). Finally, Section 13(10) provides that no alteration
made under the Section shall have effect unless it is registered in accordance with
the provisions of the Section.
52 A company’s MOA is its charter and outlines the purpose for which the
company has been created. Some of those purposes/objects have to then be placed
in the MOA, in accordance with Section 4(1)(c) of the CA 2013. In the 19th edition of
A Ramaiya’s Guide to the Companies Act, it has been stated29:
“[s 4.2.3] Objects for which the company is proposed to be
incorporated and any matter considered necessary for the
furtherance of its objectives
[…]
It is pertinent to note that section 4(1)(c) speaks about ‘the
objects for which the company is proposed to be
incorporated’. This implies that the company contemplates to
pursue its objects either immediately after incorporation or
within a reasonable period of time. It is the duty of the
registrar to verify whether the objects included in the draft
memorandum are indeed the ones which the company
proposes to pursue upon incorporation. He should satisfy
himself on this score by verifying the documents/ information
provided by the company.”
The object clause in an MOA is considered to be representative of the purpose of a
company and it is expected that the company will fulfill/attempt to fulfill the objects it
has laid out in its MOA.
53 In the present case, the MOA of the respondent unequivocally states that one
of its main objects is to take over the Proprietary Concern. However, the respondent
 29 (LexisNexis, 2020)
PART E
44
has produced a resolution dated 1 September 2014 passed by its Board of
Directors, purportedly resolving to not take over the Proprietary Concern. The
resolution states:
“CERTIFIED TRUE COPY OF THE RESOLUTION PASSED
AT THE MEETING OF BOARD OF DIRECTORS HELD AT
10.00 AM ON 1st SEPTEMBER 2014 AT THE REGISTERED
OFFICE OF THE COMPANY AT CHENNAI.
"RESOLVED THAT the company do hereby decided not to
take over the Proprietorship concern M/S.HITRO ENERGY
SOLUTIONS as envisaged in clause 4 of main objects of the
Memorandum of Associations of the Company."”
In support of the resolution, the respondent has also produced a certification from
the banker of the Proprietary Concern, Indian Bank, Mylapore Branch, on 10 April
2018 and from the Chartered Accountants of the Proprietary Concern, K R
Sarangapani and Co, on 27 April 2018.
54 Admittedly, there was no reference to the resolution in the counter-statement
dated 18 January 2018 and additional counter-statement dated 9 March 2018 filed
by the respondent before the NCLT. However, in their appeal filed before the
NCLAT, the respondent states that the resolution was, in fact, brought to the notice
of the NCLT:
“(xii). It is submitted that a Board resolution dt 01.09.2014 of
M/s. Hitro Energy Solutions Pvt Ltd coupled with the Auditor
Certificate dated 01.09.2014 was also placed on record and
brought to the attention and Notice of the Learned NCLT
Tribunal, Chennai in which it was resolved that clause 4 of the
Memorandum of Association of the M/s. Hitro Energy
Solutions Pvt Ltd i.e to take over the existing proprietorship
concern i.e M/s. Hitro Energy Solutions will not be given effect 
PART E
45
to and as such the Proprietorship concern namely M/s. Hitro
Energy Solutions will continue. Thus M/s. Hitro Energy
Solutions is continuing its business as a proprietary concern.”
The NCLT in its judgment dated 6 December 2018 made no mention of this
resolution or the auditor’s certificate. The conduct of the respondent in bringing up
this resolution for the first time before the NCLAT would lead to an adverse
inference against them for having suppressed this document earlier, if at all it was in
existence.
55 In any case, Section 13 of CA 2013 provides for the procedure which has to
be followed when the MOA is to be amended. In cases where the object clause is
amended, it requires the Registrar to register the Special Resolution filed by the
company. However, the respondent has provided no proof that: (i) the purported
resolution dated 1 September 2014 was a Special Resolution; (ii) it was filed before
the Registrar; and (iii) that the Registrar ultimately did register it. Thus, in terms of
Section 13(10) of CA 2013, the purported amendment to the MOA would not have
any legal effect.
56 Consequently, the MOA of the respondent still stands and the presumption
will continue to be in favor of the appellant. Thus, it can be concluded that the
respondent took over the Proprietary Concern and was liable to re-pay the debt to
the appellant. Hence, the application under Section 9 of the IBC was maintainable.
PART F
46
F Whether the application under Section 9 is barred by limitation
57 The respondent urged that the application under Section 9 is barred by
limitation. The respondent has argued that the date of default mentioned by the
appellant is 7 November 2013, when the cheque was issued by CMRL to the
Proprietary Concern. As such, the submission is that the limitation of three years
under Article 137 of the Limitation Act 196330 would expire on 7 November 2016,
while the application under Section 9 was only filed on 1 November 2017.
58 In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates31
(“B.K. Educational Services”), a two-judge Bench of this Court held that the
Limitation Act would apply to applications filed under Sections 7 and 9 of the IBC.
The Court held:
“42. It is thus clear that since the Limitation Act is applicable
to applications filed under Sections 7 and 9 of the Code from
the inception of the Code, Article 137 of the Limitation Act
gets attracted. “The right to sue”, therefore, accrues when a
default occurs. If the default has occurred over three years
prior to the date of filing of the application, the application
would be barred under Article 137 of the Limitation Act, save
and except in those cases where, in the facts of the case,
Section 5 of the Limitation Act may be applied to condone the
delay in filing such application.”
59 The respondent’s submission that limitation commences from 7 November
2013 has to be rejected. In its application under Section 9, the appellant has
mentioned this as the date on which the debt became due. However, as noted in
 30 “Limitation Act” 31 (2019) 11 SCC 633
PART F
47
B.K. Educational Services (supra), limitation does not commence when the debt
becomes due but only when a 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.
60 In the present case, CMRL issued the cheque of Rs 50,00,000 to the
Proprietary Concern on 7 November 2013. However, at that time, it was issued as
an advance payment for the purchase order of the appellant. It was only on 2
January 2014 that CMRL terminated its project with the appellant, and it was after
this that the Proprietary Concern encashed the cheque. Subsequently,
correspondence was exchanged between the appellant and the Proprietary Concern
in July 2016 in relation to the re-payment of the amount. Thereafter, a joint meeting
was also held on 4 August 2016. Till this point in time, both the parties were in
negotiation in relation to the re-payment and the minutes of meeting show that the
Proprietary Concern was willing to make the re-payment if CMRL issued a letter
stating that they will not pursue a claim in the future or if the appellant provided a
bank guarantee for the amount. 
PART G
48
61 A final letter was addressed by the appellant to the Proprietary Concern on 27
February 2017, demanding the payment on or before 4 March 2017. The Proprietary
Concern replied to this letter on 2 March 2017, finally refusing to make re-payment
to the appellant. Consequently, the application under Section 9 will not be barred by
limitation.
G Conclusion
62 Therefore, we answer the three issues formulated earlier in the following
terms:
(i) The appellant is an operational creditor under the IBC, since an ‘operational
debt’ will include a debt arising from a contract in relation to the supply of
goods or services from the corporate debtor;
(ii) The respondent will be considered to have taken over the Proprietary
Concern in accordance with its MOA; and
(iii) The application under Section 9 of the IBC is not barred by limitation.
63 The appeal is allowed by setting aside the impugned judgment and order of
the NCLAT dated 12 December 2019. Since the CIRP in respect of the respondent
is ongoing due to this Court’s order dated 18 November 2020, no further directions
are required. 
PART G
49
64 Pending application(s), if any, stand disposed of.

 ……….….....................................................J.
[Dr Dhananjaya Y Chandrachud]
.…..….….....................................................J.
 [Surya Kant]
.…..….….....................................................J.
 [Vikram Nath]
New Delhi;
February 04, 2022
 

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

Comments

Popular posts from this blog

100 Questions on Indian Constitution for UPSC 2020 Pre Exam

भारतीय संविधान से संबंधित 100 महत्वपूर्ण प्रश्न उतर

संविधान की प्रमुख विशेषताओं का उल्लेख | Characteristics of the Constitution of India