The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated November 10, 2022 in the matter of Chipsan Aviation Private Limited v. Punj Lloyd Aviation Limited [Company Appeal (AT) (Ins) No. 261 of 2022] held that an advance paid towards availing of service falls within the definition of operational debt in terms of Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), even if there was no privity of contract between the parties.

Facts

Chipsan Aviation Private Limited (“Appellant”) was engaged in business with Punj Lloyd Aviation Limited (“Corporate Debtor/Respondent”) for charter services of aeroplanes and helicopter, hired on long term basis from non-scheduled operators/ owners from the Corporate Debtor. On receiving the assurance for delivery of services from the Corporate Debtor, the Appellant made an advance payment of INR 60 Lakhs (“Advance”) on March 28, 2016.

The concerned aviation related services were not provided by the Corporate Debtor nor was the Advance refunded by the Corporate Debtor. However, the Advance was reflected in the balance sheets of the Corporate Debtor for the financial years 2015-16, 2016-17 and 2017-18 under the head current liabilities. In view of the aforesaid, the Appellant addressed a written correspondence to the Corporate Debtor on November 8, 2017, demanding refund of the Advance at the earliest.

On March 26, 2019, the Appellant filed a complaint against the Corporate Debtor with the Registrar of Companies Delhi and Haryana in respect of the Advance, thereby seeking appropriate action against the director, agents and officials of the Corporate Debtor.

Subsequently, on September 19, 2019, the Appellant issued a Demand Notice upon the Corporate Debtor under Section 8 (Insolvency resolution by operational creditor) of the IBC, which was delivered to the Corporate Debtor on September 21, 2019. Thereafter, the Appellant filed an application against the Corporate Debtor before the Hon’ble National Company Law Tribunal, New Delhi (“NCLT”) under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC (“Application”), thereby demanding an amount of INR 97,40,055/-, inclusive of the interest being claimed on the Advance.

Subsequently, the Corporate Debtor filed a reply, contending that there was no privity of contract between the Appellant and the Corporate Debtor since the contract in question was between the Appellant and M/s Buildarch Aviation and that there was no operational debt in existence in terms of Section 5(21) of the IBC. It was further contended that the Application was barred by limitation since it was filed after expiry of 3 years from the date of making the Advance. In view of the aforesaid submissions made by both the parties, the NCLT dismissed the Application holding that advance payment made by operational creditor to corporate debtor does not fall within the purview of operational debt.

Aggrieved by the NCLT order dated January 6, 2022 (“Impugned Order”), the Appellant filed the present appeal before the NCLAT (“Appeal”).

Whether an advance amount paid by the operational creditor to the corporate debtor, towards goods and/or service which has not been availed and wherein there was no privity of contract between them, amounts to operational debt under Section 5(21) of the IBC.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the Advance was paid by the Appellant towards obtaining goods and services, and therefore it falls within the purview of operational debt in terms of Section 5(21) of the IBC. It further submitted that in the balance sheets of the Corporate Debtor, the Advance reflects as “advance received from customs”, which is an acknowledgement of the Advance.

The Appellant relied on the judgment of the Hon’ble Supreme Court in the matter of Construction Consortium Limited v. Hitro Energy Solutions Private Limited [(2022) SCC OnLine SC 142] (“Construction Consortium Judgment”) whereby it has been held that advance payment for goods and services is an operational debt.

Contentions raised by the Respondent:

The Respondent submitted that there is no evidence on record to indicate that there is any contract between the Appellant and Respondent. Hence, it was contended that there was no privity of contract between them. The Respondent further submitted that the Application was barred by limitation.

Observations of the NCLAT

NCLAT observed that basis the materials made available on record, there is no contract between the Appellant and the Corporate Debtor. However, it is evident that the Advance was made on March 28, 2016, which is reflected in the balance sheets of the Corporate Debtor from the financial year 2015-16 onwards. It was further observed that there have been several correspondences and various requests from the Appellant to the Corporate Debtor with regard to goods and services. However, neither goods and services could be provided, nor any agreement could be entered between the Appellant and the Corporate Debtor.

NCLAT also analyzed the definition of operational debt under Section 5(21) of the IBC which defines it as a claim in respect of the provision of goods and services. The NCLAT noted that the expression “goods and services” are preceded with the words “in respect of”. Relying upon the Construction Consortium Judgment wherein it was held that advance payment is covered within the definition of operational debt in the IBC, the NCLAT observed that a wide interpretation to the words “in respect of” in the definition of operational debt as stipulated under Section 5(21) of the IBC was adopted.

In view of the above-stated observations, the NCLAT arrived at a conclusion that in the present case, the Advance amounts to operational debt and that the NCLT committed an error in dismissing the Application.

However, as regards the issue of limitation, the NCLAT observed that the NCLT has not dealt with the issue in the Impugned Order.

Decision of the NCLAT

The NCLAT directed the revival of proceeding before the NCLT under Section 9 of IBC and the matter be decided at an early date after hearing both parties afresh. The NCLAT further noted that it shall always be open for the parties to enter into settlement in accordance with law.

VA View:

The NCLAT has provided a much-needed clarity which will help the adjudicating authorities across the country to adjudicate such cases wherein there was no privity of contract between the operational creditor and the corporate debtor and/or wherein the operational creditor had paid an advance amount, however the goods or services in question were actually not availed.

Further, in majority of the cases pertaining to operational debts, it is often the operational creditor who supplies goods or services and corporate debtor who avails of those goods or services but fails to pay for the same. However, notably, in this case, the NCLAT has pronounced this judgment in a factual scenario wherein the operational creditor had made an advance payment intending to avail certain goods and services from the corporate debtor.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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