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NCLAT Holds Advance Paid Towards Service as ‘Operational Debt’ under IBC

By - King Stubb & Kasiva on January 2, 2023

The National Company Law Appellate Tribunal (NCLAT) in the recent judgment of Chipsan Aviation Private Limited v. Punj Lloyd Aviation Limited[1] held that even if there is no privity of contract between the Parties to a particular contract, the advance paid for service falls under the definition of operational debt.

The facts of the case involve the Appellant’s business with the Respondent for charter services of airplanes and helicopters, that were hired on a long-term basis from non-scheduled operators/ owners. The Operational Creditor paid an advance amount of Rs. 60 lakhs to the Corporate Debtor for these services. However, the Corporate Debtor did not provide the services and neither provided the refund of the advance amount. After around 3 years, the Operational Creditor issued a Demand Notice under Section 8 of the Insolvency and Bankruptcy Code (IBC)[2] for the refund of the advance amount. Despite that, no refund was initiated, and hence, the Creditor filed a petition under Section 9 of IBC to seek a Corporate Insolvency Resolution Process. The Respondent contended that there was no privity of contract between the parties and hence, no Operational Debt as per Section 5(21) of IBC. The Adjudicating Authority rejected the Section 9 Petition, thus the present appeal.

Analyzing the Decision of NCLAT

The Supreme Court’s judgment in Construction Consortium Limited v. Hitro Energy Solutions Pvt. Ltd.[3] observed that the term ‘in respect of’ in Section 5(21) is to be interpreted in a broad manner that fulfills the purpose of the clause. The advance payment for goods and services was held to be Operational Debt.

Relying on this judgment, the NCLAT Bench held that though there was no privity of contract between the parties for aviation services, as evident from the materials on record, the advance payment of Rs. 60 lakhs is reflected by the Bank transaction and is an Operational Debt. The same transaction is evident from the Balance Sheets of the Corporate Debtor. Therefore, they held the rejection of the Section 9 petition as erroneous and revived the same.

From this decision and the previous judgment of the Supreme Court, it is evident that Section 5(21) of IBC has a broad interpretation. Under this section, an Operational Debt is a claim in respect of the provision of goods or services and does not explicitly have to specify the supplier or the receiver.

[1]Chipset Aviation Private Limited v. Punj Lloyd Aviation Limited, Company Appeal (AT) (Insolvency) No. 261 of 2022.

[2] Section 8, Insolvency and Bankruptcy Code, 2016.

[3]Construction Consortium Limited v. Hitro Energy Solutions Pvt. Ltd., (2022) SCC OnLine SC 142.

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