# M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LIMITED v. M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED

- **Citation:** [2022] 2 S.C.R. 212
- **Court:** Supreme Court of India
- **Decided:** 2022-02-04
- **Case number:** Civil Appeal No. 2839 of 2020
- **Bench:** Dr. Dhananjaya Y Chandrachud, Surya Kant, Vikram Nath
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-consolidated-construction-consortium-limited-v-m-s-hitro-energy-solutions-35968
- **Pages:** 42

## Headnote

Insolvency and Bankruptcy Code, 2016: ss.5(20), 5(21), 8(1)
- Operational creditor - Meaning of - Appellant was engaged by
CMRL for a project - For the said project, appellant entered into a
contract for supply of light fittings with a Proprietary Concern (P.C.)
- CMRL, on appellant's behalf, paid a sum of Rs 50 lakhs to P.C. as
an advance - However, CMRL terminated its project with the
appellant - The communication of termination was given to P.C.,
however P.C. encashed the cheque for Rs 50 lakhs - Appellant
paid the sum of Rs 50 lakhs to CMRL and requested P.C. to make
the payment - Meanwhile, respondent was incorporated and it took
over P.C. - Appellant sent demand notice under s.8 of the IBC to
the respondent - Respondent denied that any debt was owed by
them to the appellant - Appellant filed application u/s.9 of IBC r/w
r.6 IBC Rules 2016 which was admitted by NCLT and Interim
Resolution professional appointed - NCLAT set aside the NCLT's
decision and dismissed the application of appellant - On appeal,
held: Operational creditors are those whose debt arises from
operational transactions i.e transactions involving goods or services
which are considered necessary for the operational functioning of
an entity - s.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 -
s.8(1) of the IBC r/w r.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 - The presence of an invoice is not a
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sine qua non, since a demand notice can also be issued on the
basis of other documents which prove the existence of the debt - 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 - Appellant had sought an operational service
from P.C. when it contracted with them for the supply of light fittings
- Enchashment of cheque by P.C., even though the contract was
terminated, gave rise to an operational debt in favor of the appellant
- Hence, the appellant is an operational creditor under s.5(20) of
the IBC.
Companies Act, 2013: Memorandum of Association (MOA)
- Evidentiary value of - A company's MOA is its charter and
outlines the purpose for which the company has been created - In
the instant case, the MOA of the respondent unequivocally states
that one of its main objects is to take over a Proprietary Concern
(P.C.) - However, the respondent has produced a resolution
purportedly to not take over P.C. - s.13 of Companies Act, 2013
provides the procedure for amendment of MOA - In case of
amending an object clause, it requires the Registrar to register
the Special Resolution filed by the company - However, respondent
provided no proof for the above amendment - MOA of the
respondent still stands.
Limitation Act, 1963: Maintainability of IBC application -
Limitation does not commence when the debt becomes due but only
when a default occurs - Default is defined under s.3(12) of the
IBC as the non-payment of the debt by the corporate debtor when
it has become due - CMRL issued a cheque of Rs 50 lacs to a
Proprietary Concern (P.C.) on 7 November 2013 as an advance
payment for the purchase - After termination of contract,
correspondence was exchanged between the appellant and P.C. -
Final letter demanding payment from P.C. was addressed on 27
February 2017 which was refused by appellant on 2 March 2017
- On 1 November 2017, appellant filed an application u/s.9 of
IBC which is within three years from default - Hence, application
u/s.9 of IBC is not barred by limitation - Insolvency and
Bankruptcy Code, 2016 - s.9.
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD.
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SUPREME COURT REPORTS
[2022] 2 S.C.R.
[2022] 2 S.C.R. 212
212
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM
LIMITED
v.
M/S HITRO ENERGY SOLUTIONS PRIVATE LIMITED
(Civil Appeal No. 2839 of 2020)
FEBRUARY 04, 2022
[DR. DHANANJAYA Y CHANDRACHUD, SURYA KANT
AND VIKRAM NATH, JJ.]
Insolvency and Bankruptcy Code, 2016: ss.5(20), 5(21), 8(1)
- Operational creditor - Meaning of - Appellant was engaged by
CMRL for a project - For the said project, appellant entered into a
contract for supply of light fittings with a Proprietary Concern (P.C.)
- CMRL, on appellant's behalf, paid a sum of Rs 50 lakhs to P.C. as
an advance - However, CMRL terminated its project with the
appellant - The communication of termination was given to P.C.,
however P.C. encashed the cheque for Rs 50 lakhs - Appellant
paid the sum of Rs 50 lakhs to CMRL and requested P.C. to make
the payment - Meanwhile, respondent was incorporated and it took
over P.C. - Appellant sent demand notice under s.8 of the IBC to
the respondent - Respondent denied that any debt was owed by
them to the appellant - Appellant filed application u/s.9 of IBC r/w
r.6 IBC Rules 2016 which was admitted by NCLT and Interim
Resolution professional appointed - NCLAT set aside the NCLT's
decision and dismissed the application of appellant - On appeal,
held: Operational creditors are those whose debt arises from
operational transactions i.e transactions involving goods or services
which are considered necessary for the operational functioning of
an entity - s.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 -
s.8(1) of the IBC r/w r.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 - The presence of an invoice is not a
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sine qua non, since a demand notice can also be issued on the
basis of other documents which prove the existence of the debt - 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 - Appellant had sought an operational service
from P.C. when it contracted with them for the supply of light fittings
- Enchashment of cheque by P.C., even though the contract was
terminated, gave rise to an operational debt in favor of the appellant
- Hence, the appellant is an operational creditor under s.5(20) of
the IBC.
Companies Act, 2013: Memorandum of Association (MOA)
- Evidentiary value of - A company's MOA is its charter and
outlines the purpose for which the company has been created - In
the instant case, the MOA of the respondent unequivocally states
that one of its main objects is to take over a Proprietary Concern
(P.C.) - However, the respondent has produced a resolution
purportedly to not take over P.C. - s.13 of Companies Act, 2013
provides the procedure for amendment of MOA - In case of
amending an object clause, it requires the Registrar to register
the Special Resolution filed by the company - However, respondent
provided no proof for the above amendment - MOA of the
respondent still stands.
Limitation Act, 1963: Maintainability of IBC application -
Limitation does not commence when the debt becomes due but only
when a default occurs - Default is defined under s.3(12) of the
IBC as the non-payment of the debt by the corporate debtor when
it has become due - CMRL issued a cheque of Rs 50 lacs to a
Proprietary Concern (P.C.) on 7 November 2013 as an advance
payment for the purchase - After termination of contract,
correspondence was exchanged between the appellant and P.C. -
Final letter demanding payment from P.C. was addressed on 27
February 2017 which was refused by appellant on 2 March 2017
- On 1 November 2017, appellant filed an application u/s.9 of
IBC which is within three years from default - Hence, application
u/s.9 of IBC is not barred by limitation - Insolvency and
Bankruptcy Code, 2016 - s.9.
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD.
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Allowing the appeal, the Court
HELD: 1. 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
goods and services with the corporate debtor or an invoice
demanding payment for the goods and services supplied to the
corporate debtor. Hence, this leaves no doubt that a debt which
arises out of advance payment made to a corporate debt or for
supply of goods or services would be considered as an operational
debt. 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 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. [Para 43, 45][245-F-H; 246-D;
247-C-E]
2.1 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. The
dispute revolves around the MOA of the respondent. Section 4
of the Companies Act 2013defines 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
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for which the company is proposed to be incorporated and any
matter considered necessary in furtherance thereof". Section 13
provides the requirements for the alteration of an MOA. [Para
47, 49, 52][247-G; 248-C-D; 249-G]
2.2 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 has produced
a resolution dated 1 September 2014 passed by its Board of
Directors, purportedly resolving to not take over the Proprietary
Concern. 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. 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. [Para 53, 55, 56][250-D;
251-D-F]
3. In respect of question of limitation, 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
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD.
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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. 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. [Para 60, 61][252-F-G;
253-A-B]
B.K. Educational Services (P) Ltd. v. Parag Gupta &
Associates (2019) 11 SCC 633:[2018] 12 SCR 794 -
relied on.
Pioneer Urban Land and Infrastructure Ltd. v. Union
of India (2019) 8 SCC 416:[2019] 10 SCR 381;
Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC
407:[2017] 8 SCR 33; Mobilox Innovations (P) Ltd. v.
Kirusa Software (P) Ltd. (2018) 1 SCC 353: [2017] 10
SCR 1006; Phoenix ARC (P) Ltd. v. Spade Financial
Services Ltd. (2021) 3 SCC 475 - referred to.
Case Law Reference
[2019] 10 SCR 381
referred to
Para 34
[2017] 8 SCR 33
referred to
Para 35
[2017] 10 SCR 1006
referred to
Para 36
(2021) 3 SCC 475
referred to
Para 44
[2018] 12 SCR 794
relied on
Para 58
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2839
of 2020.
From the Judgment and Order dated 12.12.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No.19 of 2019.
M. P. Parthiban, Adv. for the Appellant.
K. Parameshwar, Ms. A. Sregurupriya, Prasad Hegde, Advs. for
the Respondent.
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The Judgment of the Court was delivered by
DR. 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
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Conclusion
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
1 "IBC"
2 "NCLAT"
3 "NCLT"
4 CP/708/(IB)/CB/2017
5 "Appellant"/"Operational Creditor"
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD.
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SUPREME COURT REPORTS
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Corporate Insolvency Resolution Process6 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 Solutions9, 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.
3. In appeal11 , 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.
6 "CIRP"
7 "Respondent"/"Corporate Debtor"
8 "MOA"
9 "Proprietary Concern"
10 "IRP"
11 Company Appeal (AT) No 19 of 2019
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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 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:
[...]
12 "CMRL"
13 "TLIPL"
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
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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 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.
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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, 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."
M/S CONSOLIDATED CONSTRUCTION CONSORTIUM LTD. v. M/S HITRO
ENERGY SOLUTIONS PVT. LTD. [DR. DHANANJAYA Y CHANDRACHUD, J.]
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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 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
14 "2016 Application Rules"
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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 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'...
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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.
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
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from the respondent. Thus, the respondent cannot be made
liable for its debt;
(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. 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;"
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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, 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-
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(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 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
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(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."
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:
"
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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 -
(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."
15 "CIRP Regulations 2016"
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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-
(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.
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(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;
(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
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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.