Debt under agreement for goods or services always an ‘operational debt’ under IBC? – Supreme Court opines
Overview:
Where the creditor is claiming under a written agreement / arrangement providing for rendering ‘service’, the debt is an operational debt only if the subject matter of the debt has some connection or correlation with the ‘service’ subject matter of the transaction.
This has been held by the Supreme Court in Global Credit Capital Limited & Anr v. Sach Marketing Pvt. Ltd. & Anr. [Civil Appeal No. 1143 of 2022; decided on 25.04.2024
JC Key Takeaways:
This significant decision paves way for creditors to not be labelled as operational creditors, simply because the debt being claimed arises under an agreement / arrangement for goods or services. Needless to state, this would entail a careful analysis and consideration of the terms of agreement / arrangement, and not all claims for security deposit would be classified as financial debts under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Technical Details:
1) Sach Marketing Pvt. Ltd. (“SMPL”) and Mount Shivalik Industries Limited (“Corporate Debtor”) had entered into agreements, which were in the form of letters addressed by the Corporate Debtor, appointing SMPL as a ‘sales promoter’ to promote beer manufactured by it (“Agreements”). As per the Agreements, SMPL was to be paid a sum of INR 4,000/- per month for acting as a sales promoter for the Corporate Debtor. SMPL was further required to place a security deposit which would carry interest at 21% per annum.
2) In the insolvency process of the Corporate Debtor, SMPL claimed that the security deposit was a financial debt. This contention was rejected by the National Company Law Tribunal but was accepted by the National Company Law Appellate Tribunal (“NCLAT”).
3) The Supreme Court, while agreeing with the decision of the NCLAT, held that the security deposit paid by SMPL to the Corporate Debtor was a ‘financial debt’ under the IBC basis the following:
(a) The debt arising under a written agreement/arrangement for rendering ‘service’, would be an operational debt only if the subject matter of the debt had some connection or correlation with the ‘service’ aspect of the transaction.
(b) The security deposit had no correlation with performance of other terms of the agreement or services rendered by SMPL. Further, there was no clause for forfeiture of the security deposit and the Corporate Debtor was obligated to refund the same with interest after the specified period.
(c) Section 5(8)(f) of the IBC subsumes within it amounts raised under transactions which are not necessarily loan transactions, provided they have the commercial effect of a borrowing. In this case, there was an arrangement in writing for the transfer of funds to the Corporate Debtor, which was covered within the definition of ‘transaction’ under the IBC. Further, the amounts were treated as long-term loans and advances as well as a ‘long-term liability’ in the financial statements of the Corporate Debtor.
For further details, please see:
https://webapi.sci.gov.in/supremecourt/2021/30893/30893_2021_7_1501_52458_Judgement_25-Apr-2024.pdf
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