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Operation Creditor under IBC

Insolvency and Bankruptcy Code, 2016 (IBCďż˝) defines Operational creditor as a person to whom an operational debt is owed including the debt that has been legally assigned or transferred. Operational Debt is debt may arise out of provision of goods or services or dues arising out of employment or dues arising under any law for time being in force and payable to the Centre/State Government. In common parlance the Operational Creditor debt emanates from transactions on operations.

Cases under IBC
1. DBM Geotechnics & Constructions (P.) Ltd.( Petitioner Operational Creditor ) v. Dighi Port Ltd.(Respondent Corporate Debtor)

Facts of case
 · The Operational Creditor had rendered services for construction of multipurpose berth 1, 2 and 3, basis contractual arrangements between parties. The dispute in relation to berth no. 3 was under arbitration.

· In relation to the contractual debt owed by Respondent, Parties had entered into consent terms in relation to relinquishment for the claim owned by Operational Creditor wherein it was agreed by parties that the settlement amount shall be consideration of full and final settlement of all the disputes between the parties, consequently the arbitration invocation notice addressed by the corporate debtor to the operational creditor shall be considered as withdrawn. It was further agreed that failure to abide by the terms of settlement would lead to filing of fresh insolvency petition against the Corporate Debtor.

· The Corporate Debtor however failed to pay the Operational Creditor as per the agreed consent terms, hence petition was filed by Operational Creditor for default in making payment in compliance of consent terms.

· The Corporate Debtor further contended the insolvency petition submitted is without proper authorisation and petitioner is not competent to enter into consent terms, hence the consent terms shall be declared as null and void. The Corporate Debtor stated that claim does not fall within the elements of operational debt since the claim emanated from default in complying the consent terms

Questions under consideration
 · Can entering into consent terms over an operational debt for dismissal of earlier company petition will change the nature of the claim?
 · Can withdrawing arbitration proceedings post issue of arbitration invocation notice will amount to existence of dispute which is prior to giving section 8 notice or not?

Synopsis of Judgement
 · The tribunal observed that merely because consent terms have been arrived between the parties the nature of the claim does not change the claim emanates from the service performed by petitioner and money not been paid. where the Corporate debtor having defaulted in making the payment as stated in the consent terms and there cannot be any argument that dispute is in existence in regard to the services provided by the petitioner, the company petition is liable to be admitted.

· Corporate debtor did not raise any issues except entering into consent terms with the petitioner, losing an opportunity to raise a dispute in the earlier proceedings, the said party is estopped from raising the same dispute in the subsequent proceedings, especially after consent terms arrived between the

 · The High Court of Allahabad1 had held that ....” Every arrear of rent is also a debt and it is transferable as a debt. But that does not mean that the character of the liability changes because of its having been transferred from one hand to another.” A similar reasoning was reiterated by High Court of Gujarat2. The claim under the current case emanates from the services provided the Operational Creditor, the consent terms are just an arrangement arrived between parties in relation to debt due. Hence any method of transfer cannot change the nature of liability

· Even the Apex Court in its judgement3 has stated that plea not raised by petitioner earlier it would not be open for them to raise subsequently.

2. Operational Creditor
(i) Akshay Jhunjhunwala and Another v. Union of India through the Ministry of Corporate Affairs and Others [2018] 147 SCL 163 (Calcutta)

(ii) JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd. [2017] 143 SCL 761

Questions under consideration
(i) In the first case, the moot question whether the treatment of a financial creditor on pedestal higher than an operational creditor and bestowing a higher or better right, so to speak, to a financial creditor is just and proper or whether the same offends any provisions of the Constitution of India requires consideration?

(ii) In the latter case, can a trade union be construed as an Operational Creditor under IBC?

Synopsis of Judgements
(i) (a) In the judgement it was held that if the classification is on reasonable differentia it does not offend the principle of equality. A financial creditor means a creditor whose claim arises out of a transaction in liquidity entered into by such creditor with the company on the other hand operational creditors are those whose claim arises out of a normal business transaction that such creditor with the legal entity.

(b) Additionally placing reliance on Bankruptcy Committee report para wherein it was concluded that......”The Committee reasoned that members of the creditors committee have to be creditors both with the capability to access viability, as well as to be willing to modify terms of existing liabilities in negotiations. Typically, operational creditors are neither able to decide on matters regarding the insolvency of the entity, nor willing to take the risk of postponing payments for better future prospects for the entity.” Hence the committee shall be restricted to financial creditors

(c) Additionally placing reliance of certain judgements it was concluded that piece of legislation on a possibility of abuse cannot be struck down. It was further viewed unless the legislation is violation to Constitutional law

(ii) (a) The Adjudicating Authority in the latter case held that “person” under IBC who can be termed as operational creditor are those who claim in respect of provision of goods; Providing services including those who are in employment and Government Authorities claiming dues;

(b) Under the current case the workmen/employees have rendered services to the Corporate Debtor whereas the Trade Union under the current case has not rendered any services to the Corporate Debtor. Hence in absence of any liability or application in respect of any claim which is due to workmen association/trade union from the Corporate Debtor as they do not provide any service to the Corporate Debtor they cannot claim to be operational creditor

(i) (a) In relation to first case the Claim in relation to Financial Creditor is less contested than the claim of Operational Creditor as claims in relation to operational debt. The claim of operational creditor can be disputed. The final report of the Committee in para 5.2.1 defines “operational creditor” like the wholesale vendor of spare parts whose spark plugs are kept in inventory by Car Mechanic and who gets paid only after spark plugs are sold to acquire the status of “operational creditor” so and so forth.

(b) Additionally supra of Apex Court4 judgements wherein it was inferred that: - Permissible classification must satisfy the twin tests, namely, (i) the classification must be founded on an intelligible differential, which distinguishes persons or things grouped together from others left out of the class, and (ii) such differential must have a rational relation with the object sought to be achieved by the legislation. It is difficult to expect the Legislature carving out a classification which may be scientifically perfect or logically complete or which may satisfy the expectations of all concerned, still the court would respect the classification dictated by the wisdom of Legislature and shall interfere only on being convinced that the classification would result in pronounced inequality or palpable arbitrariness on the touchstone of Article 14.

(ii) In Apex Court judgement, Raghunath Rai Bareja v. Punjab National Bank, (2007) 2 SCC 230 under paragraphs 39 to 47 held that the literal construction of a statute is the only mode of interpretation when the statute is clear and unambiguous. Hence in order to fall within the four corners of “operational creditor” as per section 9 of the IBC it must be shown that operational creditor is a person to whom an “operational debt” is owned or it is legally assigned/transferred. The expression “operational debt” has been defined by Code and it must fulfil following substantive elements, namely: debt arising out of provisions of goods or services or out of employment or dues payable to Central Government, any State Government or any local authority.

In simple words, to fall under the ambit as an Operational Creditor the operational debt should emanate from provisions of goods or services or out of employment or dues payable to Central Government, any State Government or any local authority .
. .
1 Ram Prakash Ghai vs Karam Chand and Anr. AIR 1963 All 47
2 Prem Govindram Sajnani vs H.M. Methwani on 2 February, 1973, Equivalent citations: AIR 1974 Guj 140, (1973) GLR 952
3 The Associated Cement Company Ltd vs Shri P. D. Vyas And Others on 11 February, 1960 Equivalent citations: 1960 AIR 665, 1960 SCR (2) 974
4 Welfare Assocn. A.R.P., Maharashtra & Anr. Vs. Ranjit P. Gohil & Ors. Dated February 18, 2003. Bench :- R.C. Lahoti & Brijesh Kumar.

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