IBC – SUPREME COURT HOLDS OPERATIONAL CREDITORS INCLUDE RECEIVER OF GOODS OR SERVICES

In a significant decision, the Hon’ble Supreme Court (SC) in the case of M/s Consolidated Construction Consortium Limited V/s Hitro Energy Solutions Private Limited, has provided clarity on the scope of  ‘Operational Creditor’ for the purpose of insolvency proceedings under Insolvency and Bankruptcy Code (the Code). Under Sec. 5(20) of the Code, ‘Operational Creditor’ is defined to mean “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”. Further Sec. 5(21) of the Code defines ‘Operational Debt’ to mean “a claim in respect of the provision of goods or services including employment or a debt in respect of the 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”

Hitherto, it was generally understood that ‘Operational Creditor’ is a creditor who has an outstanding claim against the other party (debtor) for provision of goods and services. It was ambiguous whether a party providing advance to another party for provision of goods and services would also qualify as ‘Operational Creditor’ in case such advance had to be recovered for any contractual reason. The SC has settled this ambiguity by interpreting the phrase “in respect of” in Sec. 5(21) in a broad and purposive manner to include all those who provide or receive operational services from the corporate debtor, which ultimately lead to an operational debt. The SC has accordingly held that a debt which arises out of advance payment made for supply of goods or services would be considered as an ‘Operational Debt’. The SC observed that the ‘Operational Creditor’ had the 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 to establish the debt. The fact that the debt can be established from the contract for the supply of goods and services between the Operational Creditor and Corporate Debtor, it supports the inference that the Operational Creditor can be the receiver of goods or services from the Corporate Debtor. The law explained by the SC has wide implications and bringing to rest a long pending debate on the issue.