Security Amount Not Operational Debt: Section 9 Petition Dismissed for Failing IBC Threshold and Operational Debt Criteria
- REEDLAW
- 15 hours ago
- 4 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Tribunal (NCLT), New Delhi Bench, dismissed a Section 9 petition filed by an Operational Creditor for initiation of CIRP against a Corporate Debtor. The Tribunal held that a security amount provided under a commercial agreement to secure performance does not qualify as operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016, unless it is directly linked to the provision of goods or services, and emphasized that Section 9 petitions are maintainable only when the debt satisfies both the operational nature and statutory threshold requirements.
The NCLT, New Delhi Bench, comprising Mr. Mahendra Khandelwal (Judicial Member) and Ms. Anu Jagmohan Singh (Technical Member), while adjudicating the admission of the Section 9 Company Petition, observed that the debt claimed by the Operational Creditor included a security amount paid to the Corporate Debtor to ensure performance under a Manufacturing Agreement. The Tribunal concluded that this security amount was not connected to the actual supply of goods or services and therefore did not constitute operational debt under Section 5(21) of the IBC. Further, the remaining amount claimed did not meet the minimum threshold prescribed under Section 4 of the Code, rendering the petition not maintainable.
The Operational Creditor filed a petition under Section 9 of the Insolvency & Bankruptcy Code, 2016 read with Rule 6 of the IBBI (Application to Adjudicating Authority) Rules, 2016, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor on account of an alleged unpaid operational debt totaling ₹2,36,20,939/-, comprising principal amounts and interest under a Manufacturing Agreement executed on 10.07.2021. The agreement involved the manufacture and supply of products by the Corporate Debtor, with a fixed security amount of ₹31,00,000/- provided by the Operational Creditor to secure execution of deliveries, repayable within 15 days of termination of the agreement, along with interest at 18% per month for any delay. The Operational Creditor contended that the Corporate Debtor defaulted in payment of both the security amount and other advance invoices despite repeated reminders and a formal demand notice under Section 8 of the Code.
The Corporate Debtor opposed the petition, asserting that the claim was baseless, constituted an abuse of process, and did not qualify as an operational debt under Section 5(21) of the Code. It contended that the ₹31,00,000/- was a security deposit, unrelated to the supply of goods or services, and that interest charged thereon was exorbitant and contrary to regulatory norms. The Corporate Debtor further argued that after the termination of the agreement, the Operational Creditor continued commercial interactions, including the supply of goods to a related entity, which did not create additional obligations for the Operational Creditor, and therefore, the threshold requirement under Section 4 of the Code was not met.
In its rejoinder, the Operational Creditor emphasised that the Manufacturing Agreement and Subsequent conduct clearly demonstrated the agreed terms for the advance security and other payments. It relied on the decision of the National Company Law Appellate Tribunal in Sanam Fashion and Design Exchange Limited v. Ktex Nonwovens Private Limited, REEDLAW 2024 NCLAT Del 05511, highlighting that operational debt includes advance payments made for the supply of goods, as long as a nexus exists between payment and provision of goods or services. The Operational Creditor also cited the Supreme Court judgment in Global Credit Capital Limited v. Sach Marketting Private Limited and Another, REEDLAW 2024 SC 04604, which established that the label of a transaction cannot be determinative; a debt is operational only if there exists a demonstrable connection between the claim and the service or supply of goods under the agreement.
Upon examining the pleadings, agreement clauses, and referenced judgments, the Adjudicating Authority noted that the Corporate Debtor acted as the manufacturer while the Operational Creditor was the distributor. Clause 7.4 of the agreement clearly characterised the ₹31,00,000/- as a fixed security amount, intended solely to secure the Operational Creditor’s obligations, and not as an advance payment for goods or services. The Tribunal observed that although advance payments for the supply of goods could qualify as operational debt, the disputed security amount had no direct or indirect connection with the delivery of goods, and therefore could not be treated as operational debt under Section 5(21) of the Code. Further, the remaining default from invoices, amounting to ₹26,64,939/-, was below the statutory threshold of ₹1 crore under Section 4, rendering the petition non-maintainable.
Applying the principles in Global Credit Capital Limited v. Sach Marketting Private Limited and Another, REEDLAW 2024 SC 04604, the Tribunal held that the nature of the debt must be objectively determined from the agreement and the underlying transaction. While the Operational Creditor relied on Sanam Fashion and Design Exchange Limited v. Ktex Nonwovens Private Limited, REEDLAW 2024 NCLAT Del 05511 to assert that advance payments could constitute operational debt, the Tribunal distinguished the facts, finding that in the present case, the security deposit lacked the requisite nexus with the provision of goods or services. Accordingly, the petition filed under Section 9 was found not maintainable and was dismissed without costs.
Mr. Sumeet Verma, Sr. Advocate, with Mr. Rachit Ranjan, Mr. Mahinder Pratap Singh and Ms. Charu Verma, Advocates, represented the Applicant.
Mr. Sanjeev Bindal, Advocate, appeared for the Respondent.
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