‘Return on advance payments’ not an operational debt, NCLT

The scope and width of the definition of an ‘operational debt’ under the Insolvency and Bankruptcy Code is continually tested by courts. The scope has been narrowed by the NCLT Kolkata Bench by excluding ‘return on advance payments’ from this list..SHRM Biotechnologies Pvt. Ltd. (operational creditor) had sought the help of VAB Commercial Pvt. Ltd. (corporate debtor) for arranging an investor to enter into a joint venture with. For this purpose, an advance of Rs. 3,00,000 was paid by SHRM to VAB. The terms of the mandate letter stipulated that this engagement would last for a period of 3 months and in the event VAB is unable to find an investor, the entire sum would be refunded..VAB was unable to find the investor, and failed to refund the sum. The total claim along with interest, was Rs. 3,63, 122. There was no opposition from VAB when the statutory demand notice was issued by SHRM, and an application under Section 9 was then filed with the NCLT..The NCLT looked into the definitions of the terms ‘debt’, ‘operational debt’ and ‘operational creditor’ to check whether a return of advance on breach of terms of a mandate letter would in fact qualify as a debt, that can be proceeded against. In this regard, the NCLT observed,.“A reading of Section 5(21) of the Code , it is clear that the debt includes a claim in respect of provision of goods or services including employment or a debt in respect of repayment of dues arising under any law for the time being in force and payable to the Central Government, State Government or a local authority. The applicant in this application does not come under the category of Central Government, State Government or local authority nor fall within the definition of sub-section (21) of Section 5 of the Code.”.Interestingly, the NCLT took upon itself to see whether the debt qualifies as an operational one, in the absence of any opposition from the corporate debtor..The NCLT further noted that the SHRM did not provide any goods, or render any service to VAB. It then referred to a Delhi NCLT ruling which established the test for ascertaining whether a debt is operational or not. The test laid down considers three factors for establishing whether a debt is operational or not:.1) debt arising out of provision of goods; or .2) services; or .3) out of employment .Accordingly, the NCLT held that the money due in such a case is not an operational debt and that SHRM is not an operational creditor..Akash Sharma appeared for the SHRM, the operational creditor..(Read order)