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The Supreme Court on Friday held that a demand notice for an operational debt by an operational creditor does not necessarily need to be accompanied by an invoice, but it may be sent where such debt arises under a “provision of law, contract, or other document” and for which documents can be attached along with the demand notice.

Further, relying on Regulation 7(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Court held that an operational creditor can prove their claim not only through “an invoice demanding payment for the goods and services supplied to the corporate debtor” (Regulation 7(2)(ii)) but also through “a contract for the supply of goods and services with corporate debtor” (Regulation 7(2)(i)).

These observations were made by the top court while dealing with an appeal filed by M/s Consolidated Construction Consortium Limited, who approached the court being aggrieved by an order of the National Company Law Appellate Tribunal (NCLAT) whereby it held the appellant to not be an operational creditor within the ambit of the Insolvency and Bankruptcy Code (IBC), and therefore its application under Section 9 of the IBC was not maintainable.

In their decision, the NCLAT held that the appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the respondent.

A bench of Justices Dr Dhananjaya Y Chandrachud, Surya Kant and Vikram Nath noted that operational creditors are those whose debt arises from operational transactions, i.e., transactions which are undertaken in relation to the operation of an enterprise.

Referring to the examples given in the Report of the Bankruptcy Law Reforms Committee, the Court added that operational transactions generally include transactions involving goods or services which are considered necessary for the operational functioning of an entity.

With regard to 'debt' arising between the parties, the bench found that the debt arises from purchase orders between the appellant and the Proprietary Concern (which is the underlying contract), regardless of whether Chennai Metro Rail Limited (CMRL), for whom the appellant was working, may have made the payment on behalf of the appellant. Thus, the ultimate dispute still remains between the appellant and the Proprietary Concern, and the debt arises from that.

"In the present case, the appellant clearly sought an operational service from the Proprietary Concern when it contracted with them for the supply of light fittings. Further, when the contract was terminated but the Proprietary Concern nonetheless encashed the cheque for advance payment, it gave rise to an operational debt in favor of the appellant, which now remains unpaid. Hence, the appellant is an operational creditor under Section 5(20) of the IBC", observed the Court.

With this view, the bench allowed the appeal and set aside the NCLAT judgment.

Cause Title: M/s Consolidated Construction Consortium Limited vs M/s Hitro Energy Solutions Private Limited