Mobilization advance is operational debt: NCLAT Delhi

The National Company Law Appeals Tribunal (“NCLAT”), main bench, consisting of Judge Ashok Bhushan (President), Judge M. Satyanarayana Murthy (Judicial Member) and Mr. Barun Mitra (technical member), while ruling on an appeal filed in Athena Demwe Power Ltd. against Abir Infrastructure Private Limited & Ors., ruled that a mobilization advance given for the mobilization of equipment and labor is an operating debt.

Background Facts

On 24.12.2010, Athena Demwe Power Ltd. (“Appellant”) had awarded a contract to Abir Infrastructure Private Limited & Ors. (“Corporate debtor”) for the execution of the 1,750 MW Demwe Lower hydroelectric project in Arunachal Pradesh. A mobilization advance of Rs. 7,48,40,06,136/- was transferred by the Appellant to the Debtor Company through the Bank Transfer in execution of the Contract. On 14.02.2011, the debtor company had issued a company guarantee in favor of the appellant, which was extended until 23.11.2021. However, the contract work could not be completed because the site was never made available by the owner.

Subsequently, NCLT New Delhi Bench (“Deciding Authority”) initiated the Corporate Insolvency Resolution (“CIRP”) process against the debtor company and the appellant filed his claim with the Interim Resolution Professional (IRP) for an amount of Rs. 1784,99,28,651/- as Financial Creditor. The IORP informed the Appellant that his claim falls under operational and non-financial debt. Consequently, the appellant filed his application as an operational creditor, which was again rejected by the resolution professional on the grounds that the application falls under the rubric of “other creditor”. In the meantime, the supervisory authority see an order dated 28.10.2021 had approved the Resolution Plan submitted by SREI Multiple Asset Investment Trust, i.e. Respondent No. 2 for the Debtor Company.

The Appellant had filed a motion for interim relief before the Arbitration Authority contesting the rejection of its request, which was rejected by the Arbitration Authority on 01.12.2022. The Appellant appealed to the NCLAT against the order of 12.01.2022.

The appellant’s claims

The appellant argued that it is a financial creditor who advanced an amount of Rs. 7,48,40,06,136/- as a mobilization advance. Since the debtor company had issued a corporate guarantee for the mobilization advance to the appellant, the provisions of section 5(8)(i) of the Insolvency and Bankruptcy Code 2016 ( “IBC”) were applied, making the transaction a financial debt. In addition, the resolution professional does not have the power to rule on the claim filed by the appellant.

The Respondent’s Arguments

Respondent no. 1 argued that the mobilization advance is not a loan/borrowing contracted and intended to be repaid by respondent no. 1 and that it was therefore not a debt financial. The transaction does not fall under section 5(8)(i) of the IBC since the corporate guarantee has not been provided to support any liability under or within the meaning of clauses (a) to (h) of the section 5(8) of the IPC. The Appellant has not rendered any service or delivered any goods to the Debtor Company and is therefore not an Operational Creditor.

Problems

  1. Is the mobilization advance granted by the Appellant to the Debtor Company a Financial Debt within the meaning of Article 5(8) of the CIB?
  1. Is the mobilization advance granted by the Appellant to the Debtor Company an Operating Debt within the meaning of Article 5(21) of the CIB?

Relevant laws

BAC Section 5(8)

“Section 5(8): “financial debt” means debt together with interest, if any, which is disbursed in return for the time value of money and includes:

(a) money borrowed against payment of interest; (b) any amount raised by acceptance under an acceptance credit facility or its dematerialized equivalent;

(c) any amount raised under a note facility or the issue of bonds, notes, debentures, loan shares or any similar instrument;

(d) the amount of any liability in respect of any lease or hire-purchase which is deemed to be finance or capital lease under Indian accounting standards or any other accounting standard which may be prescribed;

(e) receivables sold or discounted other than receivables sold without recourse;

(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a loan; xxx

(g) any derivative transaction entered into in the context of protection or profit against fluctuations in any rate or price and for the calculation of the value of any derivative transaction, only the market value of this transaction will be taken into account. account ;

(h) any counter-collateral obligation in respect of any guarantee, indemnity, bond, documentary letter of credit or other instrument issued by a bank or financial institution;

(i) the amount of any liability for warranty or indemnity for any of the items mentioned in sub-paragraphs (a) to (h) of this clause; »

BAC Section 5(21)

“Section 5(21): “operating debt” means a debt relating to the provision of goods or services, including employment, or a debt relating to the payment of royalties arising under any law now in force and payable to the central bank, government, any state government or local authority;”

NCLAT Decision

Not a financial debt

The Chamber finds that the mobilization advance that was given for the mobilization of equipment and labor on the site; and has not been disbursed against the time value of money. The guarantee referred to in Article 5(8)(i) has been held to relate to any of the items referred to in subparagraphs (a) to (h) of Article 5(8) of the IBC and since these clauses do not include a mobilization advance, this cannot be qualified as a financial debt.

The mobilization advance is an operational debt

The Panel finds that the mobilization advance was granted by the Appellant under an EPC contract dated 24.12.2010. The advance granted had to be adjusted in the current invoices according to the terms and conditions of the contract or could have been claimed by the appellant. The contract between the parties could not be executed due to the lack of provision of a site for carrying out the work. The contract was virtually abandoned and never executed.

We relied on the judgment of the Supreme Court in Ms. Consolidated Construction Consortium Limited Vs. Ms. Hitro Energy Solutions Private Limited, Civil Appeal No. 2839 of 2020, in which it was held that the words “in respect of” in Article 5(21) should be interpreted broadly and purposively, to include all who provide or receive operational services of the debtor company, which ultimately results in an operational debt.

“In view of the law enacted by the Honorable Supreme Court in the case of M/s. Consolidated Construction Consortium Limited, the mobilization advance granted by the Appellant to the Debtor Company is clearly an Operating Debt and the Contracting Authority erred in rejecting the Appellant’s advance claim under Operating Debt.”

The Court ordered the implementation of the approved Resolution Plan and to treat the Appellant’s claim as an Operating Debt and the Resolution Applicant would be obligated to include this claim and make payment to the Appellant. Consequently. The appeal was allowed by the Chamber.

Case title: Athena Demwe Power Ltd. v Abir Infrastructure Private Limited & Ors., Company Appeal (AT) (insolvency) No.158 of 2022

Counsel for the Appellant: Mr. Kunal Godhwani, Lawyer

Counsel for the Respondent: MP Ramesh Babu, Advocate for R-1 (RP). Mr. Ramji Srinivasan, Senior Counsel with Mr. RS Sravankumar, Counsel for R-2 (SRA).

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