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M/S Consolidated Construction Consortium Ltd. vs. M/S Hitro Energy Solutions Private Limited

Civil Appeal · 2022 INSC 150Decided 4 Feb 2022
Civil Appeal No. 2839 of 2020
Dr. Dhananjaya Y. Chandrachud · Surya Kant · Vikram Nath

Background

The appellant, a construction company executing a project for Chennai Metro Rail Limited (CMRL), placed purchase orders worth an advance of Rs. 50 lakh with a proprietary concern (Hitro Energy Solutions) for light fittings, with CMRL paying the advance directly on the appellant's behalf. When CMRL terminated the underlying project in January 2014, the appellant repaid the Rs. 50 lakh to CMRL and sought a refund from the proprietary concern, which had already encashed the cheque but refused to return the money despite years of correspondence. The respondent company (incorporated shortly after, under a Memorandum of Association listing "taking over" the proprietary concern as one of its objects) resisted the appellant's insolvency application, and while the NCLT had admitted the appellant's Section 9 insolvency petition against the respondent, the NCLAT reversed this, holding that the appellant was merely a "purchaser" and not an "operational creditor" since it had not supplied goods/services to the debtor, and that in any event the claim was time-barred.

Decision Breakdown

The Supreme Court held that the definition of "operational debt" under Section 5(21) of the IBC, a claim "in respect of" the provision of goods or services, must be read broadly and purposively to cover both those who supply goods/services to a corporate debtor and those who receive them, not just suppliers as the NCLAT had narrowly held; since the appellant's advance payment was for a contract to receive light fittings that were never validly retained after the project's cancellation, the resulting refund claim was an operational debt, making the appellant an operational creditor. On the MOA issue, the Court held that the respondent company's own Memorandum of Association explicitly declaring an object "to take over" the proprietary concern was, absent evidence to the contrary, sufficient proof that it had indeed taken over the proprietary concern's liabilities, including this debt. On limitation, applying Article 137 of the Limitation Act (three years from when default occurs, not merely from when the debt becomes due), the Court traced the timeline of negotiations, correspondence, and a final refusal to repay dated 2 March 2017, and held the Section 9 application (filed within three years of that refusal) was not time-barred. The appeal was allowed, the NCLAT's order was set aside, and the earlier admission of the insolvency proceeding was restored.

Lesson Learnt

Under India's insolvency law, a person who advances money to a company for goods or services can qualify as an "operational creditor" even if they were meant to receive rather than supply the goods, so long as the debt arises from that operational contract; and a new company's own incorporation documents (like its Memorandum of Association) can be used against it as proof that it took over the liabilities of a business it absorbed.

Official source (sci.gov.in)View Judgment (PDF)

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