Defining Operational Creditor: NCLAT's Decision in Rk Associates & Hoteliers Pvt. Ltd. v. Bw Businessworld Media Pvt. Ltd.

Introduction

The case of Rk Associates & Hoteliers Pvt. Ltd. v. Bw Businessworld Media Pvt. Ltd. decided by the National Company Law Appellate Tribunal (NCLAT) on February 12, 2021, addresses pivotal issues concerning the classification of debt under the Insolvency and Bankruptcy Code (I&B Code), 2016. The dispute revolves around whether payments made for a performance guarantee in the context of a joint venture can be classified as "Operational Debt" under Section 5(21) of the I&B Code, thereby making the claimant eligible to initiate Corporate Insolvency Resolution Process (CIRP).

Summary of the Judgment

M/s RK Associates & Hoteliers Pvt. Ltd. (Appellant) filed an appeal against the dismissal of their application under Section 9 of the I&B Code by the Adjudicating Authority. The Appellant had transferred a total of ₹1,22,09,975/- to Bw Businessworld Media Pvt. Ltd. (Respondent) for performance guarantees and initial revenue shares related to an IRCTC tender. When IRCTC terminated the contract due to the Respondent's defaults, the Appellant sought to categorize the unpaid amount as Operational Debt. The Adjudicating Authority dismissed the application, stating that the payments were not for goods or services rendered but were for business propositions like performance guarantees. Upon appeal, NCLAT upheld the lower authority's decision, reinforcing that such payments cannot be deemed as Operational Debt under the I&B Code.

Analysis

Precedents Cited

The judgment references the case of M/s Sree Sankeshwara Foundation and Investments Vs. M/s Dugar Housing Limited (CA (AT) (Ins) No. 515 of 2019), where the Tribunal held that within a joint venture, payments among partners for project-related expenses do not qualify as Operational Debt since they do not pertain to the supply of goods or services between the parties. This precedent was significant in guiding NCLAT's reasoning to distinguish between operational liabilities and business investment expenses within a joint venture framework.

Legal Reasoning

The core legal question was whether the funds transferred by the Appellant for performance guarantees and initial expenses qualify as Operational Debt under Section 5(21) of the I&B Code. NCLAT scrutinized the nature of the payments, the agreement between the parties, and the actual obligations arising from the joint venture.

Key points in the legal reasoning include:

**Nature of Expense:** The payments made by the Appellant were towards performance guarantees and initial expenses for project execution, not for services rendered or goods supplied.
**Joint Venture Status:** The Memorandum of Understanding (MOU) and subsequent Shareholders Agreement indicated a joint venture with equal shareholding, suggesting that the parties were partners rather than creditor-debtor entities.
**Absence of Operational Relationship:** There was no evidence that the Appellant provided ongoing services or goods to the Respondent, which is a prerequisite for classifying a claim as Operational Debt.
**Legal Precedents:** Aligning with previous judgments, such as the Sree Sankeshwara Foundation case, reinforced the Tribunal's stance on differentiating between joint venture financial contributions and operational credit relationships.

Impact

This judgment has significant implications for entities engaged in joint ventures and similar collaborative arrangements. It clarifies that financial contributions towards performance guarantees, initial project expenses, or similar business propositions within a joint venture framework do not qualify as Operational Debt under the I&B Code. Consequently, creditors in such arrangements may find it challenging to initiate CIRP solely based on these types of payments unless there is a clear operational debtor-creditor relationship involving goods or services.

Future litigations and insolvency proceedings will likely draw upon this precedent to assess the nature of financial transactions and their classification under the I&B Code, ensuring that only genuine operational claims qualify for insolvency proceedings.

Complex Concepts Simplified

Operational Debt under Section 5(21) of the I&B Code

**Operational Debt** refers to financial obligations arising out of:

The supply of goods or services.
Any scheme of financing entered into in the course of carrying out business.

To qualify as Operational Debt, the creditor must have supplied goods or services directly, establishing an operational relationship with the debtor.

Corporate Insolvency Resolution Process (CIRP)

**CIRP** is a process initiated under the I&B Code to resolve insolvency in a time-bound manner, allowing creditors to recover their dues through rehabilitation or liquidation of the debtor company.

Joint Venture vs. Creditor-Debtor Relationship

A **Joint Venture** involves two or more parties collaborating towards a common business objective, sharing profits, losses, and management responsibilities. In contrast, a **Creditor-Debtor Relationship** entails one party lending resources with an expectation of repayment, often involving interest or specific return on investment.

Conclusion

The NCLAT's decision in Rk Associates & Hoteliers Pvt. Ltd. v. Bw Businessworld Media Pvt. Ltd. underscores the importance of accurately characterizing financial relationships within business collaborations. By distinguishing between joint venture contributions and operational credit relationships, the Tribunal provided clarity on the scope of claims eligible for CIRP under the I&B Code. This ensures that insolvency mechanisms are applied appropriately, safeguarding the interests of genuine operational creditors while recognizing the distinct nature of joint venture investments.

Stakeholders engaging in joint ventures must meticulously structure their agreements and financial transactions to delineate creditor-debtor relationships clearly. This will not only aid in resolving disputes efficiently but also in ensuring compliance with insolvency provisions when necessary.