Introduction

The judicial landscape of insolvency and bankruptcy underwent a pivotal evaluation in the case of Mr. Harrish Khurana v. M/s One World Realtech Private Limited, adjudicated by the National Company Law Appellate Tribunal (NCLAT) on November 30, 2021. This case centers on the interpretation of operational creditor status under the Insolvency and Bankruptcy Code, 2016 (IBC), particularly scrutinizing the necessity of privity of contract between a creditor and a corporate debtor. The appellant, Mr. Harrish Khurana, sought to classify his professional services' unpaid invoices as operational debt owed by M/s One World Realtech Private Limited (the Corporate Debtor), thereby triggering the Corporate Insolvency Resolution Process (CIRP). The core issue revolved around whether his engagement through the company's statutory auditor established the required privity of contract under Section 9 of the IBC.

Summary of the Judgment

The NCLAT, in its principal bench constituted by Justice Ashok Bhushan, rendered a decision dismissing the appellant's appeal. The Adjudicating Authority had initially held that there was no direct privity of contract between Mr. Harrish Khurana and M/s One World Realtech Private Limited, thereby negating the establishment of an operational creditor relationship as mandated by Section 9 of the IBC.

Mr. Khurana contended that he was contracted by the Corporate Debtor through its statutory auditor to provide professional services related to compliance and financial reporting. He presented four unpaid invoices totaling ₹1,81,000 as evidence of the debt owed to him. However, the Respondent refuted these claims, asserting that no direct agreement existed between the parties and that any engagement was solely between Mr. Khurana and the statutory auditor, not the Corporate Debtor itself.

The NCLAT upheld the Adjudicating Authority's findings, emphasizing the absence of a direct contractual relationship between the appellant and the Corporate Debtor. Consequently, the appeal was dismissed, reinforcing the necessity of privity of contract for the classification of operational debt under the IBC.

Analysis

Precedents Cited

The judgment predominantly references the statutory definitions and provisions outlined in the Insolvency and Bankruptcy Code, 2016. Notably, the Tribunal delved into the definitions provided under Sections 3(8), 3(11), 5(20), and 5(21) to delineate the contours of 'Corporate Debtor,' 'Debt,' 'Operational Creditor,' and 'Operational Debt.' While no specific case law precedents were cited, the Tribunal's analysis is anchored in the literal interpretation of the IBC's statutory language.

Legal Reasoning

The Tribunal meticulously examined the nature of the relationship between Mr. Khurana and the Corporate Debtor. Central to its reasoning was the necessity of establishing a direct contractual relationship to qualify as an operational creditor under Section 9 of the IBC.

Key points of legal reasoning include:

• Privity of Contract: The Tribunal underscored that for a debt to be classified as operational debt, there must be a direct contractual agreement between the creditor and the Corporate Debtor. Engagement through an intermediary, such as a statutory auditor, does not suffice.
• Nature of Engagement: The appellant's services were contracted by the statutory auditor in a personal capacity, not by the Corporate Debtor. This distinction negates the establishment of an operational creditor relationship.
• Evidence of Engagement: The lack of direct contractual documents and the presence of contradictory statements from both parties further weakened the appellant's position.

Conclusively, the Tribunal determined that without direct privity of contract, the appellant's claim did not meet the threshold for operational creditor status, thereby invalidating the application to invoke CIRP.

Impact

This judgment reinforces the stringent requirements for establishing operational creditor status under the IBC. It clarifies that indirect engagements or third-party contracts do not qualify a creditor to initiate insolvency proceedings against a corporate debtor. Consequently, professionals and service providers must ensure direct contractual agreements with corporate entities to safeguard their rights under the IBC. This decision may lead to more meticulous scrutiny of creditor relationships in future CIRP applications, promoting clarity and reducing frivolous insolvency claims based on tenuous contractual ties.

Complex Concepts Simplified

Conclusion

The NCLAT's decision in Mr. Harrish Khurana v. M/s One World Realtech Private Limited serves as a definitive elucidation of the necessity for direct privity of contract in establishing operational creditor status under the IBC. By dismissing the appellant's claim due to the absence of a direct contractual relationship, the Tribunal has reinforced the integrity and intent of the IBC to address genuine insolvency scenarios. This judgment underscores the importance for professionals and service providers to secure direct agreements with corporate entities to ensure their claims are recognized within the insolvency framework. As insolvency laws continue to evolve, such interpretations will be instrumental in shaping the dynamics between creditors and corporate debtors, promoting fairness and legal clarity in financial recoveries.