Regulatory Dues Excluded from Operational Debt: Insights from BSE Ltd. v. Asahi Infrastructure & Projects Ltd.

Introduction

The case of BSE Ltd. v. Asahi Infrastructure & Projects Ltd. addresses the contentious issue of whether regulatory dues, specifically listing fees, qualify as 'operational debt' under the Insolvency and Bankruptcy Code, 2016 (IB Code). The Bombay Stock Exchange Limited (BSE), an operational creditor, filed an application for insolvency proceedings against Asahi Infrastructure & Projects Ltd., claiming unpaid listing fees amounting to Rs. 8,85,526/- as of April 1, 2017. The central question revolved around the classification of such fees and the applicability of the IB Code in their recovery.

The National Company Law Appellate Tribunal (NCLAT), in its judgment dated December 21, 2021, upheld the decision of the Adjudicating Authority, Mumbai Bench, which dismissed BSE's application. This commentary delves into the intricacies of the judgment, exploring the legal principles established and their broader implications.

Summary of the Judgment

The core issue in this case was whether the unpaid listing fees claimed by BSE constitute 'operational debt' under Section 5(21) of the IB Code. The Adjudicating Authority had previously dismissed BSE's application, asserting that regulatory fees do not fall within the ambit of operational debts. BSE contested this decision, arguing that there is no specific procedure prescribed by SEBI for recovering listing fees, thereby making the application under Section 9 of the IB Code maintainable.

Upon appeal, the NCLAT reviewed the definitions and legislative intent behind the IB Code. Referencing the Insolvency Law Committee's report and past judicial precedents, the tribunal concluded that regulatory dues, such as listing fees payable to stock exchanges, are not categorized as operational debts. Consequently, BSE's appeal was dismissed, reinforcing the stance that the IB Code is not intended for the recovery of such regulatory fees.

Analysis

Precedents Cited

The appellant leaned heavily on the judgment from Company Appeal (AT) (Insolvency) No. 309 of 2018 in Sales Tax Department, State of Maharashtra Through Deputy Commissioner of State Tax v. M/s Raj Oil Mills Limited & Ors., where it was held that statutory dues like Income Tax and Value Added Tax are classified as operational debts. However, the tribunal distinguished this case by emphasizing that regulatory fees differ fundamentally from other statutory dues, as they are not tied to the provision of goods or services but are fees payable under specific regulatory frameworks.

Additionally, references were made to the Supreme Court's decision in Swiss Ribbons Private Limited & Anr. v. Union of India and Ors., which underscored the IB Code's primary objective of insolvency resolution rather than creditor recovery. The tribunal also noted prior decisions, including those from its own bench, which did not extend the definition of operational debts to encompass regulatory dues.

Legal Reasoning

The tribunal's legal reasoning hinged on the definitions provided within the IB Code and the overarching purpose of the legislation. Section 5(21) of the IB Code defines 'operational debt' broadly, encompassing claims related to goods, services, employment, and dues payable under any law to government entities. However, the tribunal interpreted this definition in light of the legislative intent, emphasizing that the IB Code aims to facilitate corporate insolvency resolution rather than serve as a vehicle for creditor debt recovery.

The Insolvency Law Committee's report played a pivotal role in the tribunal's analysis. The committee explicitly recommended that regulatory dues should not be included within the scope of operational debt to maintain the IB Code's focus on insolvency resolution. The tribunal concurred, asserting that including regulatory dues would subvert the core objectives of the IB Code by transforming insolvency proceedings into creditor recovery mechanisms.

Furthermore, the tribunal highlighted that regulatory bodies like SEBI possess their own enforcement mechanisms for recovering dues, such as penalties and imprisonment, as outlined in the SEBI Act, 1992. This delineation reinforces that regulatory dues operate outside the purview of the IB Code's reporting structures.

Impact

This judgment has significant implications for both regulatory bodies and operational creditors. By clarifying that regulatory dues are not considered operational debts, the NCLAT has delineated the boundaries of the IB Code's applicability. This ensures that the insolvency resolution framework remains focused on restructuring and revitalizing corporate entities rather than devolving into mechanisms for debt recovery by creditors.

For stock exchanges and other regulatory entities, this decision reaffirms their ability to pursue dues through established regulatory channels without the necessity of initiating insolvency proceedings. Operational creditors, on the other hand, must recognize the limitations of the IB Code concerning regulatory fees and seek alternative legal remedies for recovery.

Additionally, the judgment sets a precedent that will guide future cases involving the classification of various types of debts under the IB Code, providing clearer guidance for stakeholders navigating insolvency and regulatory compliance landscapes.

Complex Concepts Simplified

Operational Debt: Under the IB Code, operational debt refers to money owed for the provision of goods, services, or employment, as well as dues payable under any law to governmental bodies. It encompasses a wide range of creditor claims but excludes certain types of fees defined by regulatory statutes.

Insolvency Resolution Process (CIRP): This is a structured process defined by the IB Code aimed at reviving insolvent companies by restructuring their debts and operations to maximize asset value and ensure business continuity.

Regulatory Dues: These are fees or charges imposed by regulatory bodies (e.g., stock exchanges, SEBI) for compliance, listing, and other regulatory services. They are distinct from operational debts as they are not directly tied to the provision of goods or services but stem from statutory obligations under specific regulations.

Insolvency Law Committee Report: A comprehensive report by a designated committee that provides recommendations on the implementation and potential amendments to the IB Code. Its insights were instrumental in interpreting the scope of operational debt in this case.

Conclusion

The judgment in BSE Ltd. v. Asahi Infrastructure & Projects Ltd. serves as a definitive clarification on the classification of regulatory dues under the IB Code. By affirming that listing fees do not constitute operational debt, the NCLAT has reinforced the IB Code's primary objective of facilitating corporate insolvency resolution rather than creditor debt recovery. This distinction ensures that regulatory bodies maintain their autonomy in enforcing dues while preserving the integrity and intended focus of the insolvency framework. Stakeholders must now navigate these boundaries with a clearer understanding of the mechanisms available for debt recovery and insolvency management.

Moving forward, this judgment will guide courts, regulatory bodies, and corporate entities in categorizing and pursuing different types of debts, ensuring that the legal processes align with the foundational objectives of promoting economic growth, protecting corporate entities from undue liquidation, and maintaining orderly creditor graduations.