If one party pays an advance to another for a service and the payment receiver fails to provide the service, does the advance fall within the meaning of ‘operational debt’ under Section 5(21) of the Insolvency and Bankruptcy Code?

This question keeps coming up for judicial review in IBC cases. A recent judgment of the National Company Law Appellate Tribunal, in Chipsan Aviation Pvt Ltd vs Punj Lloyd Aviation Ltd, is instructive in this regard. Chipsan, the appellant, had paid Punj Lloyd an advance of ₹60 lakh for some services which, according to Chipsan, Punj Lloyd failed to provide.

Punj Lloyd lost the case at NCLAT, New Delhi. The appellate tribunal set aside a verdict of NCLT, holding that the advance was not ‘operational debt’ within the meaning of Section 5(21) of IBC.

The section says: “‘Operational debt’ means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.”

NCLAT New Delhi’s Chairperson Justice Ashok Bhushan and Member-Technical Barun Mitra observed that operational debt is defined as “a claim in respect of the provision of goods and services. The expression ‘goods and services’ is preceded with the word ‘in respect of’.

“The material on record does indicate that advance of ₹60 lakh was given by the operational creditor to the corporate debtor for availing the aviation services and with regard to which, however, no contract could be entered into between the appellant and the corporate debtor.”

Relying on a Supreme Court judgment in Consolidated Construction Consortium Ltd vs Hitro Energy Solutions, the tribunal said the expression ‘in respect of’ in Section 5(21) must be interpreted in a broad manner.

The advance payment of ₹60 lakh was clearly an operational debt and the adjudicating authority erred in rejecting Section 9 application.