NCLAT New Delhi: Barter Agreements Don't Constitute 'Operational Debt'

Background Facts

AG8 Ventures Ltd. ('Corporate Debtor') had obtained registration of 11 real estate projects from the Real Estate Regulation Authority, Madhya Pradesh ('RERA'). To carry out extensive advertising and marketing campaigns for its projects, the Corporate Debtor had engaged with D.B. Corp Ltd. ('Operational Creditor').

Barter Agreements i.e. cash component and Barter component for consideration were entered upon between the Corporate Debtor and Operational Debtor with the Barter Component including allotment of units to be transferred in favor of the Operational Creditor.

Numerous complaints were received by RERA from the Corporate Debtor's allottees leading to various orders for refund of allotee amounts. Further, an order on 08.01.2022 found the Corporate Debtor guilty of fund diversion and failure to maintain the designated account, leading to the revocation of the 'Aakriti Aquacity' project registration. Further, orders were also passed revoking the registration of 'Aakriti Business Arcade' and instructing the appointment of an agency for project completion under Section 8 of the RERA Act, 2016.

On 05.08.2022, NCLT Indore admitted the CIRP application filed by the Operational Creditor under Section 9 of IBC claiming a default of Rs.10.77 crores with interest as per the Barter Agreements.

\Contentions of RERA:

RERA filing an appeal against the NCLT Indore order has contended that the CIRP was collusively filed with the Corporate Debtor to evade obligations set by RERA's orders. Further, the Barter Agreement has been deemed unfair by RERA and is being exploited by the Corporate Debtor to escape its responsibilities. RERA also claimed there is no operational debt against the Corporate Debtor justifying CIRP, as the cash component has been paid, and the Allotment of units under Barter Agreements doesn't qualify as operational debt.

Further, the invoices submitted dated from 2010 to 2017 are forged since they contain columns for CGST and IGST, introduced only on 01.07.2017. The Operational Creditor fabricated the invoices after this date to trigger the CIRP and were not relied upon for the Demand Notice. The Operational Creditor, having established rights as an allottee with RERA, is argued to be ineligible to initiate CIRP as an Operational Creditor. The Section 9 proceeding is deemed an abuse of legal process, and the Barter Agreement's use undermines the IBC's objectives. NCLT Indore failed to recognize that the Operational Creditor doesn't meet the definition of Operational Creditor under Section 5(20) of the IBC. It is claimed that, out of 210 invoices filed, only one dated 29.08.2019 is within the three-year limit from the Section 9 application, rendering the others time-barred.

NCLAT Verdict:

The NCLAT New Delhi allowed the appeal and set aside the NCLT Indore's order admitting the CIRP. It held that the initiation of CIRP was contrary to the provisions of IBC since the non-discharge of the Barter Component by the Corporate Debtor does not lead to any operational debt and no payment of money was due on the corporate debtor based on which CIRP could be initiated.

The Appellate Tribunal highlighted that there are nine Barter Agreements between the parties beginning on 29.09.2010 and last being 13.08.2019 executed on stamp duty of Rs. 1000. It observed that as per the definition of a claim under Section 3(6) of IBC, both sub-clause '(a)' and '(b)' refer to “a right to payment”. The claim must subsist for a debt being debt to become operational debt and must relate to a right to payment unless the operational creditor has a claim i.e. a right to payment against the corporate debtor, no operational debt can arise to enable the Operational Creditor to initiate proceeding under Section 9 of the IBC.

Further, it pointed out that Section 8(1) uses the expression “demanding payment of the amount involved in the default” and Section 8(2)(b) uses the expression “the payment of unpaid operational debt”, non-payment of the operational debt is a sine qua non for giving any demand notice under Section 8 of the Code. Moreover, Section 9 also makes it clear that after the expiry of period of 10 days from the date of delivery of the notice, if the Operational Creditor does not receive payment from the Corporate Debtor, the operational Creditor may initiate a CIRP. Therefore, non-payment of operational debt is a condition precedent for initiating CIRP.

It also placed reliance on the Supreme Court judgment in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. NBCC (India) Ltd. & Ors. wherein it was held that the expression payment only refers to the payment of money and not anything of its equivalent in nature of Barter; when construing the same expression of payment in Section 30(2). The payment refers only to the payment of money and not anything of its equivalent like Barter, the same interpretation has to be put to Sections 8 and 9 of IBC.

In conclusion, NCLAT observed that since there was no Operational Debt due on the Corporate Debtor and the proceedings initiated by the Operational Creditor were wholly outside the IBC, no need arises to deal with the genuineness of the invoices.

Case Title: Real Estate Regulatory Authority vs. D.B. Corp Ltd. & Anr.

Case No.: Company Appeal (AT) (Insolvency) No.1172-1173 of 2022

Counsel for the Appellant: Mr. Abhijeet Sinha, Mr. Aditya Shukla, Ms. Heena Kochar, Mr. Anuj Tiwari, Mr. Swankit Nanda, Mr. Prakhar Shukla, Advocates.

Counsel for the Respondent: Mr. Krishnendu Datta, Sr. Advocate, Mr. Ashish Verma, Mr. Rahul Gupta, Ms. Salonee Keshwani, Advocates for R-1. Mr. Aditya Gauri, Mr. Amar Vivek, Advocates for RP. Mr. Keshav Sharma, Mr. Gulshan Vardhan, Mr. Mohit Singh, Mr. Praveen Agnihotri, Advocates for Intervenor. Mr. Abhishek Anand, Ms. Kashish Rehan, Advocates for Intervenor. Mr. Neeraj Malhotra, Sr. Advocate for Promoters.

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