Mobilization advance given for mobilization of material and workforce is an operational debt: NCLAT

Mobilization advance given for mobilization of material and workforce is an operational debt: NCLAT

The Bench comprised of Justice Ashok Bhushan (Chairperson), Justice M. Satyanarayana Murthy (Judicial Member) and Mr. Barun Mitra (Technical Member).

The National Company Law Appellate Tribunal ("NCLAT"), Principal Bench, while adjudicating an appeal held that a mobilization advance given for mobilization of material and workforce is an operational debt.

On 24.12.2010, Athena Demwe Power Ltd. ("Appellant") had awarded a contract to Abir Infrastructure Private Limited & Ors. ("Corporate Debtor") for execution of 1750 MW Demwe Lower Hydroelectric Project in Arunachal Pradesh, pursuant to which an advance of Rs. 7,48,40,06,136/- was transferred by the Appellant to the Corporate Debtor through the Bank Transfer.

On 14.02.2011, Corporate Debtor had issued Corporate Guarantee in favour of the Appellant, which was extended till 23.11.2021. However, the Contract work could not be completed since site was never made available by the owner.

Thereafter, NCLT New Delhi Bench ("Adjudicating Authority") had initiated Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor and the Appellant had filed its claim before the Interim Resolution Professional (IRP) for an amount of Rs. 1784,99,28,651/- as a Financial Creditor. The IRP informed the Appellant that his claim falls within operational debt and not financial. Therefore, the Appellant filed his claim as an Operational Creditor, which was yet again rejected by the Resolution Professional on the ground that the claim falls under 'other creditor' head. In the meanwhile, the Adjudicating Authority vide an order dated 28.10.2021 had approved the Resolution Plan submitted by SREI Multiple Asset Investment Trust i.e. Respondent No. 2 for the Corporate Debtor.

The Appellant had filed an interim application before the Adjudicating Authority challenging the rejection of its claim, which was dismissed by the Adjudicating Authority on 12.01.2022. The Appellant filed an appeal before the NCLAT against the order dated 12.01.2022.

The primary issues before the Court were:

• Whether the mobilization advance given by the Appellant to the Corporate Debtor is a Financial Debt within the meaning of Section 5(8) of the IBC?

• Whether the mobilization advance given by the Appellant to the Corporate Debtor is an Operational Debt within the meaning of Section 5(21) of the IBC?

The Bench observed that the mobilization advance which was given for mobilization of material and workforce on the site; and was not disbursed against the consideration for time value of money. It was held that the guarantee referred to in Section 5(8)(i) relates to any of the items referred to in subclauses (a) to (h) of Section 5(8) of the IBC and since these clauses do not include mobilization advance, the same cannot be categorized as financial debt.

The Bench observed that mobilization advance was given by the Appellant in pursuance of an EPC Contract dated 24.12.2010. The advance given was to be adjusted in the running bills as per the terms and conditions of the contract or could have been demanded back by the Appellant. The contract between the parties could not be carried out due to non-providing of site for carrying out the work. The contract was virtually given up and was never implemented.

"In view of the law laid down by the Hon'ble Supreme Court in M/s. Consolidated Construction Consortium Limited, the mobilization advance given by the Appellant to the Corporate Debtor is clearly an Operational Debt and the Adjudicating Authority committed error in rejecting the claim of the Appellant as an Operational Debt."

The Bench directed implementation of the approved Resolution Plan and to treat the claim of the Appellant as an Operational Debt and the Resolution Applicant would be obliged to include such claim and make payment to the Appellant accordingly. The appeal was allowed by the Bench.