NCLT Dismisses Insolvency Petition Against Pelican Tobacco Pvt. Ltd.

Fixed Security Amount Not Deemed Operational Debt; Petition Dismissed Due to Threshold Limit Shortfall

In a recent judgment delivered by the National Company Law Tribunal (NCLT), New Delhi Bench, the insolvency petition filed by Unique Tobacco Company against Pelican Tobacco (India) Private Limited was dismissed. The tribunal, comprising Shri Mahendra Khandelwal, Member (Judicial), and Ms. Anu Jagmohan Singh, Member (Technical), ruled that the fixed security amount stipulated under the manufacturing agreement does not qualify as operational debt, leading to the dismissal of the petition on grounds of maintainability.

Unique Tobacco Company, the operational creditor, had sought the initiation of a Corporate Insolvency Resolution Process (CIRP) against Pelican Tobacco, alleging default in clearing outstanding dues amounting to Rs. 2,36,20,939. The petition was filed under Section 9 of the Insolvency and Bankruptcy Code, 2016, which governs the initiation of CIRP by operational creditors.

The core issue revolved around a fixed security amount of Rs. 31,00,000, which Unique Tobacco claimed as part of the operational debt, alongside interest charges. The tribunal, however, found that this amount, specified under clause 7.4 of the manufacturing agreement, was intended as collateral security to ensure performance obligations, rather than a direct payment for goods or services. Consequently, any interest on this amount was also deemed non-operational in nature.

The tribunal referenced Section 5(21) of the Insolvency and Bankruptcy Code, which defines operational debt as claims related to the provision of goods or services. The judgment cited previous Supreme Court rulings, emphasizing that a debt qualifies as operational only if it is directly connected to the service aspect of the transaction.

Further, the tribunal pointed out that the remaining claim for unpaid invoices amounted to Rs. 26,64,939, which fell below the threshold limit of Rs. One Crore required for initiating CIRP under Section 4 of the Code. Thus, the petition was dismissed as not maintainable.

The judgment is significant as it clarifies the distinction between security amounts and operational debts in insolvency proceedings, reinforcing the legal requirement for a direct nexus between the debt and supply of goods or services.

Bottom Line:

Insolvency and Bankruptcy Code, 2016 - Operational debt - Fixed security amount under manufacturing agreement not treated as operational debt - Default of refund of fixed security amount has no direct or indirect connection with supply of goods or services under the agreement.

Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Section 9, Section 5(21), Section 4

Unique Tobacoo Company v. Pelican Tobacco (India) Private Limited, (NCLT)(New Delhi Bench) : Law Finder Doc Id # 2811306