Insolvency and Bankruptcy Code, 2016: Gautam Khaitan Shines Line on the Subject of Operational Debt and Advance Payment

Gautam Khaitan analyses the subject of ‘operational debt’ as opposed to ‘debt’ within the functions of the Insolvency and Bankruptcy Code, 2016. As the head of the Corporate Divison at OP Khaitan and Co. law firm in Delhi, he has been imparting his litigation expertise within the corporate world since decades.

In the previous regime of insolvency regulation, in the event of a company failing to meet its obligations to creditors, the mechanism in place to deal with the development was too cluttered and riddled with self-contradictory rulings. “The position of corporate world when it comes to insolvency process has had a tumultuous history since beginning”, expresses Gautam Khaitan, a seasoned legal personality, who has wide ranging expertise in corporate law and affairs. This made the entire procedure of corporate insolvency resolution financially unviable or far less attractive to the creditors, especially for the small investors.

Thus, with the aim to establish a rationalized and efficient framework to oversee insolvency and bankruptcy cases, the Insolvency and Bankruptcy Code, 2016 was passed by the Parliament of India. It governs the entire resolution process through formation of the Insolvency and Bankruptcy Board of India. The Board has representatives from various fields and institutions, including the Reserve Bank of India, Ministry of Finance, and Ministry of Law.

Gautam Khaitan hails from a long and rooted family of lawyers and eminent personalities in their own right, with his father, OP Khaitan, being the founder of Delhi-based law firm, OP Khaitan & Co. He heads the Corporate Division there and under his tenure, the firm has witnessed new heights of success and recognition. He has served clients over different systems in his last 29 years of litigation and has observed the changes and their effects from up close.

Thus, he furnishes a legal expert’s viewpoint on the issue of ‘operational debt’ that has long been a point of contention within the corporate world. The Code states “an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.”

The Code, as published in the Gazette of India, defines “operational creditor” as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”. Further, “operational debt” is defined as “a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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”.

On the expiry of the stipulated 10-day period of demanding payment by an operational creditor, Gautam Khaitan explains that the aggrieved has the recourse to “file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process”.

With the Code, the Indian Government endeavored to completely overhaul the insolvency process and streamline it to better serve the interests of the creditors. he adds, “previously, a claim of faulting in advance debt could allow for winding up of the company”, referring to certain provisions of the Companies Act, 1956. “In the old regime, a creditor could take the indebted company to take by filing a petition under Section 433(e), under the Companies Act, 1956”.

Citing the case of “Overseas Infrastructure Alliance (India) Private Limited v. Kay Bouvet Engineering Limited”, he describes how NCLAT (National Company Law Appellate Tribunal) overturned the decision of NCLT Mumbai (National Company Law Tribunal) on what qualifies as operational debt.

According to Gautam Khaitan, NCLAT held the view in the particular case that the advance payment made by the creditor was “supply of goods and rendering of services”, thus, it was defined as ‘operational debt’ within the ambit of the Insolvency and Bankruptcy Code, 2016. He believes that this clarity will help many creditors and small-time investors who are involved in disputes revolving around this subject.

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