NCLAT held that the security deposit claims do not qualify for operational creditor status under the Insolvency and Bankruptcy Code.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Yogesh Khanna (Judicial Member) and Arun Baroka (Technical Member) was hearing an appeal and ruled that the Appellant could not be considered an "Operational Creditor" under Section 5(21) of the Insolvency and Bankruptcy Code, 2016, because the security deposit related to a pre-existing contractual obligation rather than the direct provision of goods or services, and thus did not qualify as "operational debt”.
In the appeal filed by Carestream Health India Private Limited (“Appellant”) against the order of the National Company Law Tribunal (NCLT), Mumbai, dated 24 March 2023, the NCLAT addressed whether the Appellant's claim could be classified as an "operational debt" under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Appellant sought to initiate a Corporate Insolvency Resolution Process (CIRP) against Seaview Mercantile LLP (“Respondent”) for a refund of a security deposit paid under a "Without Prejudice" Letter of Intent (WP-LOI). The NCLT had previously dismissed the application, ruling that the Appellant did not qualify as an "Operational Creditor" because the claim did not arise from the provision of goods or services.
The dispute originated from an agreement between the Appellant and Respondent dated 7 May 2019, where the Appellant paid a security deposit for leasing premises that were later found ineligible for IT/ITES registration. Following the cancellation of the WP-LOI and repeated demands for refund, the Appellant filed a Section 9 petition, which was rejected by the NCLT on grounds that the claim did not constitute an operational debt as defined under Section 5(21) of the IBC.
The NCLAT upheld the NCLT's decision, finding that the security deposit related to a pre-existing contractual obligation rather than the direct provision of goods or services. Thus, it did not qualify as an "operational debt." The NCLAT further noted that there was a pre-existing dispute between the parties regarding the validity of the WP-LOI and the nature of the claim, which rendered the application for CIRP inadmissible. The NCLAT's ruling reaffirmed that the security deposit did not meet the criteria of operational debt and that insolvency proceedings should not be used for debt recovery in the presence of existing disputes.
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