The National Company Law Appellate Tribunal (NCLAT) delivered several significant orders during May 2024 that clarified persistent areas of ambiguity under the Insolvency and Bankruptcy Code, 2016 (IBC). Key rulings addressed the scope of operational debt under Section 5(21), the commencement of interim moratorium under Section 96 in personal guarantor proceedings, and the evidentiary threshold for establishing claims in insolvency applications.
Background
The IBC, now in its eighth year of operation, continues to generate substantial appellate litigation as stakeholders test the boundaries of statutory provisions. Two recurring areas of dispute have been the classification of debts as operational versus financial — which determines the procedural route and rights available to creditors — and the interplay between personal guarantor insolvency provisions and the corporate insolvency resolution process (CIRP).
The NCLAT, as the principal appellate forum under the IBC, plays a critical role in harmonising the jurisprudence emerging from multiple NCLT benches across the country. The May 2024 orders address questions that arise frequently at the admission stage, where jurisdictional and classification disputes can determine the trajectory of an insolvency case.
Key Holdings
The NCLAT established the following principles across multiple orders in May 2024:
Operational debt — nexus test: The Tribunal reiterated that to establish a debt as an operational debt under Section 5(21) of the IBC, the operational creditor need only demonstrate that the claim bears some nexus with a provision of goods or services. A strict contractual relationship is not the sole determinant; the commercial reality of the transaction governs classification.
Security deposits not operational debt: In a separate ruling, the NCLAT held that a security deposit made under a letter of intent to ensure execution of a leave and licence agreement does not qualify as operational debt under Section 5(21). Such deposits are linked to conditional contractual arrangements and lack the requisite nexus with provision of goods or services.
Personal guarantor applications under Section 95: The NCLAT rejected a challenge to an insolvency application filed against a personal guarantor, affirming that Section 95(1) of the IBC permits a creditor to initiate insolvency resolution proceedings against a personal guarantor through a resolution professional. The Tribunal clarified that the right of the creditor is statutory and does not require prior exhaustion of remedies against the corporate debtor.
Deliberate obstruction of CIRP: The NCLAT upheld a finding that an Assignment Agreement initiated by a corporate debtor was a deliberate strategy designed to introduce obstacles and prolong the CIRP. The Tribunal observed that such conduct undermines the time-bound nature of the resolution process and cannot be countenanced.
Implications for Practitioners
These rulings carry practical significance for insolvency professionals, creditors, and debtor advisors navigating the IBC framework. The nexus test for operational debt provides operational creditors with a broader evidentiary pathway, reducing the burden at the admission stage. However, the security deposit exclusion introduces a limiting principle: not every payment flowing from a commercial relationship will qualify as operational debt.
For practitioners advising personal guarantors, the Section 95 ruling forecloses arguments that creditors must first pursue the corporate debtor before proceeding against guarantors. This aligns with the parallel-track approach that the Supreme Court endorsed in Lalit Kumar Jain v. Union of India (2021).
The NCLAT's firm stance against deliberate CIRP obstruction signals that tribunals will scrutinise transactions entered into by corporate debtors during or proximate to insolvency proceedings with heightened scepticism. Practitioners advising debtors should ensure that all transactions during this period are commercially justifiable and transparently documented.