Pranav B Prem

The National Company Law Tribunal, New Delhi (Court-V) has held that the non-refund of a contractual security deposit, which is provided only as collateral to secure performance obligations, does not constitute “operational debt” under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). Consequently, such a claim cannot be used to trigger the Corporate Insolvency Resolution Process (CIRP) under Section 9. The ruling was delivered by a Bench comprising Mahendra Khandelwal (Judicial Member) and Anu Jagmohan Singh (Technical Member) while dismissing a petition filed by Unique Tobacco Company (Operational Creditor) against Pelican Tobacco (India) Pvt. Ltd. (Corporate Debtor).

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The dispute arose from a Manufacturing Agreement executed between the parties on 10 July 2021 for the manufacture and supply of cigarettes. The agreement required the Operational Creditor to provide a security deposit of ₹31 lakh through cheque, which was to be refunded within 15 days of the termination of the agreement, failing which interest at 18% per month would apply. The Operational Creditor alleged that after the automatic termination of the agreement—owing to the absence of any supplementary renewal—Pelican Tobacco failed to refund the security amount. It further claimed unpaid invoice amounts totalling ₹26.64 lakh and interest on the security amount, asserting a total operational debt of ₹2.36 crore. A demand notice was served in October 2024, and thereafter, the Section 9 petition was filed. 

The Corporate Debtor opposed the petition, maintaining that the security amount could not be treated as operational debt because it was not consideration for any goods or services, but merely a collateral amount securing performance. It argued that even if unpaid invoices were considered, the only amount that could qualify as operational debt was ₹26.64 lakh—far below the ₹1-crore threshold under Section 4 of the IBC. The Corporate Debtor further contended that the petition was a disguised recovery action and disputed the Applicant’s inflated interest computation, arguing that a 216% annualised rate was legally untenable.

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The Tribunal examined the terms of the Manufacturing Agreement, particularly Clause 7.4, which expressly defined the ₹31 lakh payment as a “fixed security amount” meant for ensuring delivery performance and not as an advance for the supply of goods. The Bench relied on the Supreme Court's decision in Global Credit Capital & Anr. v. Sach Marketing Pvt. Ltd. (2024) 9 SCC 482, which emphasized that a claim qualifies as operational debt only when the liability sought to be enforced has a direct nexus with the supply of goods or services. Applying this principle, the NCLT held that the security amount had “no direct or indirect connection” with any supply transaction and therefore did not fall within the definition of operational debt under Section 5(21).

The Tribunal also rejected the Operational Creditor’s reliance on precedents involving advance payments, noting that such cases were distinguishable because advances towards goods bear a clear commercial nexus with supply—unlike collateral security deposits. Since the security amount and its claimed interest were excluded from the operational-debt computation, the only remaining claim pertained to unpaid invoices of ₹26.64 lakh. This, the Tribunal held, was significantly below the statutory threshold of ₹1 crore required to initiate CIRP.

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Finding the petition not maintainable, the NCLT concluded that the Operational Creditor could not use the insolvency mechanism as a recovery tool for amounts that did not meet the legal requirements of operational debt. The application was accordingly dismissed without costs.

Appearance

For the Applicant: Senior Advocate Sumeet Verma with Advocates Rachit Ranjan, Mahinder Pratap Singh, Charu Verma

For the Respondent: Advocate Sanjeev Bindal

Cause Title: Unique Tobacoo Company Vs. Pelican Tobacco (India) Pvt. Ltd

Case No: C.P. (IB) NO.: 860/ND/2024

Coram: Mahendra Khandelwal (Judicial Member), Anu Jagmohan Singh (Technical Member)