Status as on- 17/02/2020

The Hon’ble National Company Law Appellate Tribunal, New Delhi bench in Mr. M. Ravindranath Reddy Vs. Mr. G. Kishan & Ors. 12/2019 (IBC)12 has held that claims towards rent of leasehold property do not fall within the definition of the operational debt in terms of Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

Facts in brief:

The Appellant is the Director of the Corporate Debtor Company, and the Respondent herein was the applicant before the NCLT, claiming to be the Operational Creditors. The Respondents are the Lessors and the Corporate Debtor – M/s. Walnut Packaging Private Limited is the Licensee of Industrial Premises consisting of land measuring about 1667 sq. Yards, situated at Kukatpally, Hyderabad.

That tenancy of the Appellant was yearly, and the rent payable for the period from July 2011 to June 2017 was Rs. 85,67,290/- and The Corporate Debtor stopped making the payment from January 2017, after the last part payment was made, which was adjusted towards rental dues. After that, the Respondent /Petitioner issued a legal notice dated 15-06-2017 to handover the property back to the Petitioners, but the Corporate Debtor failed to vacate the property. After that, an eviction suit was filed against the Corporate Debtor before the jurisdictional Civil Court. The Demand Notice U/S 8 of I&B Code 2016 dated 18-01-2018 was also issued against the Corporate Debtor demanding Rs. 49,51,605/-, which was duly served on the Corporate Debtor.

The Corporate Debtor/Appellant submitted that he had paid the rent until December 2017, and no amount is due to the Petitioner. It is further stated that due to slowdown in the Operations of the Corporate Debtor during the period from April 2012 to July 2012 Petitioner/Respondent agreed on a moratorium for no yearly enhancement of rent for six years. The Adjudicating Authority held that the Corporate Debtor had taken the property of the Petitioners on rent and they were paying rent up to June 2017. But the Corporate Debtor failed to pay the rent from July 2017 onwards.

Issues arose before the NCLAT :

1. Whether a landlord by providing lease, will be treated as providing services to the corporate debtor, and hence, an operational creditor within the meaning of Section 5(20)read with Section 5(21) of the ‘Insolvency and Bankruptcy Code, 2016? 
2. Whether the petition filed U/S 9 of the Insolvency and Bankruptcy Code 2016 is not maintainable on account of ‘pre-existing dispute’?

A verdict of the Hon’ble Tribunal :

The Hon’ble NCLAT held that:

Lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition of ‘Operational Debt.’

Analysis of the Verdict:

NCLAT based its decision on the following:

1. The Insolvency and Bankruptcy Code recognizes two types of debt to enable the creditors to make an application for initiating insolvency proceedings against the corporate debtor– financial debt and operational debt. If there is a debt, other than a financial debt or an operational debt, the creditor will not qualify to apply under Sections 7 or 9, as the case may be. Hence, the determination of the nature of claim/debt is an important step while considering the admission of an application under the Code.
2. There seems to be some rationale in restricting only to operational creditors for initiation of CIRP, other than financial creditors. Where default is committed to operational creditors towards payment of their debt connotes that the corporate debtor is not even in a position to service the regular payments and operational expenses, as required in the day-to-day functioning of the corporate debtor, which provides a clear indication to its insolvency, warranting the resolution process being put in place.
3. The law has not gone into defining goods or services – hence, one has to rely on general usage of the terms so used in the law, with due regard to the context in which the same has been used.
4. The Bankruptcy Law Reforms Committee (BLRC), recommends the treatment of lessors/landlords as operational creditors. However, the Legislature has not completely adopted the BLRC Report, and only the claim in respect of goods and services are kept in the definition of operational creditor and operational debt u/s Sec 5(20) and 5(21) of the Code. The definition does not give scope to interpret rent dues as operational debt. 
5. Further, for an amount to be classified for an operational debt under I&B Code, 2016, it is provided: Firstly, the amount falls within the definition of “claim” as defined under Section 3(6) of the Code; Secondly, such a claim should claim within the confines of the definition of a ‘debt’ as defined under Section 3(11), meaning it should be by way of a liability or obligation due from any person; Thirdly, such a “debt” should fall strictly within the scope of an “Operational Debt” as defined under Section 5(21) of the Code, i.e. the claim should arise in respect of 

• 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 either to the Central Government, any State Government or any local authority. 

The word “in relation to Government” or local authority and the dues owed to it, has been given a wide platform. It is important to see whether persons other than the Government or local authority can claim the benefit, that any debt owed should be construed as an ‘operational debt’ other than those classified as ‘financial debt’.

• Only if the claim by way of debt falls within one of these three categories, can be categorized as operational debt. In case if the amount claimed does not fall under any of the categories, the claim cannot be categorized as an operational debt, and even though there might be a liability or obligation due from one person, namely Corporate Debtor to another, namely Creditor other than the Government or local authority, such a creditor cannot categorize itself as an “Operational Creditor” as defined under Section 5(21) of the I&B Code, 2016. 
• In case of lease of immovable property, Default can be determined, on the basis of evidence. While exercising summary jurisdiction, the Adjudicating Authority exercising its power under Code cannot give finding regarding default in payment of lease rent, because it requires further investigation. Once an operational creditor has filed an application which is otherwise complete the Adjudicating Authority must reject the application u/s 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility, the Adjudicating Authority is to see whether there is a plausible contention which requires further investigation and the “dispute” is not a patently feeble legal argument or an assertion of fact, unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defense which is mere bluster. In the case in hand, the Respondent lessor has filed the petition for the realization of enhanced lease rent from the lessee. Thus, understanding for not increasing the rent of a period of 6 years is a question of fact, which requires further investigation. Thus, in the present case, there was a pre-existing dispute, which is proved by the issuance of notice under Section 106 of the TP Act, much before the issuance of demand notice, under Section 8 of the I&B Code. Hence, the application filed under Section 9 of the I&B Code could not have been admitted.
• Hon’ble Tribunal was of the opinion that the alleged debt on account of purported enhanced rent of leasehold property did not fall within the definition of the operational debt in terms of Section 5(21) of the Code. And based on the above, the appeal was allowed.

Cited:

1. Jindal Steel & Power Ltd. v. DCM International Ltd. Company Appeal (AT)(Insolvency) No 288/2017 
2. Parmod Yadav &Anr v. Divine Infracon (P) Ltd., 2017 SCC OnLine NCLT 11263
3. Col. Vinod Awasthy v. AMR Infrastructure Ltd.
4. CP/IB/61/9/HDB/2019 Manjeera Retail Holdings Pvt. Ltd. v. Blue Tree Hospitality Pvt. Ltd.
5. Mobilox Innovations (P) Ltd. V/s Kirusa Software (P) Ltd. reported in 2018 (1) SCC 353

Disclaimer– The above article is based on the personal interpretation of related laws, which may differ from person to person. The readers are expected to take expert opinion before relying on this article. For more clarification, the readers can be expected at shriya@centrik.in or support@centrik.in  

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