Claims Arising Out Of Grant Of Licence/Permission For Use Of Intellectual Property Rights Is An Operational Debt: NCLAT Delhi

Background Facts

Knight Riders Sports Private Limited ("Respondent") and M/s. Global Fragrances Private Limited ("Appellant/Corporate Debtor") had entered into a Licensing Agreement whereby the Respondent had permitted the Appellant to (a) use manufacture, sell, distribute and advertise the licensed products namely Deodorants, Hair Gels, and Perfumes; (b) use the Respondent's intellectual property rights i.e., the trademark 'Kolkata Knight Riders'/('KKR') brand logo. In return the Appellant was obligated to pay Minimum Guaranteed Royalties ("MGR") to the Respondent as compensation for enjoying the exclusive rights.

The Respondent had raised invoices for an aggregate sum of Rs.40,60,147/- towards MGR payable by the Appellant and only part payment was received. The Respondent filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking initiation of Corporate Insolvency Resolution Process ("CIRP") against the Appellant/Corporate Debtor.

The Appellant had opposed the petition on the ground that claims arising out of non-payment of MGR were not Operational Debt as it did not pertain to any goods or services.

Proceedings Before NCLT

On 05.07.2021, the NCLT Bench had admitted the Petition and initiated CIRP against the Appellant while observing that incorporeal rights like trademarks, copyrights, patents and rights in personam capable of transfer or transmission are included in the ambit of "goods". Further, for a claim to fall within the definition of 'operational debt', the operational creditor must establish that it has a "right to payment" in respect of the provision of goods or services and also that Corporate Debtor has committed a "default" towards its liability or obligation in respect of such outstanding claim.

The NCLT bench had held that MGR was a fixed payment due and payable by the Corporate Debtor to the Operational Creditor under the Agreement and the non-payment by the Corporate Debtor for using the "Trademark" which is the Licensed Product of the Operational Creditor, amounted to an operational debt under the IBC. The NCLT Bench had opined that the Corporate Debtor had admitted the default and no dispute was raised with respect to existence of debt, the quality of goods or service, or the breach of a representation or warranty, either directly or indirectly.

Decision Of The NCLAT

Aggrieved by the order dated 05.07.2021 passed by the NCLT Bench, the Appellant had filed an appeal before the NCLAT. The prime contention of the Appellant was such that the payment of 'Minimum Guaranteed Royalties' under the Licensing Agreement does not arise out of any 'goods or services' and therefore does not fall within the ambit of Operational Debt as defined under Section 5(21) of the IBC.

The NCLAT Bench relied on the Supreme Court judgment in Vikas Sales Corporation v Commissioner of Sales Tax, (1996) 4 SCC 433, in which it was held that even incorporeal rights like trademarks, copyrights, are 'Movable Property' and are included in the ambit of definition of 'goods' under the provisions of Sale of Goods Act, 1930.

The Bench observed that a Guaranteed Minimum Royalty is a payment made periodically by a licensee to a licensor pursuant to a licence, regardless of sales success for a licensed product over that year. Unlike a royalty which is usually calculated as a percentage of net sales revenue, a minimum royalty is generally an agreed lump-sum payment of reasonably expected revenue from the sale of a licensed product over the agreed time period.

"In this case, the 'Corporate Debtor' was permitted to use the trademark of 'KKR' in relation to its licensed products and hence we note that there was temporary transfer/permission to use, constituting 'provision of service' rendered by the first Respondent and therefore falls within the definition of service and any amounts 'due and payable' arising out of such service is an 'Operational Debt'. Further, it is also the case of the first Respondent that they had paid 'Service Tax' to the Government Authorities on the invoices raised against the 'Corporate Debtor'. As the invoices itself contemplate payment of GST for the use of the services rendered by the first Respondent, on which GST is payable, the definition of 'service' under the Central Goods and Services Tax Act, 2017 is applicable to the facts of this case."

The Bench held that the Respondent has established a 'Right to Payment' in respect of the provisions of goods and services provided by it. The grant of an exclusive right and license to the Corporate Debtor, to use manufacture, sell, distribute and advertise the licensed products and to use the associated trademark has a direct nexus with the business operations, sales and the actual product supplied by the Corporate Debtor. Hence, the 'Claim' in respect of such provisions of 'goods and services', under the terms of the License Agreement, falls within the ambit of the definition of 'Operational Debt' under Section 5(21) of the IBC. The Bench upheld the decision of the NCLT.

Case Title: Somesh Choudhary v Knight Riders Sports Private Limited & Ors., COMPANY APPEAL (AT)(INS) No. 501 of 2021

Counsel For Appellant: Mr. Aditya Sharma, Advocates.

Counsel For Respondent No. 1: Mr. Vishal Gehrana, Ms. Ruby Singh Ahuja, Mr. Lakshay Khanna and Mr. Jaiveer Shergill, Advocates for R-1.

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