NCLAT Holds Lease Rental As Operational Debt Under The Insolvency And Bankruptcy Code, 2016

The five judge bench was constituted after a three judge bench of NCLAT vide its order dated 09.03.2022 referred two issues for the consideration of larger bench;

"i. Whether the Judgment of this Tribunal in Company Appeal (AT) (Ins.) No.331 of 2019 in the matter of 'Mr. M. Ravindranath Reddy vs. Mr. G. Kishan & Ors.' lays down the correct law.

ii. Whether claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of operational debt within the meaning of Section 5(21) of the Code."

Brief Background

Jaipur Trade Expocentre Private Limited (Jaipur Trade)entered into a license agreement dated 15.04.2017 with Metro Jet Airways Training Private Limited (Metro Jet Airways) for a license of a building admeasuring 31,000 Sq. Ft. The term of the license was for a period of five years and the license was INR 4,00,000/- per month plus govt. taxes.

Initially, Metro Jet Airways made payment to the Jaipur Trade but the cheque dated 07.05.2018 & 08.10.2018 for INR 20,00,000/- each were dishonoured. Accordingly, Jaipur Trade sent a demand notice under Section 8 of the code and thereafter filed petition under Section 9 of the Code against Metro Jet Airways before NCLT Jaipur.

NCLT dismissed the Section 9 petition on the ground that the claim arising out of the license to use the immovable property does not fall in the category of goods & services and therefore, the Section 9 Application is not maintainable.

Contentions of Jaipur Trade

It was contended on behalf of Jaipur Trade that the premises were rented out to the Metro Jet Airways for running of an educational institution and the provision made by the license agreement is a provision for service as mentioned under Section 5(21) of the Code and thus qualifies as an operational debt under the Code.

Jaipur Trade further relied on the case of Anup Sushil Dubey v. National Agriculture Cooperative Marketing Federation of India ltd. and Anr. and Sarla Tantia v. Ramaani Hotels & Resorts Pvt. Ltd. and Anr wherein NCLAT held that lease rentals qualifies as operational debt.

Contentions of Metro Jet Airways

It was contended on behalf of Metro Jet Airways that the license agreement does not come within the definition of operational debt and therefore, outstanding rent/license fee cannot be termed as operational debt under Section 5(21) of the Code.

Metro Jet Airways further relied upon the case M. Ravindranath Reddy v. G. Kishan & Ors. – Company Appeal (AT) (Ins.) No.331 of 2019 and Promila Taneja vs. Surendri Designe Pt. Ltd. - Company Appeal (AT) (Ins.) No.459 of 2020 wherein NCLAT held that lease rental does not amount to operational debt.

Decision/Analysis by NCLAT

NCLAT noted that the definition of operational debt as mentioned under Section 5(21) of the Code provides that the operational debt means a claim arising out of provision of goods and services but the term "services" is not defined anywhere under the IBC.

The Bench referred to Clause 4(b) of the license agreement which provides that the licensee shall pay all govt. taxed including GST and observed that the payment of GST is only provided for goods and service and the license agreement itself provided for payment of GST which clearly indicates that the license is taxed for services. It was also observed that if the agreement was not for services then there was no requirement of payment of GST

NCLAT also held that the term operation is derived from "operate" and "operating cost" is an expense incurred in the conduct of the principal activities of the enterprise and similarly operational debt is also a debt which is incurred in the conduct of the principal activities of the enterprise.

"In the present case, the Corporate Debtor has taken a licensed premises for running an Educational Institution. All cost incurred by the Corporate Debtor and cost which remained unpaid shall become a debt on the part of Operational Creditor."

NCLAT further relied upon the Bankruptcy Law Reforms Committee Report, 2015 which under the heading "who can trigger CIRP" states that;

"5.2…Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease."

The bench also noted that the BLRC report is also being relied upon by the Supreme Court in the case of Mobilox Innovations versus Kirusa Software and thus the BLRC report can be treated as an aid for interpretation for IBC which explicitly provides that a lessor can be treated as an operational creditor.

NCLAT further held that the judgement of three judge bench of NCLAT in the case of Mr. M. Ravindranath Reddy Vs. Mr. G. Kishan & Ors does not lay down the correct law as it has referred to provisions of Section 14(1) which has nothing to do with the extent and expense of "operational debt" under the Code.

"Essential goods and services are entirely different concept and the protection under Section 14(2) as provided for is an entirely different context. Thus, the observations made that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by scheme of the Code."

The bench further held that judgement of NCLAT in the case of Promila Taneja vs. Surendri Designe Pt. Ltd. held that the definition of "service" as mentioned under Consumer Protection Act, 2019 and the Goods and Services Act, 2017 cannot be referred for the purpose of interpretation of term "Operational Debt" as these acts are not mentioned under Section 3(37) of the Code. However, the Bench held that in the present case, the license agreement itself provides for payment of GST and thus definition of term "service" under GST Act can be referred. Furthermore, the Bench held that since judgement of Promila Taneja relied upon the case of M Ravindranath reddy which is already held as bad law and therefore, consequently, Promila Taneja also does not lay down the correct law.

NCLAT allowed the appeal and concluded that;

1. Judgment of this Tribunal in Mr. M. Ravindranath Reddy (supra) as well as judgment in Promila Taneja's case does not lay down the correct law.
2. The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an 'operational debt' within the meaning of Section 5(21) of the Code.

Case Details: Jaipur Trade Expocentre Private Limited versus Metro Jet Airways Private Limited

Counsel for Appellant: Ms. Sanjana Saddy, Mr. Sanyat lodha and Ms. Harshita Singhal

Counsel for Respondent: Mr. Vikrant Arora and Mr. Manish Arora

Click Here To Read/Download Judgment