Lease Rent/Damages Subsequent To Commencement Of CIRP Cannot Be Treated As CIRP Cost: NCLAT
Mohd Malik Chauhan
31 Oct 2024 4:00 PM IST
The NCLAT New Delhi Bench of Justices Ashok Bhushan and Barun Mitra held that lease rent/damages due to the corporate debtor after the commencement of the CIRP cannot be considered as CIRP cost that too when an arbitral award with respect to the same amount had already been secured which could not be executed due to moratorium under section 14 of the IBC. Brief Facts This Appeal...
The NCLAT New Delhi Bench of Justices Ashok Bhushan and Barun Mitra held that lease rent/damages due to the corporate debtor after the commencement of the CIRP cannot be considered as CIRP cost that too when an arbitral award with respect to the same amount had already been secured which could not be executed due to moratorium under section 14 of the IBC.
Brief Facts
This Appeal has been filed challenging the Order dated 09.05.2023 passed by the Learned Adjudicating Authority was filed by the Appellant challenging the decision of the Liquidator communicated by email dated 03.01.2023.
Appellant's predecessor in title executed a Lease Deed dated 04.04.2012 in favour of the Corporate Debtor, letting out an industrial shed with built-up area and open space. Lease deed was executed for 7 years on monthly lease rent of Rs. 21,83,000/-.Appellant obtained title over the demise premises Property by virtue of Settlement Deed registered on 18.03.2015.
The Corporate Debtor started defaulting payment of the lease rent from the month of December 2014. Lessor invoked Clause 21(a) of the Lease Deed and Notice dated 01.05.2015 was issued to the Corporate Debtor terminating the Lease Deed and calling upon the Corporate Debtor on failure to pay the arrears of rent due, to hand over the possession.
Arbitration Proceedings were initiated and Arbitral Tribunal in Arbitration Case No. 01/2015 gave an Award on 07.09.2016, directing for payment of rental arrears The Appellant filed Execution Petition before the Ld. District Judge, Thiruvallur to exclude the Award, which Execution Proceedings remain pending till Corporate Insolvency Resolution Process (CIRP) was commenced against the Corporate Debtor on 03.02.2021.
By Order dated 18.10.2022, Adjudicating Authority directed for liquidation of the Corporate Debtor and appointed Respondent as Liquidator. Application filed by the Appellant I.A. No. 2379/2022 was disposed of permitting the Appellant to approach the Liquidator with their prayers and Liquidator was directed to decide.
On 03.01.2023 Liquidator communicated her decision to the Appellant that arrears of rent/damages for unauthorised occupation of the demised premises property are admitted as an Operational Debt and not as a CIRP Cost.
Contentions
The Appellant relies on Regulation 31(b) of the IBBI (Insolvency Resolution Process for Corporate Persons), Regulations, 2016, and submitted that in view of Moratorium imposed under Section 41(1)(d) Appellant could not take possession of the assets and hence rights of the Appellant are prejudicially affected, which entitled the amount which was liable to be paid to the Appellant as CIRP Cost.
That when the Liquidator was using the premises, Liquidator was liable to pay the damages as CIRP Cost. RP was occupying and using the premises during the CIRP period. Hence, the Respondents are liable to pay the same as CIRP Cost and not to consider it an Operational Debt.
Per contra, the respondents submitted that when the Appellant was not receiving the rent on the date when CIRP commenced, it cannot claim that the Moratorium prejudicially affected its rights.
That Corporate Debtor was not being run as a going concern, hence there was no occasion to treat the damages claimed by the Appellant as the CIRP Cost. Operation of Corporate Debtor has ceased five years before the commencement of the CIRP. Liquidator has accepted the claim of damages from 03.02.2021 till the commencement of the Liquidation as Operational Debt and the payment of said Operational Debt shall be discharged as per waterfall mechanism under Section 53 of the IBC.
NCLAT's Analysis
The tribunal at the outset referred to the definition of the Insolvency Cost under section 5 (13) of the and observed that when we look into the definition of Insolvency Resolution Process Cost as contained in Section 5(13), the claim does not fall in any of the Clauses (a) to (d).
The tribunal moved further to analyse the contention with respect to award could not be executed due to the moratorium under section 14 of the IBC which prejudicially affected the appellant. The tribunal noted that after enforcement of Moratorium under Section 14 by virtue of Section 14(1)(a) the Appellant could not have prosecuted the Execution Proceeding against the Corporate Debtor.
The provision against the Appellant to execute the Arbitral Award is covered by Section 14(1)(a). Present is the case where there is already an Arbitral Award in favour of the Appellant execution of which had already been initiated. Hence Appellant was by virtue of Section 14(1)(a) could not have been proceeded with the execution. When the Appellant could not have proceeded with the execution of Arbitral Award, there was no occasion to recover the rent and assets from the Corporate Debtor.
The tribunal further observed that now we come to the applicability of Regulation 31(b) on which reliance has been placed by the Counsel for the Appellant. Regulation 31(b) refers to amount due to a person whose rights are prejudicially affected on account of the Moratorium imposed under Section 14(1)(d).
The tribunal came to the conclusion that the entitlement of Appellant to receive damages and occupation from the Corporate Debtor was already crystallised in Award and it was due to 14(1)(a) Appellant could not have prosecuted the execution. Hence, we are of the view that the claim of Appellant as per Arbitral Award to receive damages and occupation from Corporate Debtor cannot be treated as Insolvency Resolution Process cost under Section 31(b).
The tribunal agreed with respondent's reliance on the NCLAT judgment in JAS Telecom Private Limited Vs. Eolane Electronics Bangalore Private Limited (2018) wherein it was held that “the rent has not been paid by the Corporate Debtor since 1st January, 2017 that is much prior to order of moratorium. The rent amount due to the Appellant was not prejudicially affected on account of the moratorium imposed under Section 14(1)(d). In fact it has not been paid since prior to the order of moratorium i.e. since 1st January, 2017.”
The tribunal concluded that in the present case, when the Appellant was not in receipt of rent from December 2014, and Arbitral Award obtained by the Appellant was still under execution, the lease rental subsequent to the commencement of the CIRP cannot be treated as CIRP cost and the Adjudicating Authority has rightly accepted the said claim of the Appellant as Operational Debt. It is already on the record that Appellant itself has filed its claim prior to CIRP period as an operational claim which has been admitted.
Accordingly, the present appeal was dismissed.
Case Title: Mr. A. Guhan and Anr. V. Ms. Sunita Umesh
Case Reference: Company Appeal (AT) (Insolvency) No. 1095 of 2023 & I.A. No. 3782 of 2023
Judgment Date: 29/10/2024
