NCLAT Delhi: Refund Of Security Deposit Contingent Upon Executing A Leave And License Agreement Doesn't Constitute An Operational Debt Under IBC

Background Facts:

Carestream Health India Private Limited (the Appellant) and Seaview Mercantile LLP (Corporate Debtor) signed a “Without Prejudice” Letter of Intent (WP-LOI) for leasing a unit in the Silver Metropolis building.

The Appellant paid a security deposit of Rs. 25.68 Lakhs. However, after conducting due diligence, the Appellant discovered that the premises were ineligible for IT/ITES/STPI registration, contrary to the initial representation. As a result, the Appellant sought to terminate the LOI and requested a refund of the security deposit.

The Respondent disputed the Appellant's claims and asserted the right to forfeit the security deposit due to the Appellant's non-compliance. Subsequently, on 20.02.2020, the Appellant filed a Corporate Insolvency Resolution Process ('CIRP') petition under Section 9 of the IBC.

NCLT Mumbai dismissed the Appellant's application to initiate CIRP against the Corporate Debtor via its Order dated 24.03.2023. NCLT determined that the Appellant did not qualify as an “Operational Creditor” under the IBC because the claim did not stem from the provision of goods or services to the Corporate Debtor. The appeal has been filed against the said Order.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that the claim for refund of a Security Deposit linked to a contractual obligation contingent upon executing a leave and license agreement does not constitute an Operational Debt under the IBC.

The Appellate Tribunal noted that Section 5(21) of IBC defines an “operational debt” as a claim related to the provision of goods or services, including employment, or a debt arising under any existing law. Thus, the definition indicates a claim stemming from the provision of goods or services. However, the Letter of Intent anticipated a future license agreement, the security deposit itself was not directly associated with any services provided by Seaview.

It noted that the security deposit is associated with a conditional contractual arrangement rather than the actual provision of any goods or services. Thus, the claim does not meet the criteria for an operational debt under the IBC but is instead tied to a contractual obligation dependent on executing a leave and license agreement.

NCLAT also ruled on the applicability of the Jaipur Trade Expo Centre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. case and decided that the said judgment establishes that a claim for unpaid license fees for immovable property constitutes an operational debt under IBC. However, it does not support the Appellant's argument that a security deposit is akin to a license fee that can be adjusted for unpaid license fees.

It held that in the current case, there are no outstanding license fees, and the security deposit cannot be considered a form of license fee available for such adjustments. Furthermore, the judgment does not suggest that a security deposit is a form of license fee. The decision was based on the fact that GST was paid on the license fee, indicating services were rendered, thus falling under Section 5(21) of the IBC.

Moreover, no GST was payable or paid on the security deposit. The security deposit was not an advance license fee but rather a deposit ensuring the Appellant entered into a license agreement. It was not intended for adjustment against any outstanding or future license fees. No services were rendered or supplied by either party. Instead, the security deposit became subject to forfeiture due to the Appellant's failure to fulfill the obligation to enter into a leave and license agreement. Thus, this situation does not involve the supply of goods or services.

In conclusion, NCLAT upheld NCLT Mumbai's Order dated 24.03.2023 and noted that the scope of “operational debt” under the IBC does not encompass situations like security deposits unrelated to any immediate service rendered. Even if it is presumed that the security deposit is to be treated as an operational debt as claimed by the Appellant, the petition could not have been accepted under Section 9 of IBC as is analysed in subsequent paragraphs. The claimed amount does not constitute an operational debt under the IBC as it does not arise from the provision of goods or services. There exists a pre-existing dispute between the parties also, rendering the application under Section 9 of the IBC non-maintainable.

In conclusion, the NCLAT upheld the NCLT Mumbai's Order dated 24.03.2023, emphasizing that the definition of “operational debt” under the IBC does not include situations involving security deposits not linked to any immediate service rendered.

It observed that even if it were assumed that the security deposit should be considered an operational debt, the petition would still be unacceptable under Section 9 of the IBC, as there is a pre-existing dispute between the parties making the CIRP application non-maintainable.

Case Title: Carestream Health India Private Limited vs. Seaview Mercantile LLP

Case No.: Company Appeal (AT) (Insolvency) No. 579 of 2023

Counsel for Appellant: Ms. Fereshte Sethna, Mr. Abhishek Chauhan, Mr. Abhishek Tilak, Advocates

Counsel for Respondent: Mr. Sean Wassoodew, Advocate

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