CIRP Cannot Be Initiated Over Undecided Claims Or Unstamped And Unregistered Agreements: NCLT Cuttack

Background Facts

Smarkworks Coworking Spaces Pvt. Ltd. ("Petitioner") was engaged in the business of co-working and shared office spaces. On 17.08.2018, the Petitioner entered into an agreement with Turbot HQ India Pvt. Ltd. ("Respondent"), whereby it agreed to provide serviced office space consisting of 44 works stations at a monthly fee of Rs. 3,52,000/ - (plus taxes) to the Respondent in its centre situated in Kolkata.

Contentions Of The Petitioner

The Petitioner submitted that the Agreement had a clause mentioning that the lock-in period was 36 months. The Agreement came into force on 01.10.2018 and on 04.06.2019 the Respondent had intimated that it intends to terminate the Agreement in first week of September 2019. It was further submitted that the Petitioner had reminded the Respondent about the lock-in-period clause, nonetheless, the Respondent vacated the co-working centre on 01.09.2019 and made a part payment only up to Ju1y 2019. Thereafter, the Petitioner had sent a demand notice to the Respondent under Section 8 of the IBC, claiming an amount of Rs. 1,28,95,402/-, however, the Respondent responded to the notice and denied payment. Hence, the Petitioner had filed a petition under Section 9 of the IBC before NCLT Cuttack Bench ("Adjudicating Authority") seeking initiation of CIRP against the Respondent.

Contentions Of The Respondent

The Respondent contended that though the Agreement mentions "pay-as-you-use" service, but in actual it contains all essentials of a lease agreement as per Section l05 of the Transfer of Property Act, 1882. Further, as a lease agreement for more than eleven months is compulsorily registrable document under Section17(1)(d) of the Registration Act, 1908, the Agreement being unregistered cannot be considered by the Adjudicating Authority as being barred by Section 49(c) of the Registration Act, 1908.

It was further submitted that realization of rent is not covered under definition of 'operational debt' under Section 5(21) of the IBC and lease of immovable property cannot be considered as a supply of goods or rendering of any service to attract Section 9 of the IBC. The Respondent also contended that the lease Agreement was executed on unstamped papers. The Petitioner had attached ante dated stamp paper before filing petition before the Adjudicating Authority. The absence of signature of the Respondent in the stamp paper established that it was subsequently appended with Agreement in order to avoid defect being pointed out by the Respondent.

The Respondent contended that after it had vacated the premises, the Petitioner had leased it out to another firm; therefore, no damages have accrued. Moreover, the claim for rent for the lock-in period amounts to damages, which requires adjudication before Civil Court. Hence, the petition is liable to be dismissed as no default pertaining to operational debt has taken place.

Issues

1. Whether the amount claimed by the Petitioner for the lock-in period amounts to operational debt?
2. Whether the agreement dated 17.08.2018 is compulsorily registrable instrument under the Registration Act, 1908?
3. Whether the Agreement dated 17.08.2018 was originally engrossed on an unstamped paper?

Observations Made By The Adjudicating Authority

CIRP Cannot Be Initiated Against Undecided Claims

The Adjudicating Authority observed that liquidated damages will crystalize only after being adjudicated by a competent Civil Court and undecided claim cannot be used to bring an application for insolvency. It was further observed that as per Section 5(21) of the IBC, operational debt means debt due towards the supply of goods or service rendered, however, the Petitioner has claimed amount arising out of breach of contract, which does not come under the definition of 'Operational Debt' in IBC. The breach of agreement gives right to the other party right to sue but not confer any right to receive the amount straight away.

A Compulsorily Registrable Document Cannot Be Considered If Unregistered

The Adjudicating Authority opined that the nature of an agreement cannot be decided on the nomenclature given in the deed, rather on the contents of the document. A lease deed creates certain rights to the lessee in the immovable property but the recitals of the Agreement do not convey any right. Hence, it is not a lease deed.

It was further observed that Section 17(1)(b) of Registration Act, 1908 says any instrument which creates or declares, either in present or in future, certain rights over the immovable property which values more than Rs. 100/-, is to be compulsorily registered. The Agreement dated 17.08.2018 created certain right to the Respondent, to stay in the service rooms, for consideration of more than Rs.100/-, thus the Agreement satisfies all the requirements of Section 17(1)(b) of Registration Act, 1908 and consequently, it is a compulsorily registrable instrument. As the Agreement is not registered, it cannot be taken into consideration in view of the bar provided under Section 49(c) of the Registration Act 1908.

Unstamped Agreement Not Admissible In Evidence

The Adjudicating Authority observed that the stamp paper filed in the petition bears the signature and office seal of the Petitioner alone. The missing of signature and office seal of the Respondent in stamp paper creates doubt and support the version of the Respondent. Normally, the beginning lines of an agreement are written in the stamp paper and rest of the matter is attached on full-scale paper. It was observed that no portion of the Agreement was written on the stamp paper, it stands alone without connecting the Agreement. The names of both companies were typed as like cause-title of the case typed in judicial stamp paper in court proceedings.

The Adjudicating Authority took the view that the stamp paper was ante dated, placed before the copy of agreement and filed along with the petition. It was concluded that Agreement dated 17.08.2018 was engrossed on unstamped paper. The Bench held that when an agreement is engrossed on unstamped paper, the said instrument is not admissible in evidence for any purpose, unless stamp duty and penalty is paid as provided under Section 35 (a) of Indian Stamp Act. 1869.

Decision Of The Adjudicating Authority

The Adjudicating Authority dismissed the petition with observation that the Agreement being unstamped and unregistered holds no legal value. Further, if the Agreement dated 17.08.2018 is set apart from the legal proceeding, the claim of the Petitioner stands without base; in consequence the Petitioner's plea is negated.

Case title: Smarkworks Coworking Spaces Pvt. Ltd. v Turbot HQ India Pvt. Ltd., CP (IB) No. 181/CB (2020).

Counsel for Petitioner: Adv. Aditya Kanodia and Adv. Indradeep Basu.

Counsel for Respondent: Adv. Sidhant Dwibedi.

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