Whether Non-payment Of Rent Would Qualify As An Operational Debt Under IBC? Supreme Court Issues Notice

Whether the non-payment of rent would qualify as an operational debt within the meaning of Section 5(21) of the Insolvency and Bankruptcy Code 2016?  The Supreme Court issued notice in an appeal filed against an order passed by National Company Law Appellate Tribunal.

In this case, the landlord filed the Application under Section 9 of Insolvency and Bankruptcy Code, 2016, which was dismissed by the Adjudicating Authority on ground that dues in the nature of rent of immovable property do not fall under the head of Operational Debt as defined under Section 5 (21) of IBC. The NCLAT upheld this order of the Adjudicating Authority referring to its earlier judgment in M. Ravindranath Reddy Versus G. Kishan & Ors.

In appeal, the appellant contended that there are two conflicting decisions of NCLAT on the issue and that, in the present case, the demand was both in respect of the arrears of rent as well as on account of damages for breach of the lock-in period. The decision in Anup Sushil Dubey v National Agriculture Co-operative Marketing Federation of India Limited & Ors, was referred to.

Taking note of this, the bench comprising Justices DY Chandrachud, Indira Banerjee and Sanjiv Khanna issued notice.

In Ravindranath Reddy, the Tribunal (three member bench headed by Justice A.I.S. Cheema) considered this issue:  Whether a landlord by providing lease, will be treated as providing services to the corporate debtor, and hence, an operational creditor within the meaning of Section 5(20 )read with Section 5(21) of the 'Insolvency and Bankruptcy Code, 2016? 

"An operational debt is essentially a claim in respect of the following: (a) provision of goods; (b) provision of services, including employment; or (c) a debt arising under any statute and payable to Government/local authority. If the claim by way of debt does not fall under any of the three categories as mentioned above, the claim cannot be categorized as an operational debt, even though there may be a liability or obligation due from the corporate debtor to the creditor, and hence, such a creditor disentitled from maintaining an application for initiation of corporate insolvency resolution process (CIRP) of the corporate debtor", it was held in that judgment. 

In Anup Sushil Dubey, the NCLAT bench (two member) headed by Justice Venugopal M., held that lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an 'Operational Debt' as envisaged under Section 5 (21) of the Code.

To hold thus, the bench had relied on 'Para 5.2.1' of the Supreme Court judgment in Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited (2018) 1 SCC 353. [Note: The said 'Para 5.2.1' are not Supreme Court's own observations but from a report by Bankruptcy Law Reforms Committee (quoted in the judgment)] In the impugned judgment, this aspect has been noticed by the bench (headed by Justice AIS Cheema) which observed as follows: "We have gone through the original Judgment in the matter of Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited as reported in (2018) 1 SCC 353, in Paragraph 22 of the Judgment, the Hon'ble Supreme Court was reproducing portions from the final report dated November, 15 of Insolvency Law Reforms Committee and Paragraph 5.2.1 which was part of the report of the Committee was reproduced. Such paragraph 5.2.1 of report of Insolvency Law Reforms Committee has been recorded in Paragraph 17 of the Judgment as if it is observation of the Hon'ble Supreme Court in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors. This is apparently not correct."

CASE: PROMILA TANEJA vs. SURENDRI DESIGN PVT LTD. [Civil Appeal No(s).4237/2020]

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