NCLAT: Reiterated that rent is not to be considered as an operational debt under the IBC January 22, 2021
Published in: Between The Lines
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The National Company Law Appellate Tribunal (“NCLAT”) has in its judgment dated November 10, 2020 (“Judgement”) in the matter of Promila Taneja v. Surendri Design Private Limited [Company Appeal (Insolvency) No. 459 of 2020], held that rent is not to be considered as an operational debt (“Operational Debt”) as defined under Section 5(21) of Insolvency and Bankruptcy Code, 2016 (“IBC”).
The appeal had been filed by the landlady Ms. Promila Taneja (“Appellant”) against the impugned order of dismissal of an application filed by her under Section 9 of the IBC, by the National Company Law Tribunal, Chandigarh, (“NCLT”). The application was dismissed by the NCLT by relying on the judgement of NCLAT in the matter of Mr. M. Ravindranath Reddy v. Mr G. Kishan and Others [Company Appeal (Insolvency) No. 331 of 2019] wherein it was held 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 the IBC. The NCLT had also held that there was a pre-existing dispute between the parties.
The Appellant had entered into a lease agreement (“Agreement”) with a lock-in period of 36 months beginning from February 01, 2016 with Surendri Design Private Limited (“Respondent”). The Respondent stated that after renting out the shop premises in the mall from the Appellant it had made huge investments. The Respondent stated that it was running an apparels showroom from the shop premises which was at strategic spot, but due to a liquor shop nearby, and the judgment of the Hon’ble Supreme Court (“SC”) in the matter of State of Tamil Nadu represented by its Secretary, Home, Prohibition and Excise Department v. K. Balu [(2017) 2 SCC 281] wherein it was held that sale of liquor should not be in proximity of national highway, there was change of entry of the mall, which eventually hampered its business.
Therefore, it was stated that the Respondent had suffered losses due to demonetization and change in entry to the mall. The Respondent stated that the Agreement was terminated in July, 2017 due to the said change of circumstances.
Whether arrears of rent can be considered as Operational Debt.
Contentions raised by the Appellant:
It was contended that the conclusion of NCLT that there was a pre-existing dispute, was baseless. It was submitted that, the Respondent had informed the Appellant that it was facing losses and wanted to vacate the premises, irrespective of the lock-in period in the Agreement. Subsequently, the Respondent had unilaterally stopped making payments of rent. Thus, it was submitted that in the given circumstances it cannot be treated as a preexiting dispute.
It was further submitted that subsequent to the judgement of the NCLAT in the matter of Mr. M. Ravindranath Reddy (supra), the NCLAT had in the matter of Anup Shushil Dubey v. National Agriculture Co-operative Marketing Federation of India Limited and Others [Company Appeal (Insolvency) No. 229 of 2020] held that when the space provided is for commercial purposes, the arrangement has to be treated as services considering the definitions as seen in the Consumer Protection Act and the Central Goods and Services Tax Act, 2017. Therefore, it was submitted that the Appellant should also get relief on parity, considering the view taken in the recent judgement of Anup Shushil Dubey (supra).
Contentions raised by the Respondent:
The Respondent contended that the Appellant was informed by way of an e-mail that the lease deed had already been terminated due to change of circumstances. The Respondent contended that the notice under Section 8 of the IBC was sent on August 06, 2018 and even if it was to be presumed that rent can be considered as an Operational Debt, it shows that there was pre-existing dispute.
Observations of the NCLAT
The NCLAT observed that, in its judgment of Mr. M. Ravindranath Reddy (supra), and basis the reference to the Bankruptcy Law Reforms Committee Report, November 2015 (“BLR Committee Report”) made therein, the bench had observed as follows, “…… Simultaneously, it is also relevant to understand the intention of the lawmakers. The Bankruptcy Law Reforms Committee (BLRC), in its report dated November 2015, states that “Operational creditors are those whose liability from the entity comes from a transaction on operations”. While discussing the different types of creditors, the Committee points out that “enterprises have financial creditors by way of loan and debt contracts as well as operational creditors such as employees, rental obligations, …” Further, while differentiating between a financial creditor and an operational creditor, the Committee indicates “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”. Hence, the BLRC recommends the treatment of lessors/landlords as operational creditors. However, the Legislature has not completely adopted the BLRC Report, and only the claim in respect of goods and services are kept in the definition of operational creditor and operational debt u/s Sec 5(20) and 5(21) of the Code. The definition does not give scope to interpret rent dues as operational debt.” The NCLAT therefore had concluded as follows: “Therefore, we are of the considered opinion that lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition or Operational Debt.”
The NCLAT noted that the judgement in the matter of Mr. M. Ravindranath Reddy (supra) was delivered by a 3-member bench, while the judgement in the matter of Anup Shushil Dubey (supra) was delivered by a 2-member bench.
In paragraph 17 of the judgment of Anup Shushil Dubey (supra) it was observed as follows: “17. The Hon’ble Supreme Court in Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited (2018) 1 SCC 353 in Para 5.2.1 observed as hereunder; “5.2.1 Who can trigger IRP? Here, the code differentiates between financial creditors and operational creditors. … Operational creditors are those whose liability from the entity comes from a transaction on operations. … 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. …”.
Further in the said judgment of Anup Shushil Dubey (supra), there is reference to the definition of “service” under the Consumer Protection Act, 2019 and “a list of activities” which are treated as supply of goods or services under the Central Goods and Services Tax Act, 2017, referring to which in the paragraph 22 of the said judgment, it was concluded as follows, “Therefore, keeping in view, the observations made by the Hon’ble Supreme Court in Para 5.2.1 of Mobilox (Supra), and having regard to the facts of the instant case this Tribunal is of the earnest opinion that the subject 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.”
The NCLAT noted that for the above reasons, the bench had taken a contrary view in the judgment of Anup Shushil Dubey (supra).
The NCLAT in the instant Judgement distinguished the precedents and upheld the view taken in the judgment of Mr. M. Ravindranath Reddy (supra) for the following reasons:
1. Misinterpretation of the precedents:
The NCLAT went through the original judgment in the matter of Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353] and noted that in the original judgment, the SC had reproduced portions from paragraph 5.2.1 of the BLR Committee Report. The NCLAT observed that such paragraph 5.2.1 of the BLR Committee Report has been recorded in paragraph 17 of the judgment of Anup Shushil Dubey (supra) as if it is an observation of the SC. The NCLAT noted that this was apparently not correct. The reproduced portions of the BLR Committee Report were only to gauge the legislative intent and were not the opinion of the SC in the matter of Mobilox Innovations Private Limited (supra).
Further, the SC in the case of Mobilox Innovations Private Limited (supra), held that at the time of admitting application under Section 9 of the IBC, all that the adjudicating authority is to see is whether there is plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. The NCLAT noted that the learned counsel for the Appellant did not show that the SC in the case of Mobilox Innovations Private Limited (supra), had held rent to be Operational Debt. Therefore, NCLAT upheld the opinion arrived at in the judgment of Mr. M. Ravindranath Reddy (supra).
2. Legislative intent and interpretation of the IBC:
The NCLAT observed that the words and expressions used in the IBC which have not been defined under the IBC, but have been defined in the acts mentioned under Section 3(37) of the IBC, can be directly imported from them. Section 3(37) of the IBC mentions various legislations, however, the NCLAT noted that the Consumer Protection Act, 2019 and the Central Goods and Services Tax Act, 2017 have not been covered under the said Section 3(37) of the IBC. Therefore, the NCLAT observed that the reference to the definition of “service” and “activities” to be treated as supply of service cannot simply be lifted from the said legislations and applied in the IBCas has been done in the case of Anup Shushil Dubey (supra).
The NCLAT observed that the definition of ‘financial debt’ under Section 5(8)(d) of the IBC, includes the following: “(d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standard or such other accounting standards as may be prescribed”. The NCLAT observed that, the legislature was conscious regarding liabilities arising from lease but only for particular types of leases, as mentioned in Section 5(8)(d) of the IBC, and that the legislature made specific provision to even consider it as financial debt, but while dealing with Operational Debt, there is no such provision that has been made. Thus, the NCLAT observed that, even on the parameters of interpretation of statutes, the rent due could not be treated as Operational Debt.
The NCLAT further noted that even if the rent was presumed to be Operational Debt from the e-mail sent by the Respondent, it is clear that the Respondent had referred to financial stress and terminated the Agreement that had a lock-in period. Therefore, the NCLAT observed that the issue whether the said termination of Agreement was legal would be an issue of trial between the parties.
Decision of the NCLAT
The NCLAT dismissed the appeal and reiterated that rent is not to be considered as an Operational Debt, thereby relying upon the judgement of Mr. M. Ravindranath Reddy (supra). The NCLAT also upheld the observation of the NCLT that there is a pre-existing dispute between the parties.
Vaish Associates Advocates View:
The NCLAT in this Judgement, while upholding the view of the NCLT in the impugned order, has looked into the parameters of interpretation of statutes as well as the precedents, thereby crystallising the scope of Operational Debt as limited to goods and services and that dues in the nature of rent of immovable property are not within the scope of Operational Debt as defined under the IBC. Further, the NCLAT has also limited the scope of reference for determining the meaning/definition of terms to legislations as mentioned under Section 3(37) of the IBC.
Furthermore, the NCLAT analysed in detail the precedents and clarified that in the case of Anup Shushil Dubey (supra) the bench had misinterpreted the reference to BLR Committee Report 2015, as the opinion of the SC in the judgement of Mobilox Innovations Private Limited (supra). The NCLAT has over-ruled the judgement of Anup Shushil Dubey (supra) which was per incuriam of the decision of the larger bench that is, Mr. M. Ravindranath Reddy (supra). The bench in the case of Anup Shushil Dubey (supra)should have followed the general rule of either accepting the ratio as laid down by the larger bench, or while considering a different view should have made a reference to a larger bench to decide the matter. Therefore, the NCLAT by this Judgement has laid straight the matrix of scope of Operational Debt and settled the issue whether arrears of rent can be considered as Operational Debt, in the negative.
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