Insolvency Law

[By Sushant Kumar and Vanshaj Dhiman] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow. The contract of guarantee is an essential part of the restructuring process of the corporate debtor. It is a settled position in contract law that the guarantor’s liability arises as soon as the borrower defaults in making payment of the debt. However, the advent of the Insolvency and Bankruptcy Code, 2016 [hereinafter ‘IBC’ or ‘Code’] and some judicial pronouncements of National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) have given rise to a catch-22 situation before the creditors. In this article, an attempt has been made to understand the law governing guarantees of a corporate debtor in the current insolvency regime. The confusion has arisen due to conflicting judicial pronouncements on the issue of maintainability of simultaneous insolvency proceedings in respect of the same debt and certain lacunae in the legislative framework of the Code. Let us first understand the basic principle of a guarantee-contract. A contract of guarantee is entered into between the creditor, the principal debtor, and the guarantor. Here, the guarantor may be a body corporate or a natural person. It is said that the guarantors and corporate debtor sail in the same boat, and therefore, the very objective of securing the guarantee would be defeated if the creditor is forced to first exhaust its remedy against the principal debtor before proceeding against the guarantor. This right of the creditor is the hallmark of a guarantee-contract. It is a trite legal position that the guarantor’s liability is co-extensive with that of the principal debtor. Guarantor’s Liability Before the Maturity of Corporate Insolvency Resolution Process Before we delve into the discussion, it is important to note that the Committee of Creditors (“CoC”) drives the insolvency resolution process (“IRP”). Therefore, the guarantor(s) cannot be allowed to dictate the terms and manner of the proceedings under the Code or seek deferment of the proceeding initiated against them. Though the relationship between the corporate debtor and the guarantor originates from the same transaction, both are separate and independent entities. Since the guarantor’s liability is distinct and separate from that of the corporate debtor, the creditor can proceed against the guarantor and the corporate debtor simultaneously or alternatively. Section 14(3)(b) of the IBC guides this aspect. It states that the moratorium will not apply to the surety in a contract of guarantee. In other words, only the estate of the corporate debtor will be protected by moratorium under Section 14 of the Code, and this benefit shall not extend to the assets of the surety. Further, Sections 60(2) and 60(3) of the IBC reflect the Parliament’s intention to allow concurrent insolvency proceedings against the corporate debtor as well as the personal guarantor. The Parliament, intentionally, has made the personal guarantor to the corporate debtor equally liable to reduce the number of non-performing assets (NPA) for the speedy resolution of outstanding debt and make the promoters liable for their flawed decisions.  Besides, the Code does not prohibit the creditors from proving double proof of the same debt against two separate estates (also known as double-dipping). That means the creditor is entitled to prove its claim against both the principal debtor and the guarantor(s) but cannot claim more than the total debt. The NCLT, in ICICI Bank Ltd v CA Ritu Rastogi, permitted simultaneous initiation of IRPs against both the principal borrower and the guarantor. In State Bank of India v V Ramakrishnan, the Supreme Court clarified that the moratorium does not extend to the surety’s assets thereby accepting the proposition that the IBC does not bar the filing of two insolvency proceedings simultaneously. However, the ratio of the NCLAT, in Vishnu Kumar Agarwal v Piramal Enterprises Ltd, seems to circumvent these decisions by holding that for the same debt, a claim cannot be filed, and proceedings maintained, by the same financial creditor in two separate IRPs simultaneously. Arguably, the proceedings against the guarantors should not be initiated unless the corporate debtor’s liability is not crystallized in the resolution plan itself or until the CIRP has not been completed. However, the CIRP is not a recovery proceeding, but a means to resolve and restructure the corporate debtor’s debt. Having an independent and co-extensive liability, the guarantor cannot claim immunity in the garb of CIRP being underway because his liability is to pay off the entire outstanding debt subject to the guarantee contract. Mostly, the promoters/directors of a corporate debtor furnish a personal guarantee for the sanctioning of a loan to the corporate debtor. If the proceedings against such personal guarantors are stayed during a CIRP, they may file frivolous applications with ulterior motives merely to escape from their liabilities until the CIRP is not completed. Besides, the IBC aims to protect the rights of the creditors and not to reward such personal guarantors by whose decisions the corporate debtor became insolvent in the first place. A Hypothetical Scenario to Understand the Law To better understand how the invocation of guarantee(s) before the CIRP of the corporate debtor matures should play out, let us take an example [hereinafter ‘the example’]. Say, the corporate debtor is CD, corporate guarantor to the corporate debtor is Gc, personal guarantor to the corporate debtor is Gp and that there exist four creditors of the corporate debtor, namely C1, C2, C3, and C4. C1 has the corporate guarantee, C2 has the personal guarantee, C3 has both the corporate and the personal guarantee for the same debt from the same guarantors as C1 and C2, respectively, and C4 has no guarantees. C1 invoked the CIRP against CD. However, before the CIRP could be completed, C3 invoked both its guarantees but the guarantors (both Gc and Gp) defaulted on their respective guarantees. Consequently, C3 filed an application against Gc under Part II of the Code and Gp under Part III of the Code before the same NCLT overlooking the CIRP process due to the amended Section 60

[By Shubham Nahata] The author is a student at the Hidayatullah National Law University. Introduction Post the enactment of the Insolvency and Bankruptcy Code, 2016(“Code”), the credit recovery mechanism in India has witnessed substantial growth in terms of improved resolution opportunities for ailing entities. However, there still exist certain anomalies in its jurisprudential framework which need correction either in the form of affirmative action by the legislature or purposive interpretation by the Judiciary. One such irregularity was addressed by the National Company Law Appellate Tribunal (NCLAT), in its recent judgment of State Bank of India v. Athena Energy Pvt. Ltd. The NCLAT while dealing with an appeal filed by a Financial Creditor against the Corporate Guarantor, settled the law relating to the simultaneous application for the same debt against the Principal Borrower and the Corporate Guarantor under the Code. This post discusses the law laid down by the NCLAT with reference to its previous judgment in Piramal’s Case and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. Facts of the Case The State Bank of India (Financial Creditor) filed an insolvency application under Section 7 of the Code against Athena Energy Ventures Pvt. Ltd. (Corporate Guarantor) for a secured loan to Athena Chhattisgarh Power Ltd. (Principal Borrower), a joint venture company promoted by the Corporate Guarantor. The application against the Principal Borrower was admitted by the NCLT bench of Hyderabad. However, the application filed by the Financial Creditor against the Corporate Guarantor was rejected by the Adjudicating Authority following the dicta laid down in the case of Vishnu Kumar Agarwal v. Piramal Enterprise Ltd. In the Piramal Enterprises case, an application was filed by the financial creditor against two corporate guarantors for the same set of debt and default. The NCLAT while dealing with this issue held that under the scheme of the Code there exists no bar to the filing of simultaneous applications against the corporate debtor and the guarantor. However, the Tribunal deviated from the scheme of the Code and held, that once a Section 7 application is admitted against the corporate debtor then it places a bar on admission of the same application against the guarantor on the same set of debt and default. Similarly, a Section 7 application cannot be filed jointly against two corporate debtors on the ground of joint liability unless they are a joint venture company. Hence, while dealing with an application filed by two Corporate Guarantors, the NCLAT denied simultaneous insolvency proceedings on the same set of debt and default. In the present case, the NCLT relying on the dicta as laid down by the NCLAT ruled, that as the companies were not joint ventures (because of different MoA) they shall not be covered under the exception clause as given under the ratio of Piramal’s judgment. The decision of the NCLT was thus challenged by the Financial Creditor relying on the law laid down by the Supreme Court in State Bank of India v. Ramakrishna & Ors. and the Insolvency and Bankruptcy Code (Second Amendment) Act of 2018. It was also brought to the notice of the Appellate Tribunal that the judgment in Piramal’s case was stayed by the Apex Court in a subsequent appeal. Judgment and Analysis Financial debt under Section 5(8) of the Code has been defined as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. It also includes guarantee and counter indemnity obligations as provided under Section 5(8)(h) and (i) of the Code. Under Section 60(2) of the Code, when an insolvency resolution or liquidation process of the Corporate Debtor is pending before the NCLT then an application against a Corporate Guarantor or Personal Guarantor can also be filed before the NCLT. Similarly, when an insolvency resolution or liquidation process of a Corporate Guarantor or a Personal Guarantor is pending before the Court or the Tribunal then the same shall be transferred to the Adjudicating Authority dealing with the resolution or liquidation of the Corporate Debtor. Hence, under the scheme of the Code, an application for insolvency resolution of the Corporate Guarantor can be initiated even when an application has been accepted for the resolution of the Corporate Debtor. The Insolvency Law Committee Report of 2020, also discussed the conundrum surrounding simultaneous proceedings under the Code. The Committee suggested in its report that in case of different applications against the Corporate Debtor and the Guarantor under the Code, the amount of recovery can be revised based on the quantum of Creditor’s recovery in any one of the proceedings. The Committee referred to the NCLAT judgment in Edelweiss Asset Reconstruction Co. v. Sachet Infrastructure Ltd. & Ors., wherein simultaneous applications were allowed against the principal borrower and corporate guarantors under the Code. The Tribunal also referred to the Supreme Court judgment in State Bank of India v. Ramakrishna & Ors., wherein it was held that simultaneous applications can be filed as, under the contract of guarantee the liability of the surety is co-extensive. The Court emphasized that once a resolution plan is approved for the corporate debtor, the same becomes binding on the guarantor and it cannot escape liability under Section 133 of the Indian Contracts Act. Contracts of guarantee are usually governed by the principles as enshrined under Chapter VII of the Indian Contracts Act, 1872. One of the primary principles governing guarantee is that the liability of the surety is “joint and several” and “co-extensive with that of the principal borrower”. In Bank of Bihar v. Damodar Prasad &Anr., the Supreme Court has emphasized that joint and several liability is the key feature of the contract of guarantee. The fact that a creditor has proceeded against the corporate debtor doesn’t preclude him from an alternative remedy against the surety. However, the creditor is also not entitled to recover more than what is due and the amount of claim is adjusted based on the result of one of the proceedings. Conclusion Covenants in the nature

[By Arushi Gupta] The author is a student at the National Law University, Odisha. The Insolvency and Bankruptcy Board of India (hereinafter ‘IBBI’) in a press release dated November 13, 2020, has notified the Insolvency and Bankruptcy Board of India (Liquidation Process)(Fourth Amendment) Regulations, 2020 (hereinafter ‘the Amendment’). The amendment enables the liquidator to assign or transfer a ‘not readily realizable asset’ (hereinafter referred to as ‘NRRA’) to any person after due consultation with the stakeholders’ consultation committee.[1]The article aims to discuss the backdrop and possible implications of the amendment. Background The amendment has been introduced to address the concerns with respect to the increasing delays in the liquidation process due to the non-realization of certain assets that are uncertain in nature and the realization of which takes time longer than the usual time frame for the realization of other assets. These concerns were first highlighted by the report of the Bankruptcy Law Reforms Committee which while contemplating upon the “Rules to close the liquidation” for the code, discussed the issues regarding the probability of recoveries of certain assets forming part of the liquidation estate in the future (i.e after the end of the liquidation). The committee was of the view that the liquidator must close down the case with the permission of the adjudicating authority and create a trust wherein the recoveries would be deposited. Subsequently, due to the rising number of corporate insolvency cases with a long-drawn liquidation process leading to a reduction in the realizable value of such assets, a discussion paper on the Corporate Liquidation Process was floated by the IBBI to address the aforementioned issue. The discussion paper discusses in detail the need for the amendment and the framework for the same. The discussion has also been substantiated with the examples of various International Practices[2] and statutory provisions[3] in the Indian realm, wherein assignment of a cause of action to a third party is allowed. Rationale The code basically envisages the timely completion of the liquidation process so as to ensure that the assets of the Corporate Debtor can be put to use for alternate purposes. As per regulation 44(1) of the IBBI (Liquidation Process) Regulations, 2016, the liquidator is required to liquidate the corporate debtor within a period of one year from the date of commencement of the liquidation.[4] However, the presence of NRRA in the liquidation estate leads to delays due to the uncertain nature of the asset and the indefinite period involved for the conversion of such assets into cash. An NRRA has been defined as any asset which is included in the liquidation asset and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit, and fraudulent transactions.[5] Before the amendment came into the picture, two scenarios could be envisaged: In case of dissolution of the Corporate debtor without realization of the NRRA, the assets would be left unrealized and in an undistributed state. Furthermore, the stakeholders would be deprived of their due recovery leading to the interests of such stakeholders being compromised; or In case the dissolution is kept pending for the purposes of realization of the value of NRRA, it would lead to mounting expenses of the liquidation process and also lead to depreciation of the value of an asset over the pending time period. Furthermore, the liquidator would have to arrange for monetary resources (i.e. funds) to suffice for the costs associated with legal proceedings. Additionally, considering the delay involved in the litigation, the liquidation process might extend beyond the timelines and hence defeat the entire object of timely completion of the liquidation process. In order to address the above-mentioned concerns, the amendment has been introduced. The amendment essentially aims at enabling the liquidator to assign or transfer an NRRA to any person in consultation with the stakeholders’ consultation committee. It is to be noted here that the liquidator must first attempt to sell the assets. In case of failure to sell, the asset may be assigned or transferred to any person after consultation. In a scenario where both the remedies fail, the undisposed assets would be distributed amongst the stakeholders with approval from the Adjudicating Authority. Analysis The discussion paper while contemplating upon the amendment discusses in detail the concept of assignment of rights and cause of action. With respect to assignment, in the case of ICICI bank Ltd. v Official Liquidator of APS Star India Ltd.[6], the Supreme Court held that “rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties”. Hence assignment may be denied on the grounds of (a) a provision in the respective law barring the assignment, or (b) an agreement between the parties placing a restriction on assignment. It is to be noted that the entire discussion upon the assignment and the framework proposed by IBBI does not deal with the consequences or possible alternatives in a case where the agreement between the parties places a bar on assignment. Furthermore, another point of consideration that arises is that there is no express provision in the Code that bars or allows such assignment in the liquidation process. While the code does allow the creditors to assign their claims or interest in favor of the third parties at the resolution stage, there is no such right that has explicitly provided at the liquidation stage. Considering the fact that time is the essence in the liquidation processes, the amendment would serve a dual purpose of ensuring the maximum realization of the NRRA and the closure of the liquidation process within the specified timelines. Furthermore, this move would also lead to the creation of a new market for these assets and consequently better utilization of such assets. Endnotes: [1] https://ibbi.gov.in//uploads/press/2020-11-13-220539-eb6yn-50277513bcc7d94092ce4ee2b6591aad.pdf [2] Practices of UK, Australia, Hongkong and Singapore [3] Transfer of Property Act, Section 132; Code of Civil Procedure, Order XXV [4] IBBI(Liquidation Process) Regulations, 2016, Regulation

[By Anjali Soni] The author is a student at the National Law University, Odisha. Introduction Real estate developers use various mechanisms to raise finance apart from the traditional loans received from Financial Institutions and buy-back agreements are one of such instruments. Buyback schemes are where the developers agree to repurchase the property at a higher price, within a stipulated time, during which the homebuyers generally get some percentage of annual returns. Such offers are usually undertaken to encourage sales. Even though the homebuyers were declared as financial creditors so far as the Insolvency and Bankruptcy Code is concerned, however, homebuyers categorized as speculative investors have no remedy under the IBC. The NCLAT recently in the case of  Shubha Sharma, Suspended Board of Director v. Mansi Brar Fernandes ruled that homebuyers with a compulsory buy-back agreement are not genuine buyers but mere speculative investors and hence cannot seek relief under the provisions of the IBC. This article seeks to analyze the judgment and make a case for investors under buy-back agreements. Facts Gayatri Infra Planner Pvt. Ltd. Company, a real estate developer, and Mrs. Mansi Brar Fernandes entered into an agreement/MoU for the provisional allotment of four apartments in a project named “Gayatri Life”. Rs. 35 lacs was paid by the financial creditor at the time of signing the agreement. The agreement had a compulsory buy-back provision which stipulated that upon the expiry of 12 months, the Corporate Debtor was to return the initial amount along with an additional Rs. 65 lacs as premium, failing which the homebuyer was to take possession of the apartments. The Corporate Debtor issued two post-dated cheques in favor of the financial creditor. Upon inquiring, the Corporate Debtor expressed his interest to exercise the buyback but the said cheques were dishonored upon encashment. No amount was returned after repeated extensions nor the possession of the apartments was given. The financial creditor finally filed the application under Section 7 of the IBC. Decision of the adjudicating authority The two primary objections raised before the Adjudicating Authority. First, that the allottee does not come under the definition of Financial creditor, and second, that the amount of default is Rs. 35 lacs and not Rs. 1,02,50,000 as claimed by the allottee. The NCLT did not accept either of the objections and admitted the application on the grounds of the debt being a financial debt in view of the explanation inserted under clause Section 5(8)(f) by the Insolvency and Bankruptcy (Second Amendment) Act, 2018. Aggrieved by this order, the former Director of the Corporate Debtor filed an appeal before the Appellate Tribunal. Decision of the Appellate Tribunal The Honourable Appellate Tribunal while setting aside the impugned order ruled that the MoU signed by the financial creditor and the real estate developer is an agreement to buy back the apartments and not an agreement for sale of the apartments. Since the buyback is an irrevocable and compulsory buy-back agreement, the homebuyer is actually a speculative investor and not a genuine homebuyer. Judicial precedents regarding homebuyers with a buy-back agreement under IBC In the case of Kussum Chadha v. C&C Towers Ltd. the real estate developer launched a ‘Buy Back’ scheme inviting investors but defaulted in payment of the assured monthly returns to financial creditors. Cheques issued in favor of the financial creditors towards the refund and premium due were dishonored, and the CIRP petition was admitted by the NCLT. Similarly, in the case of Narender Kumar v. Aadinath Probuild a buy-back agreement cum guarantee deed was executed in favor of the applicant and after the default in payment, CIRP proceedings were initiated. The Adjudicating Authority categorically laid down that since the amount of money has been raised under a real estate project, it has the commercial effect of a borrowing and comes within the scope of a financial debt. Analysis of the nature of debt under a buy-back agreement In the author’s opinion, homebuyers under a compulsory buy-back agreement should be considered as financial creditors because the debt owed to them fulfills all the prerequisites of a financial debt. Section 5(8) of the IBC provides two primary components for a debt to be classified as a financial debt. First, the debt has to be disbursed against the consideration for the ‘time value of money’ and second, the transaction should fall under any clauses between (a) to (i). The NCLAT in the case of Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd ruled that the first essential requirement of financial debt has to be that the debt is disbursed against the consideration for the time value of money. Black’s Law Dictionary defines ‘time value’ as “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. Essentially, the time value of money is the incentive that the said investor gets after a stipulated time period against the investment. Under buy-back agreements, the real-estate developers give lucrative offers to investors in order to stimulate sales. These offers include assured annual returns at attractive rates and heavy premiums along with the principal amount after the time period is over. The time value of money in such transactions is evident from the monetary benefits received by such investors. With regard to the second requirement, a debt can be classified as a financial debt if it is raised under any transaction having the commercial effect of a borrowing as mentioned in Section 5(8)(f) of IBC. The Hon’ble the Appellate Tribunal in the case of Rajendra Kumar Saxena v. Earth Gracia Buildcon Pvt. Ltd. held that the explanation inserted under Section 5(8)(f) states that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing, making all allottees of real estate as ‘financial creditors’. Finances raised under a buy-back agreement also have the same commercial effect of a borrowing. During times of financial crises, real estate developers resort to raising funds through buy-back agreements

[By Nikhil Singh] The author is a student at the National University of Juridical Sciences, Kolkata. Introduction The Insolvency and Bankruptcy Code, 2016 (“Code”) was brought with an intent to secure the creditors’ interests by providing exhaustive provisions for corporate restructuring and debt recovery. Creditors are classified into two heads i.e. financial and operational creditors and the process to initiate a corporate insolvency resolution process (“CIRP”) has been provided in the Code. The phrase “creditor” has also been defined in the code itself under Section 2(10). The definition expressly includes “decree holder” within the scope of the term. As regards the homebuyers, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 put them in a priority position by including the amount advanced by them to the builders within the definition of “financial debt” under Section 5(8)(f) of the Code. The Supreme Court has also held that the remedies under Real Estate (Regulation and Development) Act, 2016 (“RERA”) and the Code co-exist with concurrent remedies under the two statutes. However, a recent ruling by the National Company Law Appellate Tribunal (“NCLAT”) has raised a debate as to whether a decree holding homebuyer would be covered within the definition. Analysis In Sushil Ansal v Ashok Tripathi (“Sushil Ansal Case”), the respondent i.e. the homebuyer had purchased a flat from the appellants and paid a certain amount in relation to it. Upon the appellant’s failure to deliver possession, the respondent got a recovery certificate i.e. decree in his favour from the Real Estate Regulatory Authority. After this, he initiated CIRP under Section 7 claiming himself as a decree-holder, and not a homebuyer. Now based on the facts of the case, it was clear that there was no dispute as to the existence of the debt and even the appellants did not challenge this. The only contention raised by the appellant was that once the respondent became a decree-holder, the underlying builder buyer contract stood terminated and thus no CIRP could be initiated based on it. Now a question arises as to whether a decree-holder ceases to be a financial creditor who can imitate a CIRP under Section 7. On this point, there are contradicting positions taken by the courts. In the case of Urgo Capital Ltd. v Bangalore Dehydration and Drying Equipment Co.(“Urgo Case”) the court had ruled in the positive holding that a decree-holder continues to be a financial creditor and can consequently initiate a CIRP under Section 7. The court had further clarified that just because the claimant does not go for court execution of the decree, it does not disqualify him from initiating CIRP based on the decree. Further jurisprudence on Section 7 is that the claimant only needs to show the existence of creditor-debtor relations by proving the existence of a debt. More specifically, the court had allowed section 7 application stating that as long as the amount under the decree has not been paid, the debt exists and that the decree itself will be evidence of the existence of a debt. Now, a parallel to money decree can be drawn from arbitral awards passed by tribunals. The position taken by the court in K Kishan v Vijay Nirman Co. was that an award- the creditor is considered as a financial creditor who can initiate a CIRP based on the award. The only condition is that the timeline to challenge the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) has elapsed. This analogy is further strengthened by Section 36 of the Arbitration Act, which states that an award is to be enforced as if “it is a decree of a court”. Now, one might rightly argue that if an arbitral award is kept on the same pedestal as a court decree, the Code and NCLAT cannot treat them differently to establish the creditor-debtor relations. The NCLAT had done the same mistake in the heavily criticized judgment in Digamber Bhondwen v. JM Financial Asset Reconstruction Company (“Digamber”). There, the Tribunal had taken an erroneous position in holding that a decree-holder, although falling under the definition of a creditor under section 3(10) of the Code, will not be entitled to file an application under section 7 or section 9 of the Code as the definition of a ‘financial creditor’ or an ‘operational creditor’ does not include a decree-holder. Such a position is flawed because it would invalidate the definition of the term “creditor” itself. If decree-holder has been expressly included in the scope of creditor, and judicial precedents have appreciated such inclusion, the position in Digamber would not only be in conflict with the legislative intent but also its own position in previous judgements. Now although a larger bench in the Urgo Case has contradicted this and taken the correct position, the judgement has not been overruled and has made way for the larger bench decision in the Sushil Ansal Case. Thus, currently, these two judgements stand in contradiction with each other and as both are of the same bench strength, none of them have overruled the other. This has created a gap on this issue which can only be settled by a larger bench of the NCLAT or the Supreme Court of India. Another, problem that the exclusionary position creates is that the decree holding homebuyers are now left remediless under the Code. Explanation II of Section 5(8) categorically includes the amount raised through a builder buyer contract as a “financial debt” enabling homebuyers to initiate CIRP as financial creditors under Section 7. Now it is true that the basis of the creditor-debtor relation is the builder buyer contract and that once a decree is passed based on such a contract, the contract stands terminated. However, this basis is only relevant to prove the existence of the debt and once a decree is passed based on such a contract, the decree itself becomes evidence of the debt if there is no appeal against it. The NCLAT seems to have failed in analysing this point in

[By Aashna Shah] The author is a student at the Institute of Law, Nirma University. Indian courts have pronounced inconsistent judgements regarding the classification of dues arising out of Lease and rentals as Operational Debts. With contradictory reasoning, courts had earlier put the creditors at a great disadvantage, thus neglecting the objective of the Insolvency and Bankruptcy Code, 2016 (“IB Code” or “the Code”) to balance the interests of all stakeholders. Finally, this ambiguity was settled in the case of Anup Dubey v. National Agricultural Co-operative Marketing Federation of India Ltd. & Ors., wherein the court stated that Lease and License agreements shall come within the ambit of section 5(21) of the IB Code i.e., they shall be construed as operational debts. Hence the adjudicating authority deviated from its judgement in Ravindranath Reddy v. G. Kishan, wherein it had excluded Lease and Rentals as Operational Debts. In this article, the author shall provide an analytical account of the present case. Additionally, the author will explain arguments that could have been used by the NCLAT to strengthen its decision. Factual Background M/s. National Agriculture Co-operative Marketing Federation of India Ltd. (“Operational Creditor”) entered into a leave and license agreement (“Agreement”) with Umarai Worldwide Private Limited (“Corporate Debtor”) to use cold storage facilities for three years. The corporate debtor started defaulting in the payments as stipulated in the agreement from September 2017. The operational creditor contended that despite repeated reminders to pay the ‘outstanding debt’, and serving an eviction notice, the Corporate debtor did not pay the outstanding debt. Subsequently, the Operational creditor sent a demand notice under section 8 of the IB Code. The Corporate debtor, in its reply, denied all the claims and requested for renewal of the agreement. Thereafter, the Operational creditor initiated insolvency proceedings against the Corporate debtor under section 9 of the IB Code, which was accordingly admitted by the National Company Law Tribunal, Mumbai (“MNLCT”). While admitting the application, the MNCLT stated that the Corporate debtor vide two letters had confirmed to pay the outstanding dues for rent as established by the agreement. Hence, the Corporate debtor has committed a default by not paying the debt due to the Operational creditor. The Corporate debtor’s suspended board member challenged this order of MNCLT before the National Company Law Appellate Tribunal (“NCLAT”).  The NCLAT upheld the order of MNCLT and stated that lease rentals which arise due to the use and occupation of a cold storage unit for commercial purposes shall come under the ambit of section 5(21) of the IB Code i.e., it shall be considered as an ‘Operational Debt’. Analysis The adjudicating authority examined section 5(21) of the code which states that for a debt to be construed as an ‘Operational debt’ it should arise out of any of the following: (a) Claim in respect of provisions for goods and services (b) Employment or debt in respect of dues and (c) Such repayment of dues which should arise under any law in force at that time What Operational debt can be construed as has been interpreted by the courts time and again because the legislature has not defined the term ‘goods and services.’ This lacuna in law has given rise to the varying application of this provision. In Ravindranath Reddy v. G. Kishan, NCLAT wrongly observed that there is no difference between ‘essential goods and services’ under section 14(2) of the IB Code and ‘goods and services’ under section 5(21) of the Code. Hence, the goods and services stated under section 14(2) shall only be construed as Operational debts. This incorrect position of law was rectified in the present case, where the same tribunal refused to consider the contention of the Corporate debtor that section 14(2) read with Regulation 32 (Insolvency Resolution Process for Corporate persons, Regulation 2016) do not include rental dues from cold storage facilities, which is why it should not be considered Operational debt. The adjudicating authority rightly differentiated between ‘goods and services’ and ‘essential goods and services’ because the latter only comprises of those goods and services whose supply is not to be terminated during Corporate Insolvency Resolution Proceedings. Also, it is nowhere mentioned in the Code, that essential goods and services under Section 14(2) are the same goods and services under section 5(21). .The adjudicating authority rejected the reasoning provided by the Tribunal in Ravindranath’s case for excluding dues out of lease agreements as Operational Debt. In the aforementioned case, the tribunal had stated that for the determination of dues arising out of a lease agreement, the court will have to rely on evidence. But the tribunal will not be able to investigate as it exercises a summary jurisdiction, hence dues arising out of lease agreements are not considered to be Operational debts. Instead in support of its decision, the court relied on the judgement of the Supreme court in the case of Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd, wherein debts arising out of lease rentals were included under Operational debt. The judgement of the apex court was pronounced by relying on recommendations of the Bankruptcy Law reforms committee report (BLRC) which stated that the liability of Operational creditors arises due to transactions on operations. Hence, in Lease and Rentals which are included in the operations, any debt arising thereof should be considered as an operational debt. The only issue on placing reliance on the report is that despite the suggestions of the committee, the Legislature never expressly included Lease and Rentals as an Operational debt. Additionally, the adjudicating authority in the present matter did not state that in cases of Operational debts, the very reason that the Corporate Debtor can claim the defence of the existence of a dispute is because of the lack of evidence relating to the ‘Existence of Debt’. This completely negates the reasoning of the tribunal in the Ravindranth case related to the investigation of the evidence for the existence of debt and would have strengthened the decision of the tribunal to