[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.
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’.
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 include Lease and Rentals in Operational Debts.
Rather, the Tribunal chose to rely on Section 2 (42) of the Consumer Protection Act 2019 which defines ‘service’, and Schedule II of Central Goods and Services Tax Act 2017 which lists activities considered as ‘goods and services.’ Accordingly, it concluded that these definitions coupled with the apex court’s decision in Mobilox, include lease as a service, thereby, concluding that it is to be construed as Operational Debt.
Subsequently, the adjudicating authority also placed reliance on the decision in the case of Sarla Tantia V/s. Ramaanil Hotels & Resorts Pvt Ltd, wherein the Tribunal concluded that dues arising out of ‘leave and license’ agreement shall be considered to be ‘Operational Debts’. It is pertinent to note that the judgement has been stayed by the Supreme court. But the author opines that until the apex court overrules the judgement, a stay shall not affect its precedential value.
This judgement by the NCLAT is significant because it is aligned with the objectives envisaged by the IB Code i.e., to balance the interests of all stakeholders. The precedential value of this judgement is confounding because it has been pronounced by a smaller bench (2 judges) than in the Ravindranath case (3 judges), which provided a contrary view. Hence, the tribunal will have to refer this case to a larger bench. Another important aspect is that the legislature has purposely not included lease under section 5(21) despite the BLRC’s recommendations. Thus, it may be the legislature’s intention to keep Lease and Rentals out of the preview of Operational Debt. The Supreme Court’s decision in the Sarla Tantia case is awaited to see whether the court upholds this position of law or gives a completely contrary opinion.