Post-CIRP Rental Dues as CIRP Costs: A Jurisprudential Inquiry

[By Yash Arjariya]

The author is a student of Hidayatullah National Law University.

 

Introduction

Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) explains operational debt as a claim made in respect of ‘goods and services’. The earlier jurisprudence developed by the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) in M. Ravindranath Reddy v. G. Kishan & Ors and subsequently followed in Promila Taneja v. Surendri Designe Pt. Ltd.held that rent of a leasehold property did not amount to ‘operational debt’ for the purpose of Sec 5(21) of IBC and purported to follow what can be described as the “direct-nexus test”, i.e., the supply by the creditor must directly relate to or affect the production of goods and services by the debtor to classify the creditor as operational creditor. The decision of the NCLAT in Jaipur Trade Expocentre Private Limited v. M/s Metro Jet Airways Training Pvt. Ltd.overruled the earlier interpretation of Sec 5(21) of IBC and provided that lease of premises is a ‘service’ and hence the claim of the licensor for the payment of licence fee is a claim of ‘operational debt’ within the meaning of Sec 5(21) of IBC.

The dust, with respect to the classification of rental dues or leasehold dues as operational debt, is settled now. However, there remains to be an inquiry made about the treatment of rental or leasehold dues arising after a Corporate Insolvency Resolution Plan (hereinafter referred to as “CIRP”) has been filed and a moratorium is imposed, i.e., whether such dues will continue to be classified as operational debt or be included in CIRP costs. If such rental dues are considered as post-CIRP cost, they shall be treated as CIRP cost and would be payable to recipients on priority, as held by the National Company Law Tribunal (hereinafter referred to as, “NCLT”) in Hind Tradex Limited v. Lakshmi Precisions Screws.It is necessary to account for the explanation that, as per the scheme of distribution of assets as envisaged in Sec. 53 of the IBC, the insolvency resolution process costs are paid in full and in priority over other claims.Thus, when the resolution professional manages the business of the corporate debtor during insolvency proceedings, the question is whether the rental or leasehold amount becoming due after the insolvency proceedings have started should be considered CIRP costs or be pooled in the class of operational debt.

The article examines the two different jurisprudential approaches to treating post-CIRP rental dues or leasehold dues as either cost or operational debt. Then, the author makes an attempt to address this proposition through the lens of a statutory creditor (established as a creature of law). The article concludes by listing and accounting for the carvings made in the jurisprudential epoch on this proposition.

Post CIRP rental dues as ‘CIRP Cost’

In this respect, Prerna Singh v. CoC of M/s Xalta Food and Beverages Pvt. Ltd.(hereinafter referred to as “Prerna Singh”) can be said to be an epoch-making judgement. In the instant case, the operational creditor was extremely prejudiced by the moratorium imposed on account of the initiation of insolvency proceedings, to the extent of becoming insolvent in the near future. The NCLAT ordered the inclusion of post-CIRP rental dues in CIRP costs and their payment on priority. What NCLAT can be said to have devised as a rule is that if the right of the lessor to recover rent is affected on account of a moratorium, the lessor is entitled to recover the rent, which shall be included in the CIRP cost.

The Chennai Bench of the NCLAT in S. Rajendran Resolution Professional of M/s Vasan Health Care Pvt. Ltd. v. B.M. Anand(hereinafter referred to as “S. Rajendran”) in its judgement necessarily read Section 5(13) of IBC into details enumerated in Regulation 31 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to classify post-CIRP rental dues as CIRP cost. By doing so, the court has furthered the juristic principle that the rights of creditors must not be prejudiced by moratorium. However, this ‘prejudice to rights of creditor due to moratorium’ is qualified by the presentation of adequate facts and circumstances by the creditor; the law doesnot automatically classify post-CIRP rental dues as CIRP cost but on the warrant of a factum of circumstances. This factum has been a pendulum between a situation as weighty as nearly causing the bankruptcy of the creditor himself in Prerna Singh (supra) to a mere inadequacy of funds in S. Rajendran.

The law in this respect was followed in a catena of judgements delivered by both NCLT and NCLAT inNishant Singhal v. Hasti Mal Kachhara, Oriental Insurance of Commerce v. Yamuna Infradevelopers Private Limited, and Santanu T. Ray v. Tata Capital Financial Services Limited.

Necessary Outliers

The classification of post-CIRP dues as CIRP cost has not necessarily been dealt as only an issue of fact, i.e, such classification does not exlusively depended on creditor proving that his/her rights have been prejudiced on account of moratorium.

The judgement of NCLT in Karad Urban Co-Operative Bank Ltd. v. Khandoba Prasanna Sakhar Karkhana(which was later affirmed by the Supreme Court) has caused this proposition to transcend from entirely a issue to fact to so certain legal qualifications to be met. The NCLT held that an application for recovery of outstanding rental dues as CIRP cost cannot be filed after the application for approval of the resolution plan has already been filed with the adjudicating authority. The decision can be rationalised on the ground that such a belated filing of the application cannot be said to be anything but an attempt to forestall the resolution process.

Thus, the law as it stands now requires the application for treatment of post-CIRP rental dues as CIRP costs to be filed before the resolution plan is filed for approval before the adjudicating authority.

Case of a Statutory Creditor

Section 14(1)(d) of the IBC provides a general rule as to the moratorium after the initiation of insolvency proceedings. The rule is that once a moratorium is imposed, there can be no recovery of property leased, rented, or in the possession of a corporate debtor by the owner or lessor of the property. However, the explanation attached to Section 14(1)(d) of the IBC provides that a statutory creditor is not bound by the general rule, but any action for recovery of property can only be initiated if there is a default in payment of a licence fee, concession, clearance, or similar grant, etc. Thus, statutory creditors, unlike other operational creditors, have the right to recover their property in the event of a default of payments accruing out of their property during the moratorium period.

However, the question arises: in the case of this special right vested in statutory creditors, what shall be the treatment of post-CIRP rental dues, considering the fact that they can recover their property in the event of its default? In New Okhla Industrial Development Authority v. Sunil Kumar Agarwal (hereinafter referred to as “Sunil Kumar Agarwal”), the NCLT held that a statutory creditor can recover post-CIRP rental dues as costs. However, on appeal, this finding was reversed by the NCLAT holding thata statutory creditor cannot claim post-CIRP rental due as CIRP cost.

The author submits that NCLAT erred in reversing the judgement of NCLT. The NCLAT had resorted to a literal interpretation of the explanation attached to Sec 14(1)(d) of the IBC, which does not provide lease rent amid other classes of payments like concession, grant, permit, registration, etc. It would not be logical to accept that even when bestowed with a special right of recovery of property during the moratorium period, there is no right to recover post-CIRP rental dues at par with ordinary creditors.

The explanation attached to Sec. 14(1)(d) vests exclusively the statutory creditor with special rights of recovery during the moratorium period. However, it is logical to argue that such a grant of special rights cannot operate to prejudice ordinary rights granted to all creditors. Thus, NCLAT’s judgement in Sunil Kumar Agarwal attempts an unnatural construction of the scheme of Sec 14(1)(d) by not allowing the rights of an ordinary creditor to a statutory creditor.

Conclusion

Thus, it can be concluded that post-CIRP rental and leasehold dues can be considered CIRP costs if the creditor can present circumstances under which the operation of the moratorium under Section 14 has prejudiced him. Though the degree of such ‘prejudice’ suffered by the creditor has been variable in decided cases, this has come to develop as an issue of fact. However, one necessary legal underpinning has developed to qualify the inclusion of post-CIRP rental dues in CIRP costs so that the application for requesting the same cannot be belated or act to stall the insolvency proceedings.

The author has submitted that the exclusion of statutory creditors from this right of recovery of post-CIRP rental and leasehold dues as CIRP costs is erroneous and must be set aside. There exists no reason to fathom from either the IBC or regulations made thereunder that the special rights granted to statutory creditors under the explanation attached to Section 14(1)(d) of the IBC must operate to eliminate their rights similar to those of other classes of creditors.

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