2020 (2) TMI 56 - AT - Insolvency and Bankruptcy

Landlord lease not goods/services, not operational creditor. Section 9 petition dismissed due to rent dispute. Appeal allowed.

M. Ravindranath Reddy Versus G. Kishan

M. Ravindranath Reddy Versus G. Kishan - TMI Issues Involved:1. 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, 2016Rs.2. Whether the petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 is not maintainable on account of 'pre-existing dispute'Rs.Detailed Analysis:Issue 1: 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, 2016Rs.The Tribunal examined whether the unpaid rent constitutes an operational debt. The Code recognizes two types of debt: financial debt and operational debt. An operational debt is defined under Section 5(21) as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority. The Tribunal noted that the Legislature did not include rent dues in the definition of operational debt.It was highlighted that the Central Goods and Services Tax Act, 2017, considers any lease or tenancy to be a supply of services. However, previous judgments, including Jindal Steel & Power Ltd. v. DCM International Ltd., held that tenants do not come within the meaning of 'Operational Creditor' under sub-section (20) read with sub-section (21) of Section 5 of the Code.The Tribunal concluded that lease of immovable property does not constitute a supply of goods or services and thus cannot fall within the definition of operational debt. Therefore, the landlord cannot be treated as an operational creditor.Issue 2: Whether the petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 is not maintainable on account of 'pre-existing dispute'Rs.The Tribunal addressed the existence of a pre-existing dispute, which is crucial for the maintainability of a petition under Section 9 of the Code. The Corporate Debtor contended that there was an understanding of a moratorium for no rent enhancement for six years, which was disputed by the Operational Creditor. The Adjudicating Authority must reject the application under Section 9(5)(2)(d) if there is a record of dispute.The Tribunal referenced the Supreme Court judgment in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which established that the Adjudicating Authority must reject the application if there is a plausible contention requiring further investigation, indicating a genuine dispute.In this case, evidence showed that a notice to vacate the premises under Section 106 of the Transfer of Property Act, 1882, was issued before the demand notice under Section 8 of the Code, indicating a pre-existing dispute. The Tribunal concluded that the application under Section 9 could not be admitted due to the pre-existing dispute regarding rent enhancement.Order:The appeal was allowed, and the impugned order dated 21st January 2019 was set aside. The Tribunal declared all actions taken pursuant to the impugned order, including the appointment of the Interim Resolution Professional and the moratorium, as illegal. The application under Section 9 of the Code was dismissed, and the Corporate Debtor was allowed to function independently through its Board of Directors. The Adjudicating Authority was directed to fix the fee of the Interim Resolution Professional for the period he functioned, to be paid by the applicant. The appeal was allowed with no order as to costs.