Rent dues not operational debt under Insolvency & Bankruptcy Code

The Tribunal upheld the decision of the Adjudicating Authority, ruling that rent dues do not constitute Operational Debt under the Insolvency and Bankruptcy Code, 2016. It was determined that there was a pre-existing dispute between the parties regarding the termination of the lease agreement. As a result, the appeal was dismissed, and no costs were awarded.

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Issues Involved:
1. Whether rent dues can be considered as Operational Debt under the Insolvency and Bankruptcy Code, 2016 (IBC).
2. Whether there was a pre-existing dispute between the parties.

Issue-wise Detailed Analysis:

1. Whether rent dues can be considered as Operational Debt under the Insolvency and Bankruptcy Code, 2016 (IBC):

The Appellant, a landlord, filed an application under Section 9 of the IBC, which was dismissed by the Adjudicating Authority, relying on the judgment in "Mr. M. Ravindranath Reddy Versus Mr G. Kishan & Ors." This judgment 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 IBC. The Appellant argued that another Bench of the Tribunal, in "Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors.," held that lease rentals for commercial purposes should be treated as services, thus qualifying as Operational Debt.

The Tribunal examined the definitions and previous judgments, noting that the Bankruptcy Law Reforms Committee (BLRC) recommended treating lessors/landlords as operational creditors. However, the Legislature did not fully adopt this recommendation, limiting the definition of operational debt to claims in respect of goods and services. The Tribunal reaffirmed its earlier stance from "Mr. M. Ravindranath Reddy Versus Mr G. Kishan & Ors." 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 of Operational Debt.

Additionally, the Tribunal found that the judgment in "Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors." misinterpreted the Supreme Court's observations in "Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited," which only reproduced portions from the Insolvency Law Reforms Committee report and did not hold rent to be Operational Debt. The Tribunal emphasized that definitions from the Consumer Protection Act, 2019, and the Central Goods and Services Tax Act, 2017, cannot be directly applied to IBC, as they are not covered under Section 3(37) of IBC.

The Tribunal also noted that while the legislature made specific provisions for particular types of leases under the definition of Financial Debt in Section 5(8)(d) of IBC, no such provision was made for Operational Debt. Therefore, the Tribunal concluded that rent dues cannot be treated as Operational Debt.

2. Whether there was a pre-existing dispute between the parties:

The Corporate Debtor claimed that the lease agreement was terminated in July 2017 due to financial stress and changes in circumstances, such as losses incurred due to demonetization and a Supreme Court judgment affecting mall entry. The Appellant argued that the Corporate Debtor unilaterally stopped making rent payments and that this did not constitute a pre-existing dispute.

The Tribunal examined the emails exchanged between the parties, noting that the Corporate Debtor had informed the Appellant about the financial stress and termination of the lease. The Tribunal held that whether the termination of the lease was legal would be an issue of trial between the parties. However, the Tribunal agreed with the Adjudicating Authority's finding that there was a pre-existing dispute, as evidenced by the email correspondence.

Conclusion:

The Tribunal upheld the Adjudicating Authority's decision, concluding that rent dues do not qualify as Operational Debt under IBC and that there was a pre-existing dispute between the parties. Consequently, the appeal was dismissed with no orders as to costs.

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