2022 (7) TMI 241 - AT - Insolvency and Bankruptcy

License fees for commercial premises constitute 'Operational Debt' under Insolvency and Bankruptcy Code

The larger Bench found that the judgment in Company Appeal (AT) (Ins.) No.331 of 2019 did not lay down the correct law regarding the definition of ... Operational Debt or not - claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes - Whether the Judgment of this Tribunal in M. RAVINDRANATH REDDY VERSUS G. KISHAN [2020 (2) TMI 56 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] lays down the correct law? - it was held in the case that Any debt arising without nexus to the direct input to the output produced or supplied by the corporate debtor, cannot, in the context of Code, be considered as an operational debt, even though it is a claim amounting to debt. HELD THAT:- The ‘operating cost’ as defined, is an expense incurred in the conduct of the principal activities of the enterprise. The ‘operational debt’ is also a debt which is incurred in the conduct of principal activities of the enterprise. In the present case, the Corporate Debtor has taken a licensed premises for running an Educational Institution. All cost incurred by the Corporate Debtor and cost which remained unpaid shall become a debt on the part of Operational Creditor. The payment of License Fee is an obligation on the Corporate Debtor under the Agreement dated 15.04.2017. In a judgment relied by learned Counsel for the Appellant is Sanjeev Kumar vs. Aithent Technologies Private limited and another [2021 (2) TMI 443 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI], where the Corporate Debtor has taken on lease the basement and the ground floor of the premises and Lease Deed was executed for renting out the premises. Demand Notice was sent and then Section 9 Application was filed. One of the questions which arose for consideration in the case was as to 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(2) read with Section 5(21) of the Insolvency and Bankruptcy Code, 2016? In the above context, the Adjudicating Authority had admitted the Application, which order was upheld by this Tribunal holding that Operational Creditor had provided different type of services to the Corporate Debtor. Section 14, sub-section (2) deals with supply of essential goods or services to the Corporate Debtor. The said provision has nothing to do with the extent and expense of ‘operational debt’ within the meaning of Section 5(21). The observation that ‘any debt arising without nexus to the direct input or output produced or supplied by the Corporate Debtor, cannot be considered to be operational debt’ is conclusion drawn by this Tribunal contrary to the scheme of the Code. The ‘operational debt’ as defined in Section 5(21) has meaning much wider than the essential goods and services. Essential goods and services are entirely different concept and the protection under Section 14(2) as provided for is an entirely different context. Thus, the observations made that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by scheme of the Code. The observation of this Tribunal in the above case in respect of definition of ‘service’ under Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not covered by Section 3(37) of the Code, with regard to which observation, no exception can be taken. However, in the facts of the present case, where Agreement itself contemplate payment of GST for the services under the Agreement, on which GST is payable, the definition of ‘service’ under Central Goods and Services Tax Act, 2017 cannot be said to be irrelevant - in the present case, debt pertaining to unpaid license fee was fully covered within the meaning of ‘operation debt’ under Section 5(21) and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an ‘operational debt’. The Application filed by the Operational Creditor (Appellant herein) deserves admission under Section 9 of the Code - application allowed. Issues Involved:1. Whether the Judgment in Company Appeal (AT) (Ins.) No.331 of 2019 lays down the correct law.2. Whether the claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of 'Operational Debt' within the meaning of Section 5(21) of the Insolvency and Bankruptcy Code, 2016.Detailed Analysis:Issue 1: Correctness of the Judgment in Company Appeal (AT) (Ins.) No.331 of 2019The larger Bench was constituted to consider the correctness of the judgment in Company Appeal (AT) (Ins.) No.331 of 2019, specifically in the case of Mr. M. Ravindranath Reddy vs. Mr. G. Kishan & Ors. This judgment held that the claim for enhanced lease rent does not fall within the definition of 'Operational Debt' under Section 5(21) of the Insolvency and Bankruptcy Code (IBC), 2016. The Tribunal in this case relied on Section 14(2) of the IBC, which deals with essential goods and services, and concluded that there must be a direct nexus to the output produced or supplied by the corporate debtor for a debt to be considered operational.The larger Bench found that this interpretation was too narrow and not supported by the scheme of the IBC. The Bench emphasized that 'Operational Debt' as defined in Section 5(21) has a much wider meaning than just essential goods and services. The Tribunal concluded that the judgment in Mr. M. Ravindranath Reddy's case does not lay down the correct law.Issue 2: License Fee as 'Operational Debt'The second issue was whether the claim for payment of license fees for the use of immovable premises for commercial purposes constitutes 'Operational Debt' under Section 5(21) of the IBC. The Appellant argued that the license fee for the use of premises, which included fittings, fixtures, and other services, should be considered as 'Operational Debt'. The Respondent contended that such claims are purely civil matters and do not fall within the ambit of 'Operational Debt'.The larger Bench examined the definitions and provisions under the IBC, including Section 5(20) and (21), and Section 3(33) and (37). The Bench also referred to the Bankruptcy Law Reforms Committee's report, which differentiates between financial creditors and operational creditors. The report suggests that lessors of commercial premises are operational creditors.The Bench noted that the Agreement between the parties included provisions for the payment of GST, which is applicable only to goods and services. This indicated that the license fee was indeed for services rendered. The Tribunal also referred to various judgments, including Mobilox Innovations (P) Ltd. vs. Kirusa Software (P) Ltd., which supported the broader interpretation of 'Operational Debt'.The Bench concluded that the license fee for the use of commercial premises falls within the definition of 'Operational Debt' under Section 5(21) of the IBC. The Tribunal directed the Adjudicating Authority to admit the Application under Section 9 of the IBC, allowing the Operational Creditor to proceed with the insolvency process.Conclusion1. The judgment in Company Appeal (AT) (Ins.) No.331 of 2019 does not lay down the correct law.2. The claim of the Licensor for payment of license fees for the use of commercial premises is an 'Operational Debt' within the meaning of Section 5(21) of the IBC, 2016.The larger Bench allowed the appeal, set aside the impugned judgment, and directed the Adjudicating Authority to admit the Application under Section 9 of the IBC within one month, providing an opportunity for settlement if any.