2023 (5) TMI 979 - AT - Insolvency and Bankruptcy

Appellate Tribunal deems lock-in period debt as operational under I&B Code, orders admission of Section 9 Application

The Appellate Tribunal allowed the appeal by the Operational Creditor, determining that the debt for the lock-in period under the 'Services Providers ... Operational debt - claim as right to remedy for breach of contract under Section 3(6)(b) of the IBC - compulsory registration under Section 17(b) of the Registration Act, 1908 - effect of unstamped or insufficiently stamped document where the agreement was acted upon by the partiesOperational debt - claim as right to remedy for breach of contract under Section 3(6)(b) of the IBC - Debt claimed for unpaid license/office service fees on premature termination during the lock-in period is an operational debt - HELD THAT: - The Tribunal held that Section 3(6)(b) of the Code treats a right to remedy for breach of contract as a 'claim' and Section 3(11) includes such a claim within the definition of 'debt.' The agreement provided for a 36-month lock-in during which the corporate debtor could not terminate; the corporate debtor terminated the agreement prematurely and thereby committed a breach giving rise to a right to payment. The Adjudicating Authority erred in holding that the amount claimed was not an operational debt; the claim accrued on account of default and was properly the subject of a Section 9 application. The Tribunal relied on the Larger Bench decision in Jaipur Trade Expocentre recognising unpaid license fees as operational debt and overruled contrary three-member precedent relied upon by the respondent. [Paras 16, 19]The claimed amount arising from premature termination during the lock-in period is an operational debt and the Section 9 petition ought to have been admitted.Compulsory registration under Section 17(b) of the Registration Act, 1908 - The agreement was not a compulsorily registrable document under Section 17(b) of the Registration Act, 1908 - HELD THAT: - The Tribunal examined the nature of the agreement which expressly disclaims creation of any right, title or interest in immovable or movable property and is a personal services/providers agreement. Since the instrument did not purport or operate to create, declare, assign, limit or extinguish any right, title or interest in immovable property, it was not compulsorily registrable under Section 17(b). The Adjudicating Authority's conclusion to the contrary was fallacious. [Paras 20, 21]The agreement was not required to be registered under Section 17(b) and thus was not a compulsorily registrable instrument.Effect of unstamped or insufficiently stamped document where the agreement was acted upon by the parties - Deficiency of stamp/that the agreement was not originally engrossed on stamped paper was inconsequential to the existence of the operational debt where the agreement was executed and acted upon by the parties - HELD THAT: - Although the respondent asserted that the stamp paper was antedated and unsigned, the record showed that the parties executed the agreement, the corporate debtor took possession and paid the monthly fees up to a point, and the agreement was acted upon. In a Section 9 proceeding the Adjudicating Authority's task is to determine whether an operational debt is due; mere non-engrossment on stamped paper did not negate the claim when the agreement was executed and acted upon. Therefore the Adjudicating Authority erred in discounting the agreement on this ground. [Paras 22, 23, 24]The stamp-related defect did not vitiate the operational creditor's claim and was not a ground to reject the Section 9 application.Final Conclusion: The appeal is allowed; the order dated 08.04.2022 rejecting the Section 9 application is set aside. The Adjudicating Authority is directed to admit the Section 9 application within one month from production of the copy of this order, subject to any settlement between the parties during that period. Issues Involved:1. Whether the amount claimed by the petitioner for the lock-in period amounts to operational debt.2. Whether the agreement dated 17th August, 2018 is a compulsorily registerable instrument under the Registration Act 1908.3. Whether the agreement dated 17th August, 2018 was originally engrossed on an unstamped paper.Summary:Issue 1: Operational DebtThe Appellant, an Operational Creditor, challenged the rejection of their Section 9 Application under the I&B Code, 2016, which sought payment for a lock-in period under a 'Services Providers Agreement' with the Respondent-Corporate Debtor. The Adjudicating Authority initially held that the claimed amount was not operational debt. However, the Appellate Tribunal found that the debt for the lock-in period, arising from the breach of contract, qualifies as a claim under Section 3(6)(b) of the IBC and is thus an operational debt. The Tribunal referenced the larger bench judgment in Jaipur Trade Expocentre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd., which overruled the earlier judgment in M. Ravindranath Reddy v. G. Kishan & Ors., affirming that unpaid license fees are operational debts.Issue 2: Compulsory RegistrationThe Adjudicating Authority had determined that the agreement required compulsory registration under Section 17(b) of the Registration Act, 1908. The Appellate Tribunal disagreed, noting that the agreement did not create any right, title, or interest in immovable or movable property for the Corporate Debtor. Consequently, the agreement was not subject to compulsory registration.Issue 3: Unstamped PaperThe Adjudicating Authority had also found that the agreement was originally engrossed on an unstamped paper. The Appellate Tribunal observed that despite the lack of stamping, the agreement was executed, acted upon, and the Corporate Debtor had taken possession of the premises and paid the monthly office fee up to July 2019. Therefore, the unstamped nature of the agreement did not invalidate the claim of the Operational Creditor.Conclusion:The Appellate Tribunal allowed the appeal, set aside the order dated 08th April, 2022, and directed the Adjudicating Authority to pass an order of admission of the Section 9 Application within one month, allowing the parties an opportunity to settle during this period.