TaxTMI 
TaxTMI 
2022 (7) TMI 241
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.... use and occupation of immovable premises for commercial purposes is a claim of 'Operational Debt' within the meaning of Section 5(21) of the Code." 2. Before we proceed to consider the submission of the parties and the Questions framed, it is necessary to notice the facts of the case, which has given rise to this Appeal. (i) The Appellant before us entered into an Agreement dated 15.04.2017 with the Respondent M/s Metro Jet Airways Training Private Limited, the Corporate Debtor. Under the License Agreement the Licensor granted license of Admin Building with total super area measuring 31000 Sq. Ft., which premises was on Warm Shell Building with fittings and fixtures, electrical, flooring as per good corporate standards and as per the requirement of the Licensee. The Licensee took the premises for the purposes of running an Educational Establishment with effect from 01.06.2017 for an initial period of five years. License fee was agreed to Rs.4,00,000/- lumpsum per month + government taxes. (ii) Between 08.11.2017 to 22.11.2017, part payment was made by the Corporate Debtor towards the license fee. A cheque dated 07.05.2018 amounting to Rs.20,00,000/- was handed over by the Cor....
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....dards and as per the requirements of the Licensee. The premises was licensed to the Corporate Debtor for running Educational Institution. The provision made by Agreement was a provision of 'service' within the meaning of Section 5, sub-section (21) of the Code. The debt was an 'operational debt' within the meaning of Section 5, sub-section (21) of the Code. The Adjudicating Authority committed error in holding that claim arising out of grant of license to use of immovable property does not fall in the category of goods or services. The Corporate Debtor defaulted in payment of license fee and dishonour of cheques is proof that the amounts are due from the Corporate Debtor to the Operational Creditor. Demand Notice was duly served on the Corporate Debtor on 07.05.2019 but neither any reply was given to the Demand Notice nor any dispute was raised by the Corporate Debtor. The Corporate Debtor after receiving the Demand Notice with a malafide intention initiated civil proceedings before the Sanganer Court, Jaipur on 09.05.2019. The Appellant is a service provider to the Corporate Debtor by means of License Agreement, who was permitted to use the premises for the purpose of running an E....
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....s and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease. The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt." 10. Chapter 2 of the Code deals with The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Section 5, sub-sections (20) and (21) of the Code, which are relevant in the present case are as follows: "3.(20) "operational credi....
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....inbefore, on the terms and conditions appearing hereinafter. In pursuance to the above LICENCE AGREEMENT, the LICENSOR hereby agrees to hand over the vacant and peaceful license of the Demised Premises to the LICENSEE on or before 1st June 2017. b. It is specifically agreed between the parties that the "LICENSEE" will not in respect of the Demised Premises create encumbrance of any kind such as mortgage, collateral security etc. or any other interest in favour of third party or otherwise. c. At the time of signing of this License Agreement, the LICENSEE undertakes and warrants that it does not have any claim against the LICENSOR with regard to any item of work, quality of work, materials, installation etc. Any or all complaints that the LICENSEE had with respect to the Demised Premises have been sorted out by the LICENSEE with the LICENSOR before signing of this agreement. d. On termination of this agreement the LICENSEE undertakes to restore the demised premises to its original condition" 14. The tenure of the Agreement as per Clause 2 was for five years with effect from 01.06.2017 with renewal clause in Clause-3. Clause 4 of the Agreement, which deals with License Fe....
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....ational debt' has not been explained in any other provisions of the Code. The definition under Section 5(21) uses the expression 'operational'. The expression 'services' used in Section 5(21) has also not been defined in the Code. When an expression used in statute is not defined, the Court has to explain the meaning of undefined expression in accordance with the well-established rules of statutory interpretation. The Hon'ble Supreme Court has laid down the law on the above in (2015) 4 SCC 770 in Keshavlal Khemchand and Sons Private Limited and Ors. vs. Union of India and Ors., wherein in paragraph 53, following has been laid down: "53. We are of the firm opinion that it is not necessary that the legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. It has been the practice of the legislative bodies following the British parliamentary practice to define certain words employed in any given statute for a proper appreciation of or the understanding of the scheme and purport of the Act. But if a statute does not contain the definition of a particular expression....
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....t, defines "goods" in following manner: "2(52) "goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply" 22. The Agreement dated 15.04.2017 is not with regard to any 'goods'. The Agreement dated 15.04.2017 has to read to mean that the Agreement between the parties was with regard to 'services' within the meaning of Section 5, sub-section (21) of the Code. Had the Agreement dated 15.04.2017 did not contemplate services, there was no occasion for making the Licensee liable to pay GST over and above the License Fee. The License Fee to be paid under the Agreement included Government Taxes like GST etc. The above Clause of Agreement, thus, throws considerable light on the nature of provision, which was provided by the Licensor by the Agreement. 23 We have noticed above that Section 3(33) of the Code deals with 'transaction'. Agreement dated 15.04.2017 is fully covered within the meaning of word 'transaction' as defined in Section 3(33). We may also need to look into the meaning of express....
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....t of a claim which is due from any person and includes a financial debt and operational debt" 26. Before we refer to the judgments relied by learned Counsel for the parties in respect of their respective submission, we may notice the judgment of Hon'ble Supreme Court in Mobilox Innovations (P) Ltd. vs. Kirusa Software (P) Ltd. - (2018) 1 SCC 353, where the Hon'ble Supreme Court had occasion to consider Section 9 of the Code, which deals with operational debt. The Hon'ble Supreme Court in the above judgment has noticed the Bankruptcy Law Reforms Committee Report given in November 2015. In paragraph 17, the Hon'ble Supreme Court observed that it was as a result of the deliberations of this Committee, that the present Insolvency and Bankruptcy Code of 2016 was finally born. In paragraph 17, following observation has been made: "17. All this then led to the Bankruptcy Law Reforms Committee, set up by the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of Shri T.K. Viswanathan. This Committee submitted an interim report in February 2015 and a final report in November of the same year. It was, as a result of the deliberations of this Committee, that the pre....
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...., or the repayment record in response to the invoice or notice within the specified amount of time. If the debtor does not file either response within the specified period, and the creditor files for insolvency resolution, the debtor may be charged a monetary penalty by the adjudicator. However, if the debtor disputes the claim in court, until the outcome of this case is decided, the creditor may not be able to trigger insolvency on the entity. This process will act as a deterrent for frivolous claims from creditors, as well as act as a barrier for some types of creditors to initiate insolvency resolution." 22. The Committee then went on to consider as to who can trigger the insolvency process. In para 5.2.1 the Committee stated: "Box 5.2. - Trigger for IRP 1. IRP can be triggered by either the debtor or the creditors by submitting documentation specified in the Code to the adjudicating authority. 2. For the debtor to trigger IRP, she must be able to submit all the documentation that is defined in the Code, and may be specified by the Regulator above this. 3. The Code differentiates two categories of creditors: financial creditors where the liability to the debtor ar....
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....inancial creditor propose a registered insolvency professional to manage IRP. Operational creditors must present an "undisputed bill" which may be filed at a registered information utility as requirement to trigger IRP. The Code does not require the operational creditor to propose a registered insolvency professional to manage IRP. If a professional is not proposed by the operational creditor, and IRP is successfully triggered, the Code requires the adjudicator to approach the regulator for a registered insolvency professional for the case. When the adjudicator receives the application, she confirms the validity of the documents before the case can be registered by confirming the documentation in the information utility, if applicable. In case the debtor triggers IRP, the list of documentation provided by the debtor is checked against the required list. The proposal for RP is forwarded to the regulator for validation. If both the documentation and the proposed RP checks out as required within the time specified in regulations, the adjudicator registers IRP. In case the financial creditor triggers IRP, the adjudicator verifies the default from the information utility (if the d....
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....Report of Bankruptcy Law Reforms Committee in paragraph 5.2.1 is incorrect or not to be followed. We, thus, conclude that the reference to paragraph 5.2.1 of the Bankruptcy Law Reforms Committee Report by the Hon'ble Supreme Court in Mobilox cannot be said to be irrelevant or meaningless. Thus, what Bankruptcy Law Reforms Committee Report in 2015 mentioned while explaining the 'operational debt' is relevant and can be fully relied for interpreting the expression 'operational debt' as reflected in Section 5, sub-section (21). 28. Now we come to the judgments of this Tribunal relied by learned Counsel for the Appellant in support of her submission. 29. Appellant has relied on judgments of this Tribunal in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India ltd. and Anr. (supra), which was a case where Operational Creditor and the Corporate Debtor had entered into a Leave and License Agreement for the usage of cold storage. On account of default in making payment of outstanding debts, notice under Section 8 was issued and Section 9 Application was filed. One of the questions framed in the aforesaid case as to whether dues, if any, arising from the Le....
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....ply of services; (b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services." As the premises in the case on hand is leased out for 'Commercial Purpose', the cold storage owner/NAFED on collection is required to pay 'service tax' which is reflected in the tax invoices and 'Ledger Accounts' which is part of the record filed. 22. Therefore, keeping in view, the observations made by the Hon'ble Supreme Court in Para 5.2.1 of Mobilox (Supra), and having regard to the facts of the instant case this Tribunal is of the earnest opinion that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an 'Operational Debt' as envisaged under Section 5(21) of the Code. Further, in so far as the facts and attendant circumstances of the instant case on hand is concerned, the dues claimed by the First Respondent in the subject matter and issue, squarely falls within the ambit of the definition of 'Operational Debt' as defined under Section 5(21) of the Code." 30. The next judgment relied by learned Counsel fo....
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....built up area' and not for 'carpet area' as clearly stipulated in the Leave and License Agreement and the Appellant was under no obligation to reduce the rent. Reliance on irrelevant documents in coming to conclusion that there was a pre-existing dispute was uncalled for. The Adjudicating Authority also failed to notice that the Respondent never sought settlement of any dispute in regard to calculation of rent on 'carpet area' basis through arbitration which was the agreed mode of resolution of dispute between the parties in terms of the Leave and License Agreement. Significantly, no dispute was raised by the Respondent in reply to demand notice to which he did not at all respond. 9. Having regard for the factual matrix of the matter and the settled law on the subject, we are of the considered opinion that the impugned order suffers from serious legal infirmity and the same cannot be supported. A well merited case has been thrown out resulting in grave injustice. We accordingly, allow the appeal and set aside the impugned order. Since the debt and default is established, the Adjudicating Authority will admit the application under Section 9 of I&B Code after providing an opportuni....
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....the Adjudicating Authority pursuant to impugned order and action taken by the "the Resolution Professional", including the advertisement published in the newspaper and all such orders and actions in pursuant to the impugned order are declared illegal and are set aside. The application preferred by the 1st Respondent under Section 9 of the I&B Code is dismissed. The Adjudicating Authority will now close the proceeding. The 5th Respondent Company is released from all the rigour of proceedings and is allowed to function independently through its Board of Directors with immediate effect. The "Interim Resolution Professional"/"Resolution Professional" will hand over the management and records of the "Corporate Debtor". The Adjudicating Authority will fix the fee of "Interim Resolution Professional" for the period he has functioned, which shall be paid by the applicant. The appeal is allowed with the observation above and direction; there shall be no order as to cost. 33. When we perused the judgment in Mr. M. Ravindranath Reddy's case, the observations of this Tribunal were with regard to the facts of the aforesaid case and the reply which was given by the Corporate Debtor was also ....
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....tion 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. 36. The judgment of this Tribunal in Mr. M. Ravindranath Reddy's case does not consider the extent and expanse of the expression 'service' used in Section 5(21) of the Code. As noted above the Tribunal in the above case has relied on Section 14(2) of the Code for interpr....
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....d examined the provisions of IBC and observed in para 32 that "In the passage of the Bills which ultimately became the Code various important changes have taken place". Hon'ble Supreme Court went on to hold that at the time of admitting Application under Section 9 of IBC all that Adjudicating Authority is to see is whether there is plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. Learned Counsel for Appellant, before us does not show anything that in Mobilox Judgment, Hon'ble Supreme Court has held Rent to be Operational Debt. It appears to us that the Learned Counsel for parties did not properly assist the Hon'ble Bench in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors. 38. This Tribunal relying on Section 3(37) observed that words and expression used in IBC, which have not been defined, but which have been defined under Section 3(37) can be directly imported. This Tribunal held that definition of 'service' in Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not....
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....th the question as to what is the meaning of expression of 'service' used in Section 5(21) of the Code. Reference to Section 5(8)(d) regarding 'financial debt' by this Tribunal in the above case also was not relevant for finding out definition of expression 'service' under Section 5(21). We, thus, are of the view that both in Mr. M. Ravindranath Reddy and Promila Taneja this Tribunal did not dwell upon the correct meaning of expression 'service' used in Section 5(21) of the Code. In any view of the matter, in the above mentioned two cases, the dues were in the nature of rent of immovable property whereas the present is a case of license granted for use of premises on Warm Shell Building with fittings and fixtures, electrical, flooring as per good corporate standards. Hence, the Licnesee was licensed for a particular kind of service for use by the Licensee for running a business of Educational Institution. Hence, 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'. ....