NCLAT’s Ruling on Exclusion of Lease and Rental Operational Debt

[Chetan Saxena is a 4th-year student from the Institute of Law, Nirma University, Ahmedabad]

The National Company Law Appellate Tribunal (NCLAT) in Ravindranath Reddy v. G. Kishan (17 January 2020) held that rental dues arising out of a lease agreement do not fall under the definition of “operational debt” under section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). The determination of the nature of a debt has always been one of the primary tasks that the adjudicating authority has to deal with. Further, ascertainment of debt is an important consideration since there exists only two types of debt under IBC: financial debt and operational debt. This is crucial because any person holding a debt that falls outside the two categories cannot initiate proceedings against the corporate debtor under the IBC.

The definition of operational debt under section 5(21) of the IBC is divided in three parts: (a) claim in respect of provision for goods and services; (b) employment or debt in respect of dues; and (c) such repayment of dues should arise under any law in force at that time.  Relying on Parmod Yadav & Anr. V. Divine Infracon (P) Ltd., the NCLAT in the present matter stated that the term “operation” is not defined under the IBC or under any law for that matter, including the General Clauses Act. Hence, the NCLAT sought to look into the dictionary meaning of the term “operations”, which means “ready for use or able to use”. The NCLAT also relied on Jindal Steel & Power Ltd. v. DCM International Ltd.  wherein it was held that Jindal Steel and Power Ltd., being a tenant, is not an operational creditor since it appeared before NCLAT merely on the basis of MoU signed for the leased property, without claiming under any law, which is a prerequisite of section 5(21) of the IBC.

Further, what constitutes goods and services forms another important question since it is one of the pre-requisites under section 5(21). Under section 14(2) of the IBC, the term essential goods and services has been used. Upon consideration of the same, the NCLAT uses the term “goods and services” and “essential goods and services” interchangeably. The NCLAT also mentions the restrictions on the operational creditor as against the financial creditor for initiation of proceedings and states that the inability of a corporate debtor to pay for day-to-day expenses leads to an impression that it will soon be under the process of liquidation. On these lines, the NCLAT rejected the appellant Ravindranath Reddy’s contentions and held that lease and rental dues do not form part of the operational debt and they cannot be circumscribed as an operational debt.

While the NCLAT’s interpretation seems strictly based on the statutory provisions, the same cannot be deciphered from the judgment. It fails to take into consideration the recommendations of the Bankruptcy Law Reforms Committee (BLRC), which played an essential role in drafting of the IBC. The BLRC stipulated that while the lease dues should be part of the operational debt, the legislature has not included the same under the final version of the IBC. An important ruling of Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. has been neglected where the Court referred to the BLRC Report which mentions the inclusion of a lessor under operational creditor. Further, the NCLAT casually uses the terms “goods and services” interchangeably with “essential goods and services”. It further negates the meaning of goods and services provided under the Central Goods and Service Tax Act, which includes lease and rental agreements as part of goods and services.

In Swiss Ribbons Ltd. v. Union of India, the difference between a financial creditor and operational creditor was laid down. Here, the tribunal held that an important part of section 5(21) is whether the three criteria mentioned are being fulfilled or not.  Further, it was stated that operational creditors are those related to supply of goods and services. What the NCLAT fails to consider is that one of the objectives of the IBC is to balance the interest of all the stakeholders, which includes financial creditors. When such restrictive interpretation is provided, it hampers the very object of the IBC. Further, in the present case, while relying on the previous judgments, the NCLAT has neglected the claim of G. Kishan in respect of providing a valid meaning of the term “goods and services” wherein it has adopted the meaning of essential goods and services. Thus, it presents a dichotomy in terms where on the one hand a general meaning is considered in case of the term operations and, on the other, while interpreting goods and services, an entire new term is replaced having its own separate meaning.

The NCLAT in this case fails to lay down certain tests in order to set a precedent for future cases. The story has been same again where, without providing justifications as to why a land given on lease does not form part of goods and services and cannot be covered under section 5(21) of the IBC, the NCLAT has drawn support from its own previous ruling. Considering the approach of debtors who are generally sluggish in terms of making timely payments or clearing their dues to creditors, the judgment pushes such creditors on back foot to a great extent. Further, ignoring the BLRC, which was even taken into consideration by the Supreme Court, raises questions as to the direction in which tribunal seeks this legislation to move.

Chetan Saxena

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