Demystifying the Air around Lease and Rental Operational Debt

[Aridaman Raghav is a 3rd year B.A. LL.B. (Hons.) student at National University of Study and Research in Law, Ranchi]

The National Company Law Appellate Tribunal (‘NCLAT’) in Anup Dubey v. National Agricultural Co-operative Marketing Federation of India (NAFED) Ltd. & Ors.(7 October 2020) has held that lease rentals arising out of the use of a cold storage unit for commercial purpose can be construed as an ‘operational debt’ under section 5(21) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). While doing so, the NCLAT has diverged from its earlier decision in Ravindranath Reddy v. G. Kishan, which had excluded rental dues arising out of a lease agreement from the purview of operational debt.

The determination of nature of debt/claim is an important step while considering the admission of application under the IBC as there are only two types of debts: financial debt and operational debt. This is important because any person holding a debt that falls outside the ambit of these two categories cannot initiate proceedings against the corporate debtor under the IBC. In the present case, the main issue for consideration before the NCLAT was whether the dues arising from ‘leave and license agreement’ can be considered as an operational debt. As per section 5(21) of the IBC a ‘debt’ can be construed as an ‘operational debt’ when the following criteria is met: (a) claim in respect of provision for goods and services; (b) employment or debt in respect of the dues; and (c) such repayment of dues which should arise under any law in force at that time.

The counsel on behalf of Anup Dubey (‘corporate debtor’) contended that the NCLAT in Ravindranath Reddy v. G. Kishan has already held that rentals on immovable property do not amount to operational debt under the IBC. The decision of the abovementioned case was based on the premise that in case of lease of an immovable property, default can be determined on the basis of evidence and while exercising its summary jurisdiction, the adjudicating authority cannot give finding regarding default in payment of lease rent, because it requires further investigation. The NCLAT, however, deviated from the above viewpoint holding that in the abovementioned case, the appellant was a tenant and no claim in provision of the goods or services or debt in respect of repayment of dues under any law for the time being in force payable to the central government or state government was made.

Instead, the NCLAT placed reliance on its earlier decision in the case of Sarla Tantia v. Nadia Health Care Ltd., wherein the NCLAT while dealing with dues arising from the terms of the leave and license agreement, held and observed it to be an ‘operational debt’. Further, reliance was also placed on The Bankruptcy Law Reforms Committee (‘BLRC’) Report of 2015 which recommends the treatment of lessors/landlords as operational creditors. The same report was also relied upon by the Supreme Court in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.,which considered the lessor to be an operational creditor.

Further, to determine whether NAFED would be treated as operational creditor, it was necessary to ascertain whether NAFED was providing ‘services’ to the corporate debtor as per section 5(21) of the IBC. The corporate debtor contended that ‘lease rentals’ are not a ‘service’ as it does not fall within regulation 32 (Insolvency Resolution Process for Corporate persons, Regulation 2016) read with section 14(2) of the IBC which considers only electricity, water, telecommunication services, and information technology services as essential services. However, the NCLAT observed that this argument would not pass muster as regulation 32 read with section 14(2) only mentions essential goods and services whose supply cannot be terminated during the course of the corporate insolvency resolution process (‘CIRP’) and the Code does not anywhere specify that the goods so mentioned under regulation 32 are the same as those which fall within the ambit of the definition of section 5(21). Therefore, the NCLAT observed that since the law has not gone into defining goods or services, one has to rely on general usage of the terms so used in the law, with proper regard to the context in which the same has been used.

For the same, reliance was placed on section 2(42) of the Consumer Protection Act, 2019 which defines ‘service’ as service of any description which is made available to the potential user and provision of facilities encompassing various aspects like banking, financing, boarding or lodging or both, housing etc. Also, schedule II of the Central Goods and Service Tax, 2017 lists the activities that are to be treated as supply of goods and services, and identifies lease and rental agreements as well as lease of building including a commercial, industrial, or residential complex for business and commerce is a supply of services. Therefore, the NCLAT observed that lease rentals arising out of use and occupation of a cold storage unit which is used for a commercial purpose is an ‘operational debt’ as envisaged under section 5(21) of the IBC.

While the NCLAT’s decision in the present matter is praiseworthy, it is subject to further considerations. First, the NCLAT has placed reliance on the BLRC Report of 2015 and while the BLRC stipulated that the lease dues should be part of the operational debt, the legislature has not included the same under the final version of the IBC. Secondly, the precedential value of the present case is also uncertain as it was delivered by a 2-member bench, whereas Ravindranath Reddy v. G. Kishan was delivered by a 3-member bench, thereby having a higher precedential value. The correct approach would have been to either accept the findings of the larger bench, as per the principle of ‘comity of courts’ or refer the matter to be decided by a larger bench. This being said, the present case has demystified the air around lease rents as operational debts to a great extent by bringing it under the purview of goods and services. How the NCLAT and various NCLTs address the diverging viewpoints around this issue in the future would be an interesting sight.

Aridaman Raghav

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