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THE INCLUSION OF LEASE AND RENTALS AS OPERATIONAL DEBT UNDER INSOLVENCY PROCEEDINGS.

INTRODUCTION

There are various kinds of debts that are classified under different heads but under the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘Code’), recognition has been given only to “financial debt” and “operational debt” under Section 7[1] and 9[2] of the Code respectively, thereby, enabling the creditors to make an application for initiation of insolvency proceedings under the Code after determination of the nature of the debt.

The law by way of these provisions intends to protect the rights of the corporate creditors. Since the ambit of the term “corporate creditors” is wide enough to include both financial and operational creditors under the code, thus, debate pertaining to the inclusion of landlords as corporate creditors under the ambit of operational debt is making rounds all around recently. Before, dwelling on the jurisprudence in this regard, it is pertinent to understand the meaning of “operational debt”.

The term “operational debt” has been defined under Section 5(21) of the Code and provides rights to the operational creditors to claim their dues with respect to the three components i.e., provision of goods, services, or any debt that arises under any statute and is payable to the Government authority[3]. The main issue arose with respect to the scope and ambit of the term “services” to include lease and rentals which have not been clearly specified in the statute and therefore, the jurisprudence that has been formulated through various judicial precedents has been analyzed in this article.

JURISPRUDENCE CONCERNING THE ISSUE

This issue on various occasions has come before the different benches of the National Company Law Tribunal (hereinafter ‘NCLT’) and contrary views can be seen. Where the NCLT Delhi[4] and NCLT Hyderabad[5]ruled out that lease and rentals do not come under the ambit of operational debt; NCLT Chennai[6], NCLT Kolkata[7] and NCLT Ahmedabad[8]on the other hand ruled out that providing lease can be constituted as providing services to the lessee and the owner would therefore be termed as a “corporate creditor”.

The issue has been dealt with by the National Company Appellate Law Tribunal (hereinafter ‘NCLAT’) as well on many occasions. Initially, it came before the Court in Ravindranath Reddy case[9]wherein the Court analyzed the Bankruptcy Law Reforms Committee Report (hereinafter ‘BLRCR’) wherein it while distinguishing between a financial creditor and an operational creditor indicated that “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 Court, therefore, in the purview of the recommendation of the BLRCR clarified that it has been partially adopted by the legislature to include goods and services under the ambit of operational debt. It further interpreted the provision to be limited only to the three components mentioned in the definition to form a part of the operational debt and thus, it does not give scope to incorporate rental dues under its ambit. Based on this interpretation and nexus, NCLAT held that lease of immovable property does not fall under the ambit of “rendering services” and thus, cannot be considered as operational debt.

Thereafter, the issue was dealt with by NCLAT in the Anup Dubey case[10]wherein the Court deviated from its own ruling in the Ravindranath case[11]and relied upon the ruling of the Apex Court in the Mobilox case[12], giving a wider interpretation to the term “service” by holding that leasing of premises for commercial purposes falls under the ambit of “services” for the purpose of Section 5(21) of the Code. The Court interpreted the same by lifting the definitions of “service” and “activities”, treating them as the supply of services under the Consumer Protection Act, 2019[13] (hereinafter ‘CPA’) and the Central Goods and Services Tax Act, 2019[14] (CGST Act).

The matter in another recent case of Promila Taneja case[15] knocked the doors of NCLAT wherein the Court after taking a holistic view of the different judicial precedents upheld the Ravindranath ruling. The Court gave the following reasons for the same:

- Reference to Section 3(37) of the Code[16] was made to not interpret the terms “services” and “activities” by importing their definitions from CPA and CGST Act as both the Acts do not find a place in the said provision.

- Interpretation of Section 5(8)(d) of the Code[17] was done to hold “that the legislature was conscious of the liabilities arising from lease and made specific provision to club it under a financial debt, but no such provision was made for operational debt”.

The above analysis of the formulation of jurisprudence via judicial precedents makes it clear and specific that it is not conclusive as different views of the Courts on different occasions can be seen on the subject matter. Because of the existing ambiguity, an appeal on the matter is now filed up in the Supreme Court in the case of Promila Taneja[18]. The decision of the Court is awaited.


[1] The Insolvency and Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India) (hereinafter ‘IBC’).

[2]Ibid. § 9.

[3]Ibid. § 5(21).

[4]Pramod Yadav v. Divine Infracon (P) Ltd., 2017 SCC OnLine NCLT 11263.

[5]Manjeera Retail Holdings Pvt. Ltd. v. Blue Tree Hospitality Pvt. Ltd.,CP IB No. 61/9/HDB of 2019.

[6]Mahesh Madhavan v. Black N Green Mobile Solutions Pvt. Ltd., 2017 SCC OnLine NCLT 13134.

[7]Sarla Tantia v. Ramaanil Hotels & Resorts Private Limited, C.P. (IB) No. 335/KB/2018.

[8]Saiom Developers Pvt. Ltd. v. R Square Shri Saibaba Abhikaran Pvt. Ltd., TP/ MP/ 30 of 2019 in CP (IB) 510 of 2018.

[9]Mr. M Ravindranath Reddy v. Mr. G. Kishan, Company Appeal (AT) (Insolvency) No. 331 of 2019 (hereinafter ‘Ravindranath’).

[10]Anup Sushil Dubey v. National Agricultural Co-operative Marketing Federation of Indian Limited, Company Appeal (AT) (Insolvency) No. 229 of 2020.

[11] Ravindranath, supra note 9.

[12]Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., CIVIL APPEAL No. 9405 of 2017.

[13] The Consumer Protection Act, 2019, No. 35, Acts of Parliament, 2019 (India).

[14]The Central Goods and Services Tax Act, 2019, No. 12, Acts of Parliament, 2017 (India).

[15]Promila Taneja v. Surendri Design Pvt. Ltd.,Company Appeal (AT) (Insolvency) No. 459 of 2020 (hereinafter ‘Promila Taneja’).

[16]IBC, supra note 1. § 3(37).

[17]Ibid. § 5(8)(d).

[18] Promila Taneja, supra note 15.

NAVIN KUMAR JAGGI

SALONI

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