In this article, Shivam Goel discusses whether recovery of ‘arrears of lease rent’ can be claimed as ‘operational debt’ within the meaning of Section 5(21) of the I&B Code, 2016.

Preface

Section 2(a) of the Central Goods & Services Tax Act, 2017 (hereinafter referred to as the ‘CGST Act’) states that, “any lease, tenancy, easement, license to occupy land is a supply of services”, further, Section 2(b) of the CGST Act makes it clear that, “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”.

Section 5(21) of the Insolvency & Bankruptcy Code, 2016 (hereinafter referred to as the ‘I&B Code’) defines the operational debt as a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment dues arising under the law for the time being in force and payable to the Central Government, any State Government or any local authority.

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Sarla Tantia V/s Nadia Health Care (P) Ltd.

NCLT (Kolkata Bench), CP(IB) No. 108/KB/2018 and CA(IB) No. 119/KB/2018, Date of Decision: 05.10.2018,

Coram: Madan B. Gosavi, [Member (J)]:

In the matter of Sarla Tantia (Supra), the Hon’ble NCLT Bench at Kolkata held that:

1. Receiving any consideration by way of lease rent from time to time or license fee for letting out the premises falls under the purview of providing services and the consideration that is receivable becomes operational debt.
2. ‘Arrears of rent’ are in the nature of ‘operational debt’ within the meaning of definition of operational debt defined under Section 5(21) of the I&B Code. An action as regards recovery of arrears of rent is maintainable under Section 9 of the I&B Code, 2016.
3. In the matter of: Mobilox Innovations (P) Ltd. V/s Kirusa Software (P) Ltd., (2018) 1 SCC 353, the Hon’ble Supreme Court of India extracted with approval Paragraph 5.2.1 of the Report of the Bankruptcy Law Reforms Committee as presented to the Government of India (November, 2015), which stated as follows:

“…the Code differentiates between financial creditors and operational creditors… Financial creditors are those whose relationship with the entity is pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from 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…”

The Hon’ble NCLT observed that a bare perusal of Paragraph 5.2.1 of the Report of the Bankruptcy Law Reforms Committee as presented to the Government of India (November, 2015) would make it clear that ‘arrears of rent’ are in the nature of ‘operational debt due and payable’, and a ‘lessor’ is an ‘operational creditor’ as regards arrears of rent due and payable.

Jindal Steel & Power Ltd. V/s DCM International Ltd

Citation – 2017 SCC Online NCLT 989

(Coram: R. Varadharajan, J., NCLT Bench at New Delhi)

In the matter of: Jindal Steel & Power Ltd. (Supra) it was held that:

1. Any amount claimed as due by a person representing as ‘operational creditor’ should demonstrate firstly that the said amount in default falls within the definition of ‘claim’ as defined in Section 3(6) of the I&B Code. Such a claim, secondly should be capable of being treated as a ‘debt’ as defined under Section 3(11) of the I&B Code, and, finally, the ‘debt’ should fall within the confines of Section 5(21) of the I&B Code, that is, it should be capable of being treated as an ‘operational debt’ and such an operational debt must be owed by the corporate debtor to a creditor who can then be considered as an ‘operational creditor’ as defined under Section 5(20) of the I&B Code.
2. Transactions as regards immovable properties cannot be considered as transactions falling under the term ‘operation’ and ‘operational debt’ unless such transactions have a correlation of direct input to the output produced or supplied by the corporate debtor. (See: Order of the Hon’ble NCLT (Bench at New Delhi) dated: 28.09.2017, in the matter of: Parmod Yadav & Anr V/s Divine Infracon (P) Ltd., IB-209/ND/2017)
3. Meaning given to the term ‘service’ as provided in any fiscal statute such as the Service Tax Act will not hold good so far as proceedings under the I&B Code are concerned. Fiscal statutes are meant for levying taxes and are often given broad interpretation, whereas, the I&B Code deals with insolvency which has serious and crippling consequences thereby requiring a strict interpretation.

(View taken by the Hon’ble NCLT was upheld by the Hon’ble NCLAT in appeal, namely, Jindal Steel & Power Ltd. V/s DCM International Ltd., Company Appeal (AT) (Insolvency) No. 288 of 2017, Order dated: 28.11.2017, Coram: S.J. Mukhopadhaya & Bansi Lal Bhat, JJ.)

Excursus

A perusal of Section 9 of the I&B Code would show that in order to maintain an application under Section 9 of the I&B Code, the applicant (operational creditor) has to satisfy the requirements of Section 5(20) and Section 5(21) of the I&B Code.

The Adjudicating Authority, when examining an application under Section 9 of the I&B Code will have to determine:

1. Whether there is an ‘operational debt’ as defined under Section 5(21) of the I&B Code exceeding Rs. 1,00,000/-?
2. Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has yet not been paid?
3. Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application under Section 9 of the I&B Code would have to be rejected.

• If the corporate debtor fails to give reply to the statutory notice issued to it by the operational creditor under Section 8 of the I&B Code despite due service made to it, then it would be deemed that the liability imputed upon the corporate debtor by the operational creditor is not only undisputed but is rather admitted and the corporate debtor has no defence, whatsoever, to put forth, provided that there is no dispute (suit or arbitration proceeding) pending for adjudication between the corporate debtor and the operational creditor before the issuance of the statutory notice under Section 8 of the I&B Code.

1. Recovery of ‘arrears of lease rent’ by invoking the provisions of the I&B Code is maintainable only when the operational creditor is in the business of letting out properties on lease rent. The view taken by the Hon’ble NCLT (Bench at Kolkata) is slightly on a different footing from the view taken by the Hon’ble NCLT (Bench at New Delhi). As per the former, ‘arrears of lease rent’ are in the nature ‘operational debt due and payable’ irrespective of the fact, whether or not, the lessor is in the business of giving properties on lease rent; but, as per the latter, ‘arrears of lease rent’ will be termed to be in the nature of ‘operational debt due and payable’ only when the lessor is in the business of giving properties on lease rent. Moreover, the former has relied upon the definition of the term ‘service’ as defined in the fiscal statutes to come to the conclusion that giving properties on lease rent is in the nature of ‘service’ and hence the lessor is an ‘operational creditor’; but, the latter has expressly stated that definition of ‘service’ as provided in the fiscal statutes has no bearing because purpose of fiscal statute is revenue generation for the Government in form of taxes whereas the purpose of I&B Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto. Thus, the view taken by the Hon’ble NCLT (Bench at New Delhi) seems to be more appropriate and just as compared to the view taken by the Hon’ble NCLT (Bench at Kolkata).

Endnotes:

1. Section 3(6) of the I&B Code: “Claim” means-

• A right to payment whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
• Right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.

2. Section 3(11) of the I&B Code: “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.
3. Section 5(20) of the I&B Code: “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
4. Section 5(21) of the I&B Code: “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.