The Appellant is the Director of the Corporate Debtor Company, and the Respondent herein was the applicant before the National Company Law Tribunal (NCLT), claiming to be the Operational Creditors. The Respondents are the Lessors and the Corporate Debtor – M/s. Walnut Packaging Private Limited is the Licensee of Industrial Premises comprising of land measuring about 1667 sq. Yards, located at Kukatpally, Hyderabad.

That tenancy of the Appellant was yearly, and the rent payable for the period from July 2011 to June 2017 was Rs. 85,67,290/- and The Corporate Debtor stopped making the payment from January 2017, after the last part payment was made, which was adjusted towards rental dues. After that, the Respondent or Petitioner issued a legal notice dated 15th June 2017 to handover the property back to the Petitioners, but the Corporate Debtor failed to evacuate the property. After that, an eviction suit was filed against the Corporate Debtor before the jurisdictional Civil Court. The Demand Notice under section 8 of Insolvency And Bankruptcy Code 2016 dated 18th January 2018 was also issued against the Corporate Debtor demanding Rs. 49,51,605/-, which was duly served on the Corporate Debtor.

The Corporate Debtor or the Appellant submitted that he had paid the rent until December 2017, and no sum is due to the Petitioner. It is further stated that due to a slowdown in the Operations of the Corporate Debtor during the time period from April 2012 to July 2012 Petitioner or Respondent agreed on a moratorium for no yearly enhancement of rent for six years. The Adjudicating Authority held that the Corporate Debtor had taken the property of the Petitioners on rent and they were paying rent up to June 2017. However, the Corporate Debtor failed to pay the rent from July 2017 onwards.

Issues

The primary issues in the present case are as follows :

1. Whether a landlord by providing lease, will be treated as providing services to the corporate debtor, and hence, an operational creditor within the meaning of Section 5(20)read with Section 5(21) of the ‘Insolvency and Bankruptcy Code, 2016?
2. Whether the petition filed under section 9 of the Insolvency and Bankruptcy Code 2016 is not maintainable on account of ‘pre-existing dispute’?

Judgment

The Hon’ble National Company Law Appellate Tribunal, New Delhi Bench in the present case has held that claims towards rent of leasehold property do not fall within the definition of the operational debt in terms of Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

The Hon’ble National Company Law Appellate Tribunal (NCLAT) held that the lease of immovable property cannot be considered as the rendering of any services or supply of goods and hence, cannot fall within the definition of ‘Operational Debt.’

The NCLAT based its decision on the following:

1. The Insolvency and Bankruptcy Code acknowledges two kinds of debt to enable the creditors to make an application for initiating insolvency proceedings against the corporate debtor – operational debt and financial debt. If there is a debt, other than an operational debt or a financial debt, the creditor will not qualify to apply under Sections 7 or 9, as the case may be. Thus, the determination of the nature of debt or claim is an essential step while considering the admission of an application under the Code.
2. There seems to be some rationale in limiting only to operational creditors for initiation of CIRP, other than financial creditors. Where default is committed to operational creditors towards payment of their debt connotes that the corporate debtor is not even in a position to service the regular payments and operational expenses, as required in the daily functioning of the corporate debtor, which provides a clear indication to its insolvency, warranting the resolution process being put in place.
3. The law has not gone into defining goods or services – thus, one has to rely on general usage of the terms so used in the law, with due respect to the context in which the same has been used.
4. The Bankruptcy Law Reforms Committee (BLRC), recommends the treatment of landlords or lessors as operational creditors. However, the Legislature has not completely adopted the Bankruptcy Law Reforms Committee (BLRC) Report, and only the claim in regard to goods and services is kept in the definition of operational creditor and operational debt under Sec 5(20) and 5(21) of the Code. The definition does not give scope to interpret rent dues as operational debt.

Moreover, for an amount to be classified for an operational debt under the Insolvency and Bankruptcy Code, 2016, it is provided:

1. Firstly, the amount falls within the definition of “claim” as defined under Section 3(6) of the Code; Secondly, such a claim should claim within the confines of the definition of a ‘debt’ as defined under Section 3(11), meaning it should be by way of a liability or obligation due from any person; Thirdly, such a “debt” should fall strictly within the scope of an “Operational Debt” as defined under Section 5(21) of the Code, i.e. the claim should arise in regard to
2. the provision of goods or services including employment or
3. A debt in respect of the repayment of dues arising under any law for the time being in force and payable either to the Central Government, any State Government or any local authority.

Hence, only if the claim by way of debt falls within one of these three categories, can be classified as operational debt. In case if the sum claimed does not fall under any of the categories, the claim cannot be classified as an operational debt, and even though there might be an obligation or liability due from one person, namely Corporate Debtor to another, namely Creditor other than the Government or local authority, such a creditor cannot classify itself as an “Operational Creditor” as defined under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.

In case of lease of immovable property, Default can be determined, on the basis of evidence. While exercising summary jurisdiction, the Adjudicating Authority exercising its power under Code cannot give finding regard to the default in payment of lease rent, because it requires further investigation. Once an operational creditor has filed an application which is otherwise complete the Adjudicating Authority must reject the application under section 9(5)(2)(d) if notice of dispute has been received by the an operational creditor or there is a record of dispute in the information utility, the Adjudicating Authority is to see whether there is a plausible contention which requires further more investigation and the “dispute” is not a patently feeble legal argument or an assertion of fact, unsupported by evidence. It is vital importance to separate the grain from the chaff and to reject a spurious defense which is mere bluster. In the case in hand, the Respondent lessor has filed the petition for the realization of enhanced lease rent from the lessee. Hence, understanding for not increasing the rent for a period of six years is a question of fact, which requires further investigation. Therefore, in the present case, there was a pre-existing dispute, which is proved by the issuance of notice under Section 106 of the Transfer of Property Act (TP Act), much before the issuance of demand notice, under Section 8 of the Insolvency and Bankruptcy Code (I&B). Thus, the application filed under Section 9 of the Insolvency and Bankruptcy Code (I&B) could not have been admitted.

The Hon’ble Tribunal was of the view that the alleged debt on account of purported enhanced rent of leasehold property did not fall within the definition of the operational debt in terms of Section 5(21) of the Code. And based on the above, the appeal was allowed.