India: Case Comment On Hon' ble NCLT Mumbai Bench Holding – " Claims Towards Rent Do Not Qualify As Operational Debt Under IBC"

Last Updated: 30 April 2019
Article by Shubham Borkar

The Hon'ble National Company Law Tribunal or NCLT (Mumbai) Bench  in M/S Citicare Super Speciality Hospital vs. Vighnaharta Health Visionaries Pvt. Ltd.1  has held that claims towards outstanding rent do not qualify as " Operational Debt" as defined under Insolvency and Bankruptcy Code, 2016 ( IBC) and therefore the petition is not maintainable under Section 9 of the IBC. This judgment has raised some serious questions as far as Claims towards rent are concerned. In this article, we have tried to highlight these issues and explain why this judgment has turned the position grey and paves way for judicial review.

 Facts in Brief

The petitioner (M/S Citicare Super Speciality Hospital or the Operational Creditor) had entered into Leave and License Agreement on February 05, 2015 wherein, it was agreed between the parties  that the respondent (Vighnaharta Health Visionaries Pvt. Ltd. or the Corporate Debtor) will use the hospital premises for the term of 5 years. Also, they entered into a Contract, which dealt with the Purchase of the medical equipment dated February 06, 2015.

The Respondent started making default in the payments, from the month of June 2015. Hence, resulting in a debt of Rs. ₹3, 41, 30,397.50/- so, for that matter, the Petitioner filed a Company Petition under Section 9 of IBC for the initiation of the Corporate Insolvency Resolution Process against the respondent.

For a appropriate analysis, it is important that we refer to the contentions made by the Petitioner:

  • Firstly, the Counsel on behalf of the petitioner contended that, both the parties had entered into an agreement of Leave and License for the period of 5 years. The said agreement was duly registered on the very same date. The Lease Agreement stated that, the hospital premises were divided into two parts, i.e. Part A and Part B. It was agreed by the respondent that, if they use only Part A of the premises, then the License Fee will be Rs. 15 Lacs per Month with an increase of 7.5 % Per Annum. Also, it was agreed by the respondent that, after two years or at the outset of usage of Part B, then the License Fee will be of Rs. 20 Lacs per Month with an increase of 10 % Per Annum. It was clearly specified by the Petitioner that, once this fee takes place, then this Agreement will be irrevocable until, the Lease Agreement expires. Furthermore, the Petitioner had entered into an Agreement of purchase of Medical Equipments with the respondent on February 06, 2015.
  • Secondly, it was stated that, the Respondent complied with the Agreement and duly paid the License Fee till December 2016. The License Fee and the charges for the use of basement become due, from the Month of January 2017.Equipment cost was due from June 2015
  • Thirdly, it was contended that, the Petitioner has an Interest Fee Refundable Security Deposit of Rs. 40 Lacs. The total value of this Agreement is ₹98, 59,000/-. However, the principal amount of ₹34, 87,119/- and, with interest of ₹6, 39,645/- remained outstanding.
  • Fourthly, the Petitioner had issued the letter stating that, the petitioner will hand over the basement of the same premises to the respondent, and the respondent will have to pay Rs. 30 per Square Feet. Furthermore, the respondent had to pay the insurance premium for the same, but the respondent failed to comply with the same.
  • Lastly, that the petitioner requested the respondent for making the payments, but the respondent refused to do so. Thus, the petitioner issued a legal notice to the respondent on February 28, 2018 and, the respondents on receiving the legal notice denied the liability for the same.
  • Now, let's see what the Respondent had to say about these allegations:
  • The counsel for the respondent stated that the petition was based upon the claim towards the outstanding rent/ license fee payable, and was not in respect of any goods or services. Thus, the claim towards outstanding rent/license fee were baseless as, it does not come under the purview of " Operational Debt" and "Operational Creditor" as per the definition provided in the IBC, 2016 .  Another contention with respect to defect in the petition as the Bank Statement was not annexed on record was also raised.
  • Further, the counsel on behalf of the respondent stated, before the issuance of the legal notice on February 28, 2018, an E-Mail dated February 22, 2018 issued by the respondent to the petitioner, maintaining the understanding between both the parties regarding the dispute.
  • The other contention was, the petition for recovery of license fees rent is not covered under I&B Code, 2016 as, it is a well- settled law that I&B Code shall not be used for the recovery of any outstanding rent/license fee.
  • The Counsel of the respondent majorly relied upon a Judgment of Mobilox Innovation Pvt. Ltd. vs. Kirusa Software Pvt. Ltd.2 And stated that the only criteria which should be looked into are, whether the debt and default are in existence as on the date of filing the case. The term "existence of dispute" has been discussed in the above judgment as, if the notice of dispute has been received by the operational creditor and, it gives the information related to the existence of a dispute or of any arbitration proceeding which is pending between the parties, then the Adjudicating Authority must reject the application filed by the Operational Creditor.

Further, for the major contention of non-maintainability, the respondent relied upon  Judgment of Jindal Steel & Power Ltd. vs. DCM International Ltd.3 wherein claims of Corporate Debtor were rejected to be categorized Operational Debt as the amount which was claimed to be in default did not aroused in relation to the amount payable towards supply of goods or rendering services or in connection with the employment or in relation to the statutory dues as prescribed under Section 5(21) of IBC, 2016 and hence the Petitioner was not entitled to maintain the petition as an Operational Creditor.

It was further elaborated that the person who claims an amount to be due should first demonstrate that the said amount falls within the definition of "Claims"as defined under 3(6) of IBC. Secondly such claim should be capable of being treated as " debt" falling in the confines of Section 5(21) of IBC, meaning thereby capable of being treated as Operational Debt, and lastly such Operational debt must be owed to the Corporate debtor to the credit who can be considered as an operation Creditor" as defined under Section 5(2) of IBC.

Reasoning and Decision  provided  the Hon'ble Tribunal :

The Hon'ble Tribunal based its decision on the verdict of Parmod Yadav & Anr. vs. Divine Infracon Pvt. Ltd4.  wherein it was held that "Transaction related to the immovable property cannot be considered as a transaction falling under the term 'operation' as well as 'operational debt' unless, such a transaction  having a correlation of direct input to the output produced or supplied by the corporate debtor. Thus, the petitioner cannot be considered as an operational creditor, nor the claim comes under the ambit of operational debt."

Further, the Hon'ble Tribunal also referred the verdict of Jindal Steel (Supra), passed by the NCLAT, which states: "Irrespective of the Memorandum of Understanding which has been entered between both the parties, the tenant was not able to make a claim in respect of the provisions of goods or services and, the debt in reference to the repayment of dues does not fall under any law for the time being in force, payable to the Central or State Government. Thus, it was held that the  tenant cannot be considered as an operational creditor  as per the definition provided under section 5(20) read with sub-section 21 of section 5 of the Code."

Hence, in the present case, the Hon'ble Tribunal was of the view, that the petitioner's claim (which includes basic amount of license fees and its interest) does not fall under the definition of "Operational Debt" and for that matter, he cannot be considered as an "Operational Creditor" according to the I&B Code, 2016 and held

"The petitioner's claim does not fall within the ambit of "Operational Debt" as per the definition provided in the Insolvency & Bankruptcy Code, 2016 or I&B Code, 2016. Hence, the petitioner is not the Operational Creditor, as the debt is not considered as an "Operational Debt".

Analysis of the Verdict

Certainly, we have a contrasting opinion against the Judgment passed by the NCLT Mumbai Bench as; we believe that, this is the clear case of overlooking the merits of the case, by the Hon'ble tribunal.

The parameters to fall under the definition of an "Operational Creditor" have been defined under section 5(20) of I&B Code, 2016 which is: "any person to whom an  operational debt is owed  and includes any person to whom such debt has been legally assigned or transferred". Whereas, under section 5(21), the term "Operational Debt" have been defined which is: "a claim in respect of the provisions of goods or  services  including employment or a debt in respect of the repayment 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".

From our viewpoint, the petitioner in this case has given his hospital premises to the respondent for the functioning of the respondent's day to day operations, and in absence of which respondent cannot provide the services that it generally provides, hence it is clearly directly related to the input and output of the supply of services, provided by the respondent. Meaning, thereby that, the petitioner "supplied the service of providing Infrastructure" to the respondent, resulting in crystal clear relationship of the operational creditor and corporate debtor between them respectively.

To better understand the term "Supply of Services" let us refer to the act where the same is defined.

According to the Section 2(a) of the Central Goods & Services Tax Act, 2017 (herein referred to as CGST, 2017), defines the term Supply of Services as "any lease, tenancy, easement, license to occupy land is a supply of services." Furthermore, Section 2(b) of the Act makes it amply 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".

Also, section 5(21) of the I&B Code, 2016 defined the term operational debt as "a claim in respect of the provision of goods or services including employment or debt in respect of the repayment dues arising under the law for the time being in force."

A harmoniuous reading of the above paragraphs makes it amply clear that , leasing and letting out of premises amounts to supply of services, it has been already explained in the aforementioned  how these services are in directly relation to input and output of Corporate Debtors services.

In light of the above, we would also like to cite some judgments which support our viewpoint; the claim towards the arrears of the rent is covered under the definition of operational debt:

The Hon'ble NCLT (Kolkata) Bench passed an order in Sarla Tantia vs. Nadia Health Care Ltd.5  where in it was held: Amount receivable, by way of lease rent from time to time or license fee for letting out the premises comes under the ambit of providing services. Also, the term Arrears of Rent are covered under the meaning of Operational debt defined under section 5(21) of I&B Code, 2016.

Furthermore, The NCLT (Delhi) order in Parmod Yadav & Anr. Vs. Divine Infracon Pvt. Ltd.  relied upon by the Hon'ble Tribunal in the present case  , further strengthens our viewpoint . The Hon'ble Bench held that "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."

So, as in the present case, since, petitioner/ Operational Creditor was providing the services which had a correlation of direct input to the output supplied by the corporate debtor or the respondent. Basically, in simple terms, if the respondent has not been provided with the hospital premises, then the respondent wouldn't be able to proceed with his daily commercial transactions.

Thus, in the concluding remarks, We would like to say that IBC, 2016 is at a very nascent stage and it needs to be more developed until then, the judges have to refer and rely upon the other laws for the purposes of Interpretation. So, from our point of view, this judgment of the Hon'ble court has turned the position grey, and therefore it is clear that Judicial Intervention is bound to happen in light of contradictory judgments from other jurisdictions.

Footnotes

1 Citicare Super Speciality Hospital vs. Vighnaharta Health Visionaries Pvt. Ltd. (C.P No. 567/IB/2018)

2 Mobilox Innovations (P) Ltd. vs. Kirusa Software (P) Ltd., (2018) 1 SCC 353

3 2017 SCC Online NCLT 989

4 Parmod Yadav & Anr vs. Divine Infracon (P) Ltd., IB-209/ND/2017)

5 NCLT (Kolkata Bench), CP(IB) No. 108/KB/2018 and CA(IB) No. 119/KB/2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions