Recently, in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd,1 the NCLAT dealt with the issue "Can lease rentals arising out of use and occupation of a cold storage unit be categorized as 'operational debt' under Section 5(21) of I&B Code?"
Section 5(21) of IBC states that "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.
NAFED/Operational Creditor and the Corporate Debtor entered into a Leave and License Agreement for the usage of cold storage facilities for a period of three years on 01.10.2015. The Agreement stated that the license fee of Rs. 9,31,000/- shall be paid on the 7th day of every month with an increase of 10% in the monthly fee on or after the expiry of 12 months. It was further stated in Clause 1.14 of the agreement that, in case of any default in payment of monthly fee, the Corporate Debtor would be liable to pay an interest @ 21% p.a. for the delayed period. NAFED stated that the Corporate Debtor defaulted in the payment of monthly rentals from September 2017 onwards and an outstanding amount of Rs. 2,14,14,560/- is due and payable. The Corporate Debtor had acknowledged and confirmed the 'outstanding debt' vide its letters dated 01.06.2017 and 26.02.2018, but despite several reminders and issuance of eviction notice dated 24.05.2018, the Corporate Debtor failed to make the necessary payments. Hence, a Demand Notice dated 26.09.2018 in Form 3 under Section 8 of I&B Code 2016 was issued demanding a payment of Rs. 1,83,45,278/- . The Corporate Debtor in its reply dated 10.11.2018, denied all the claims and sought for renewal of the Leave and License Agreement. The Adjudicating Authority i.e. NCLT gave the decision in favour of NAFED. The Suspended Board member of the Corporate Debtor went into appeal against the order of NCLT.
The appellant had argued that criminal proceedings were initiated against him due to which the appellant was in custody at the time of initiation of Section 9 proceedings and though, efforts were made to follow up the case status on the NCLT website, it was not possible for the appellant to have knowledge of the ongoing proceedings. Only on 07.01.2020 the Advocate who had filed the reply to the Demand Notice informed the appellant about the ongoing proceedings. It was also contended that the 'Debt in Default' as per the Demand Notice is for the period September, 2017 to October, 2018, which is subsequent to termination of agreement. The Adjudicating Authority relied on letters dated 01.06.2017 and 26.02.2018 which concerns a different time period and cannot be interpreted as debt in default. The letters dated 11.09.2017 and 15.09.2017 stated that no dues are payable from October, 2017 onwards and the letters dated 23.08.2017, 11.09.2017, 15.09.2017, 15.02.2018, 19.09.2018 and 10.11.2109 show a pre-existing dispute which was suppressed by NAFED. It was further contended that the agreement with NAFED is a Leave and License Agreement and rentals on immovable property does not amount to 'Operational Debt' under Section 5(21) of the I&B Code.
Court's Analysis on the issue
In order to ascertain whether NAFED by providing lease shall be treated as 'Operational Creditor', the NCLAT observed that it is necessary to note whether NAFED is providing services to the Corporate Debtor and whether the alleged dues land within the scope of Section 5(21) of the I&B Code, 2016. The NCLAT observed that one has to rely on the general usage of the terms used in the law as there is no definition of goods or services. Bankruptcy Law Reforms Committee (BLRC) recommends treatment of lessor/landlords as operational creditors. However, the definition only included claims relating to 'Goods and Services' within the purview of 'Operational debt'. So, the Court observed that according to the terms and conditions mentioned in the Leave and License Agreement the appellants have leased out the premises for commercial purposes which comes under the meaning of 'Service' for the purpose of Section 5(21) of the I&B Code, 2016.
The Appellate Authority noted that though the agreement was terminated, yet the Corporate Debtor continued to be in possession of the storage facility and sought for an extension for a period of two years. The NCLAT also stated that a prior dispute does not truly exist between the parties. It was further held that the corporate debtor had knowledge about the ongoing proceedings and the argument that the appellant was in custody during the period is baseless. It was further held that NAFED shall be treated as operational creditor with regard to the terms and conditions of the Leave and License Agreement. The debt was due and payable as the Corporate Debtor continued to be in possession of the Storage facility even after the termination of the agreement. It was also held that no prior dispute existed between the parties. Therefore, the tribunal held that communication on record specifically the letter dated 19.09.2018, addressed by the appellant themselves prior to the demand notice clearly established that there is a 'Debt due and payable' and there is no 'Pre-Existing Dispute'.
The key take away from the judgment of NCLAT is that while dealing with the issue whether dues under leave and license agreement would be construed as an operational debt, the Appellate Authority has relied upon general usage of the term 'services' and has even relied upon the definition contained in Section 2(42) of the Consumer Protection Act, 2019 and Schedule II of the Central Goods and Services Tax Act, 2017. The arrival of finding that the debt in issue is an 'operational debt' stemmed from the reasoning that a lease out for commercial purpose is "services" as the owner of the leased premises is required to pay service tax. It is a welcome decision as it would certainly give relief to landlords who have leased out premises for commercial purposes as they would be able to initiate insolvency proceedings against defaulting tenants.
1. Company Appeal (AT) (Insolvency) No. 229 of 2020, Judgment dated October 7, 2020.
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