In a recent order passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi ("NCLAT") in Somesh Choudhary v Knight Riders Sports Private Limited & Anr. under Company Appeal (AT) Insolvency No. 501 of 2021, the NCLAT dismissed the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("Code") against the order dated 5 July 2021 passed by the National Company Law Tribunal, New Delhi ("NCLT Order"), and held that the claims arising out of the grant of an exclusive license to use intellectual property rights fall within the ambit of the definition of operational debt.


Global Fragrances Pvt Ltd ("Corporate Debtor") had entered into a licensing agreement with Knight Riders Sports Private Limited ("Respondent") whereby the Respondent had granted exclusive rights and allowance to the Corporate Debtor to use the trademark 'KKR', to manufacture, distribute and advertise licensed products including deodorants, hair gels, and perfumes (collectively the "Licensed Products"). In return, the Corporate Debtor was obligated to pay Minimum Guaranteed Royalties ("MGR") as identified in the licensing agreement as compensation for enjoying the exclusive rights.

The Respondent had raised invoices for an aggregate sum of INR 40,60,147 towards the outstanding MGR payable by the Corporate Debtor and only part payment was received. On failure of the Corporate Debtor to pay the balance MGR, the Respondent filed an application for initiation of the corporate insolvency resolution process under Section 9 of the Code. The application was admitted by the National Company Law Tribunal, New Delhi and aggrieved by the same, Mr Somesh Choudhary (a shareholder of the Corporate Debtor) filed this appeal.

Submissions of the Corporate Debtor

The Corporate Debtor had opposed the petition on the ground that claims arising out of non-payment of MGR were not operational debt as they did not pertain to non-payment of any goods or services. Further, relying on the previous judgement of the NCLAT in M. Ravindranath Reddy v Mr. G. Kishan & Ors.1 ("Ravindranath Reddy Judgement"), which held that any "'debt' arising without nexus to the direct input to the output produce or supplied by the 'Corporate Debtor', cannot be considered as an 'Operational Debt', contended that since the Respondent has failed to show that how the Corporate Debtor has used the trademark of the Respondent for sale, marketing etc., their claim concerning non-payment of MGR cannot be termed as operational debt.


Whether the amounts claimed by the Respondent fall within the definition of an operational debt as defined under section 5(21) of the Code?

Findings and Observations of the NCLAT

  1. To determine whether non–payment of the MGR would constitute an operational debt, the NCLAT looked into the definition of "goods" under the Sale of Goods Act, 19302 wherein the term "goods" included all moveable property other than actionable claims and money. The NCLAT relied on the decision of the Hon'ble Supreme Court in Vikas Sales Corporation v. Commissioner of Sales Tax3 and held that trademarks and copyrights would constitute moveable property and accordingly would be considered as "goods" under the Sale of Goods Act, 1930.
  2. The NCLAT examined the term "MGR" and observed that a guaranteed minimum royalty is a periodic payment made by a licensee towards a licensor to utilise a licensed product for an agreed period. Further, the NCLAT observed that pursuant to Section 7 of the Central Goods and Service Act 2017, any utilisation or enjoyment of intellectual property rights would be considered a service provided by the intellectual property rights holder. Accordingly, the NCLAT referred to the decision of the Madras High Court in the matter of AGS Entertainment Private Limited v. Union of India4 and held, that by providing the Corporate Debtor with a right to utilise the trademark of 'KKR' in its Licensed Products, the Respondent had temporarily provided permission to use its trademark, which would constitute the provision of a service by the Respondent. Consequently, the outstanding MGR payable in connection with the provision of such service would constitute an operational debt under section 5(21) of the Code.
  3. Further, the NCLAT set aside the contention of the Corporate Debtor on the premise that, as per the Ravindranath Reddy Judgement, there was no direct nexus established between the MGR payable and the business operations of the Corporate Debtor. The NCLAT referred to the decision by its larger bench in Jaipur Trades Expocentre Private Limited v. M/s. Metro Jet Airways Training Private Limited5 , and stated the Ravindranath Reddy Judgement had been overturned as it did not correctly deal with the meaning of "service" under section 5(21) of the Code.

The NCLAT examined the licensing agreement between the Corporate Debtor and the Respondent and held that the trademark 'KKR' was used in the development, packaging and advertisement of the Licensed Products. This established a direct nexus between the payment of the MGR and the business operations of the Corporate Debtor. Accordingly, such MGR dues constituted an operational debt under the Code.

KCO Comment

The above decision of the NCLAT has held that licensing of an intellectual property right temporarily would also be considered as a "provision of a service" and accordingly a claim arising from non-payment of such license fees would be regarded as an operational debt under section 5(21) of the Code.


1. Company Appeal (AT) (Ins.) No. 331/2019.

2. Section 2(7) of the Sale of Goods Act 1930 provides, "2(7) goods means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale."

3. (1996) 4 SCC 433.

4. 2013 SCC Online Mad 1823.

5. 2022 SCC OnLine NCLAT 263.

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