WHETHER LANDLORD IS AN OPERATIONAL CREDITOR UNDER IBC?

Richa Saraf

(resolution@vinodkothari.com)

For an amount to be classified as an operational debt, a sort of filtration process is provided under the Insolvency and Bankruptcy Code. Firstly, the amount should fall under the ambit of “claim” as defined under Section 3(6) of the Code. Secondly, such a claim should fall within the confines of the definition of “debt” under Section 3(11) of the Code, meaning it should be by way of a liability or obligation due from any person. Thirdly, such a “debt” should strictly fall within the scope of “operational debt” as provided in Section 5(21) of the Code, i.e. the claim should arise in respect of:

  • provision 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.

If the claim by way of debt does not fall under any of the three categories as mentioned above, the claim cannot be categorised as an operational debt, even though there may be a liability or obligation due from the corporate debtor to the creditor, and hence, such a creditor disentitled from maintaining an application for initiation of corporate insolvency resolution process of the corporate debtor.

There seems to be some rationale in restricting only to operational creditors for initiation of CIRP, other than financial creditors. Default committed to operational creditors in relation to payment of their debt definitely connotes that the corporate debtor is not even in a position to service the regular payments and operational expenses, as required in the day-to-day functioning of the corporate debtor, which provides a clear indication to its insolvency, warranting the resolution process being put in place.

If the corporate debtor is carrying on its operations on a rented premises, the rental dues also cannot escape the ambit of operational debt under the Code. Below we discuss whether a landlord with unpaid rent is a supplier of services, and hence, an operational creditor.

Relevant Provisions:

Section 5(20) of the Insolvency and Bankruptcy Code defines an “operational creditor” to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

To determine whether a landlord will be regarded as an operational creditor under the ambit of Section 5(20) of the Code, it is also relevant to understand the intention of the law makers. The Bankruptcy Law Reforms Committee, in its report dated November, 2015[1], states that “Operational creditors are those whose liability from the entity comes from a transaction on operations”. While discussing the different types of creditors, the Committee points out that “enterprises have financial creditors by way of loan and debt contracts as well as operational creditors such as employees, rental obligations, utilities payments and trade credit.” Further, while differentiating between a financial creditor and an operational creditor, the Committee indicates “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.

Lessor or landlord to be regarded as operational creditor:

The Apex Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.[2], laying down as to who can trigger the insolvency resolution process, relied upon the report of Bankruptcy Law Reform Committee, which considers a lessor as an operational creditor.

NCLT, Kolkata Bench, in the case of Sarla Tantia vs. Nadia Health Care Ltd.[3], relied on the order of the Apex Court in Mobilox Innovations (supra), and held as follows:

“Letting out premises on rent is nothing but providing the services… Hence, receiving any consideration by way of rent, lease 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’. ‘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.”

 The Tribunal also placed reliance on the provisions of the Central Goods and Services Tax Act, 2017. Schedule- II of the Act list down the activities that are to be treated as supply of goods or services, and paragraph 2 of the schedule stipulates as follows:

“(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) 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.”

A similar observation was given by the Hon’ble NCLT, Mumbai Bench in the case of Indiabulls Real Estate Company Private Limited vs. Crest Steel & Power Private Limited[4]. In the said case, the petitioner had given its premises on lease under an agreement, and since there was arrears of rent, the petition under Section 9 of the Code was filed. The NCLT held that not an iota of doubt can be raised whether the present proceedings are maintainable u/s 9 of the Code or not. Such claim is very much within the definition of “operational debt”, and thus, come in the purview of Sec. 9 of the Code.

Contrary rulings:

National Company Law Appellate Tribunal, in the case of Jindal Steel & Power Ltd. vs. DCM International Ltd. [5], held as follows:

“Admittedly, the Appellant is a tenant of Respondent- ‘Corporate Debtor’. Even if it is accepted that a Memorandum of Understanding has been entered between the parties in regard to the premises in question, the Appellant being a tenant, having not made any claim in respect of the provisions of the goods or services and the debt in respect of the repayment of dues does not arise under any law for the time being in force payable to the Central Government or State Government, we hold that the Appellant tenant do not come within the meaning of ‘Operational Creditor’ as defined under sub-section (20) read with sub-Section (21) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to ‘I&B Code’) for triggering Insolvency and Bankruptcy Process under Section 9 of the ‘I&B Code’”

Relying on the aforementioned judgment of NCLAT, NCLT, Mumbai Bench, in Citicare Super Speciality Hospital vs. Vighnaharta Health Visionaries Pvt. Ltd.[6], dismissed the petition which was in relation to arrears of license fee.

NCLT, New Delhi, in Parmod Yadav & Anr vs. Divine Infracon (P) Ltd.[7], noted that the word “operational” or for that matter “operation” has not been defined anywhere in the Code. In fact the General Clauses Act, 1897 also do not define the term, hence, the term has to be given a meaning as ordinarily understood. Merriam Wester defines the term “operational” as “of or relating to operation or to an operation”[8]. Further, from the usage of the term “goods or services” in relation to Section 14(2) of the Code, and what constitute or do not constitute or in other words qualify to be considered as “essential goods or services”, determined that the term “goods or services” used in the definition of operational debt must directly relate to direct input to the output produced or supplied by the corporate debtor. Thus, any debt arising without nexus to the direct input to the output produced or supplied by the corporate debtor, cannot, in the context of Code, be considered as an operational debt, even though it is a claim amounting to debt. However, without going into the aspect whether an immovable property in itself constitutes stock- in- trade of the corporate debtor and has a direct nexus to its input- output, being an integral part of its operations, the Bench held that lease of immovable property cannot be considered as a supply of goods or rendering of services, and thus, cannot fall within the definition of operational debt. In this regard, reliance was also placed on Col. Vinod Awasthy vs. AMR Infrastructure Ltd.[9]

Further, relying on Jindal Steel (supra) and Citicare (supra), NCLT Hyderabad also, in the case of Manjeera Retail Holdings Pvt. Ltd. vs. Blue Tree Hospitality Pvt. Ltd.[10], held that the petitioner claiming default in payment of rent of the premises leased out cannot be treated as an operational creditor, and the amount involved cannot be treated as an operational debt.

Conclusion:

The view taken in various cases that transactions relating to immovable properties do not have a direct nexus with the input- output of the corporate debtor, and thus, do not qualify to be operational debt, seems to be restrictive. More so, when the intention of the law makers is evidently clear from perusal of the BLRC report, which specifically includes rental obligations as operational debt.


[1] http://ibbi.gov.in/BLRCReportVol1_04112015.pdf

[2] https://indiankanoon.org/doc/166780307/

[3] https://nclt.gov.in/sites/default/files/Interim-order-pdf/CP%28IB%29%20No-108-KB-2018.pdf

[4]https://nclt.gov.in/sites/default/files/Interim-order-pdf/Indiabulls%20Real%20Estate%20Company%20Private%20Limited%20CP%201664-2017%20NCLT%20ON%2011.03.2019%20FINAL-IBC.pdf

[5] http://ibbi.gov.in/BLRCReportVol1_04112015.pdf

[6]https://nclt.gov.in/sites/default/files/final-orders-pdf/Citicare%20Super%20Speciality%20Hospital%20CP%20567%20of%202018%20NCLT%20on%2011.3.2019%20Final.pdf

[7] http://164.100.158.181/Publication/New_Delhi_Bench_III/2017/Others/174.pdf

[8] https://www.merriam-webster.com/dictionary/operational

[9] http://164.100.158.181/Publication/Principal_Bench/2017/Others/Col.%20Vinod%20Awasthy%20(Final).pdf

[10] https://nclt.gov.in/sites/default/files/Interim-order-pdf/1_347_0.pdf

Mandatory impleadment of MCA as a Respondent- Principal Bench issues direction to all NCLTs

-Megha Mittal

(mittal@vinodkothari.com)

In its recent order dated 22.11.2019, the Hon’ble National Company Law Tribunal, Principal Bench at New Delhi (“Principal Bench”), in the matter of Oriental Bank of Commerce v. Sikka Papers Ltd. & Ors.[1], has directed that the Ministry of Corporate Affairs (MCA) be made party to all applications filed under the Insolvency and Bankruptcy Code, 2016 as well as under the Companies Act. While the same does not form part of the final order as the matter is lis-pendens, the said direction only forms part of the interim order referred above.

Read more

Financial Service Provider under the clutch of IBC? Nature of the “debt” vs. Nature of the “debtor”

-Megha Mittal

(resolution@vinodkothari.com)

In a first of its kind, the Hon’ble National Company Law Tribunal, Principal Bench at New Delhi (“NCLT”) vide its order dated 04.11.2019[1] in the matter of Apeejay Trust v. Aviva Life Insurance Co. India Ltd., has initiated corporate insolvency resolution process against the Corporate Debtor, despite it being a financial service provider under the Insolvency and Bankruptcy Code, 2016 (“Code”).

In the above pretext, one may recall the order of the Hon’ble National Company Law Appellate Tribunal in the matter of Randhiraj Thakur v. Jindal Saxena Financial Services[2], wherein the Hon’ble Appellate Tribunal upheld that financial service providers shall not fall within the ambit of the Code. The order of the Hon’ble NCLAT in the said matter has been discussed in our articles “NBFCs and IBC- the Lost Connection[3] and “State of Perplexity- Applicability of IBC on NBFCs”[4].

In this article, the author has made a humble attempt to analyse the order of the Hon’ble NCLT based on its facts, observations and the extant law.

Read more