Anup Sushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Ltd.
NCLAT 674, decided on 07.10.2020

Whether the leasing of an immovable property comes under the definition of operational debt?
This article deals with the landmark judgment given by the tribunal in NCALT which expands the scope of section-5(21) and determines which leased properties can be considered under the definition of ‘operational debt'

Introduction:
This case deals in the newly codified law i.e IBC, 2016 (Insolvency and Bankruptcy Code, 2016), in this case the major issue that is to be noted is “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.

Facts of the Case
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 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.

It is the case of NAFED that the Corporate Debtor 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 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 their reply dated 10.11.2018, denied all the claims and sought for renewal of the Leave and License Agreement. So, the adjudicating authority gave the decision in favor of NAFED.

So, the counsel appearing for the operational debtor argued that the adjudicating authority has filed a one sided order and filed an appeal.

Contention by the appellant
The counsel appearing for the appellant argued that criminal proceedings were initiated against the appellant 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 displayed a single date and thus, 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.

They 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 the 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 appellate stated that the letters dated 11.09.2017 and 15.09.2017 state that no dues are payable from October, 2017 onwards and the letters dated 23.08.2017, 11.09.2107, 15.09.2017, 15.02.2018, 19.09.2018 and 10.11.2109 show a pre-existing dispute which was suppressed by NAFED. They further contended that the agreement with NAFED is a Leave and License Agreement and rentals on immovable property does not amount to ‘Operational Debt’ as under Section 5(21) of the I&B Code.

Court’s Analysis
The Court found force in the appellant Counsel’s submission that the appellant was in custody during initiation of proceedings and thus, a minimum delay of 9 days shall be acceptable. It was further observed that letters dated 15.07.2019 and 18.09.2019 were received by the Advocate for Corporate debtor which means that the corporate debtor knew about the ongoing proceedings.

In order to ascertain whether NAFED by providing lease shall be treated as Operational Creditor, it is necessary to note whether NAFED is providing services to Corporate Debtor and whether the alleged dues land within the scope of Section 5(21) of the I&B Code, 2016. The tribunal 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 Court noted that though the agreement was terminated, yet the Corporate Debtor continued to be in possession of the storage facility and sought an extension for a period of 2 years.
The court also stated that a prior dispute does not truly exist between the parties.

Held
It was held that the corporate debtor had knowledge about the ongoing proceedings and the argument by appellate counsel that the appellant was in custody during the period is baseless. It was further held that NAFED shall be treated as an operational creditor with regard to the terms and conditions of the Lease 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’.[i] [ii]

End-Notes:

1. https://nclat.nic.in/Useradmin/upload/5487276125f7d8cc994789.pdf
2. https://ibclaw.in/section-5-definitions-under-part-ii-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sections/

Written By: Veneet Sharma, BBA-LLB (Second year) BVIMR, New Delhi