Whether license fees or lease rental is operational debt - NCLAT

JAIPUR TRADE EXPOCENTRE PVT. LTD. V. M/S METRO JET AIRWAYS TRAINING PVT. LTD.
NCLAT, JAIPUR

HELD THAT

The Hon’ble NCLAT full bench overturns its two previous judgements to clarify that Licensor for payment "License Fees" will be treated as Operational Creditor and "License Fees" is an Operational Debt.

There are various judgements on this matter and there are two views in the judiciary for treatment of Licence Fees. Some Courts treated a Licensor for License Fees as Operational Creditors and some courts have not recognised. The NCLAT in through its judgement in above mentioned case settled the dispute and held that licensor for License Fees or Lessor for Lease Rent Payment will be considered and Operational Creditor.

BRIEF FACTS

1. The Appellant entered into an Agreement dated 15.04.2017 with the Respondent M/s Metro Jet Airways Training Private Limited, the Corporate Debtor. Under the License Agreement the Licensor granted license of Admin Building with total super area measuring 31000 Sq. Ft., which premises was on Warm Shell Building with fittings and fixtures, electrical, flooring as per good corporate standards and as per the requirement of the Licensee. The Licensee took the premises for the purposes of running an Educational Establishment with effect from 01.06.2017 for an initial period of five years. License fee was agreed to Rs.4,00,000/- lumpsum per month + government taxes.

2. Between 08.11.2017 to 22.11.2017, part payment was made by the Corporate Debtor towards the license fee. A cheque dated 07.05.2018 amounting to Rs.20,00,000/- was handed over by the Corporate Debtor to the Operational Creditor for part discharge of the outstanding license fee, which cheque was dishonoured and returned unpaid. Another cheque dated 08.10.2018 amounting to Rs.20,00,000/- was handed over to Company Appeal (AT) (Insolvency) No. 423 of 2021 2 the Operational Creditor by the Corporate Debtor, which on presentation also dishonoured and returned unpaid.

3. On 03.05.2019, the Appellant - Operational Creditor sent a Demand Notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code") for total dues of Rs.1,31,20,788/-, consisting of license fee + taxes with interest. The Demand Notice was not replied by the Corporate Debtor.

4. On 09.05.2019 that is, after receipt of the Demand Notice, the Corporate Debtor initiated civil proceedings before Sanganer Court, Jaipur.

5. The Adjudicating Authority issued Notice to the Corporate Debtor in Section 9 Application and reply dated 11.09.2019 was filed by the Corporate Debtor, disputing the debt. The Appellant filed its rejoinder to the reply of the Corporate Debtor. The Adjudicating Authority allowed the Corporate Debtor to file additional documents. The Adjudicating Authority vide its order dated 04.03.2020 dismissed the Section 9 Application holding that claim arising out of grant of license to use of immovable property does not fall in the category of goods or services, thus, the amount claimed in Section 9 Application is not an unpaid operational debt and therefore, Application cannot be allowed.

6. Aggrieved by the Company Appeal (AT) (Insolvency) No. 423 of 2021 3 order of the Adjudicating Authority dated 04.03.2020, this Appeal has been filed by the Operational Creditor.

7. Two Member Bench vide its order dated 07.03.2022, referred the two questions as noted above for consideration of larger Bench. The three Member Bench heard the parties and vide its order dated 09.03.2022 directed those questions framed on 07.03.2022 be placed before the larger Bench, hence, this Appeal has been placed before this larger Bench of five Members.

8. LARGER BENCH has been constituted to consider the following two questions referred to it by Three Members' Bench vide order dated 09.03.2022:
"i). Whether the Judgment of this Tribunal in Company Appeal (AT) (Ins.) No.331 of 2019 in the matter of 'Mr. M. Ravindranath Reddy vs. Mr. G. Kishan & Ors.' lays down the correct law.
ii). Whether claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of Company Appeal (AT) (Insolvency) No. 423 of 2021 1 'Operational Debt' within the meaning of Section 5(21) of the Code."

OBSERVATIONS AND DECISION OF NCLAT

9. The Government of India for the purpose of drafting of a single, comprehensive and internally consistent bankruptcy law, constituted a Bankruptcy Law Reforms Committee to deal with the task to create a uniform framework that would cover matters of insolvency and bankruptcy of all legal entities and individuals. The Bankruptcy Law Reforms Committee submitted its report dated 04.11.2015 to Finance Minister, Government of India. In paragraph 5.2.1, the Bankruptcy Reforms Committee dealt with subject "who can trigger the IRP?", the following observations have been made by Bankruptcy Law Reforms Committee, 2015 under paragraph 5.2.1:

"5.2.1 Who can trigger the IRP?

Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security.
Operational creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold is an operational creditor.

Similarly, 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. The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt."

10. Chapter 2 of the Code deals with The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Section 5, sub-sections (20) and (21) of the Code, which are relevant in the present case are as follows:

"(20) "operational creditor" means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

(21) "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"

11. Section 3 of the Code also contains definition. Section 3, sub-section 33 deals with "transaction", which is to the following effect:

"(33) "transaction" includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor"

12. Section 3(37) provides that words and expressions used but not defined in this Code but defined in other statutes, shall have the meanings respectively assigned to them in those Acts. Section 3(37) reads as:

"(37) words and expressions used but not defined in this Code but defined in the Indian Contract Act, 1872(9 of 1872), the Indian Partnership Act, 1932 (9 of 1932), the Securities Contact (Regulation) Act, 1956 (42 of 1956), the Securities Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993), the Limited Liability Partnership Act, 2008 (6 of 2009) and the Companies Act, 2013 (18 of 2013), shall have the meanings respectively assigned to them in those Acts."

13. Certain key features of the License Agreement which are reflected from the Agreement dated 15.04.2017 are as follows:

(i) License was granted with regard to Admin Building, which has super area measuring 31000 Sq. Ft., which was referred to as Demised Premises in Annexure-A to the Agreement. The Recitals as quoted above also contains following: -
"Whereas the Demised Premise is a Warm Shell Building with fittings and fixtures, electrical, flooring , as per good corporate standards and as per the requirement of the LICENSEE".

(ii) Licensee has agreed to take the Demised Premises for the purpose of running an educational establishment on the terms and conditions appearing in the Agreement.

14. Now coming back to the definition of 'operational debt' as contained in Section 5 (21), the definition clause provides that 'operational debt' means a claim in respect of the provision of goods or services. The Code,2016 does not define services and hence in this case it is duty if the court to come out with the meaning of undefined subject in the Code.

In P Ramanatha Aiyar - Advanced Law Lexicon (6th Edition Volume 4), the word 'services' has been defined in following words:

"SERVICE" means service which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the conveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service."
THE clause 4(b) of the agreement provides that

"4(b) In addition to the above, the LICENSEE shall pay all government taxes including but not limited to Service Tax, VAT GST, Excise etc., over and above the License fee, which are or may become applicable in the future, in relation to the payments under this agreement."

The above condition stipulates that Licensee shall pay all government taxes including but not limited to Service Tax, VAT, GST, Excise etc., over and above License Fee. The Agreement itself thus support payment of GST. The payment of GST is contemplated only for 'goods' and 'services' and the Clause 4 of the Agreement clearly indicates that when Licensee is to be taxed for GST, it being taxed for 'services'.

Definition of Service given by CGST Act, 2017 as follows.

"2(102) "services" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged"

Section 2(52) of 2017 Act, defines "goods" in following manner:

"2(52) "goods" means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply".

15. This Tribunal relying on Section 3(37) observed that words and expression used in IBC, which have not been defined, but which have been defined under Section 3(37) can be directly imported. This Tribunal held that definition of 'service' in Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not covered under Section 3(37). Hence, they cannot be treated as supply of service. In paragraph 13 and 15, following has been laid down:

"13. It is clear that words and expressions used in IBC which have not been defined but which have been defined in the Acts mentioned above can be directly imported. However, the Consumer Protection Act, 2019 Company Appeal (AT) (Insolvency) No. 423 of 2021 36 and Central Goods and Services Tax Act, 2017 do not appear to have been covered under the Section 3 (37) and thus definition of "Service" and "Activities" to be treated as supply of service cannot simply be lifted and applied in IBC. Learned Counsel for parties in Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors do not appear to have brought this to Notice of Bench. For such reasons, with all due respect, we find that we are unable to have a second look at the opinion we arrived at in the Judgment in the matter of "Mr. M. Ravindranath Reddy Versus Mr. G. Kishan & Ors."

16. It is clear that the legislature was conscious regarding liabilities arising from lease but although for particular types of leases, as mentioned in above subclause (d), legislature made specific provision to even make it Financial Debt, while dealing with Operational Debt, no such provision has been made. Thus, even on the parameters of interpretation of statutes, we are not in a position to hold that the rents due could be treated as Operational Debt. For reasons recorded in the matter of Mr. M. Ravindranath Reddy Versus Mr. G. Kishan & Ors., we do not find fault with Impugned Order."

17. The observation of this Tribunal in the above case in respect of definition of 'service' under Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not covered by Section 3(37) of the Code, with regard to which observation, no exception can be taken. However, in the facts of the present case, where Agreement itself contemplate payment of GST for the services under the Agreement, on which GST is payable, the definition of 'service' under Central Goods and Services Tax Act, 2017 cannot be said to be irrelevant. More so, even if an expression is not defined in the statute, the meaning of expression in general parlance has to be considered for finding out the meaning and purpose of expression. After making above observation in Promila Taneja's case (supra), this Tribunal did not dwell with the question as to what is the meaning of expression of 'service' used in Section 5(21) of the Code. Reference to Section 5(8)(d) regarding 'financial debt' by this Tribunal in the above case also was not relevant for finding out definition of expression 'service' under Section 5(21).

18. We, thus, are of the view that both in Mr. M. Ravindranath Reddy and Promila Taneja this Tribunal did not dwell upon the correct meaning of expression 'service' used in Section 5(21) of the Code. In any view of the matter, in the above mentioned two cases, the dues were in the nature of rent of immovable property whereas the present is a case of license granted for use of premises on Warm Shell Building with fittings and fixtures, electrical, flooring as per good corporate standards. Hence, the Licensee was licensed for a particular kind of service for use by the Licensee for running a business of Company Appeal (AT) (Insolvency) No. 423 of 2021 38 Educational Institution. Hence, in the present case, debt pertaining to unpaid license fee was fully covered within the meaning of 'operation debt' under Section 5(21) and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an 'operational debt'. The judgment of this Tribunal in Promila Taneja's case reiterate the law as laid down in Mr. M. Ravindranath Reddy's case. We are having held that judgment of Mr. M. Ravindranath Reddy's case does not lay down correct law, the judgment in Promila Taneja's case can also not be followed.

19. In view of the foregoing discussion, we answer the two questions referred to the larger Bench in the following manner:

(1) Judgment of this Tribunal in Mr. M. Ravindranath Reddy (supra) as well as judgment in Promila Taneja's case does not lay down the correct law.
(2) The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an 'operational debt' within the meaning of Section 5(21) of the Code.

20. In the result of foregoing discussion, we allow this Appeal and set aside impugned judgment of the Adjudicating Authority dated 04.03.2020 and hold that Application filed by the Operational Creditor (Appellant herein) deserves admission under Section 9 of the Code.

21. We direct the Adjudicating Authority to pass an order of admission within a period of one month from the date of producing certified copy of this order, during which period it shall be open to the parties to enter into settlement, if any. Parties shall bear their own costs.

CONCLUSION

This is a welcome decision of the NCLAT, in this case the Appellate Tribunal find out that in Judgment of this Tribunal in Mr. M. Ravindranath Reddy (supra) as well as judgment in Promila Taneja's case does not lay down the correct law and a licensor for Outstanding License Fees is an Operational Creditor. The NCLAT has also elaborated the definition of “Service" as same is not defined in IBC,2016. Since agreement of applicant with the respondent provides that License Fees will be payable along with GST and other applicable Government taxes. Since GST is payable on supply of goods or services and hence License or Lease is treated as supply of service and consideration will be paid in the form of License or Lease rental and hence the Licensor or the Lessor is “Operational Creditor" eligible to start CIRP or file application under Section 9 of IBC,2016.

DISCLAIMER: The case law presented here is only for sharing information and knowledge with the readers. The views are personal and shall not be considered as professional advice. in case of necessity do consult with professionals for more understanding and clarity on subject matter.