The Rights of Landlords Providing Lease-As The Operational Creditor Under Insolvency Law


Author: Kajal Jain, K.L.E Society's Law College, Bengaluru

Editor: Meghansh Reddy, Jindal Global Law School

Bench: A.I.S. Cheema, Kanthi Narahari, V. P. Singh

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

Company Appeal (AT) (Insolvency) No. 331 of 2019


This was an appeal filed against the order of the NCLT Hyderabad whereby the petitioner filled section 9 of the insolvency and bankruptcy code 2016, has been admitted by the NCLAT Delhi.


BRIEF FACTS

The Respondents are the Lessors and the Corporate Debtor/Appellant - M/s. Walnut Packaging Private Limited is the Licensee of Industrial Premises consisting of land measuring about 1667 sq. Yards, situated at Kukatpally, Hyderabad.


Tenancy was on yearly basis i.e., July 2011 to June 2012 amounting to Rs. 85,67,290/- and the appellant used to make part payments of the rent the appellant stopped making payments after January 2017 and by June 2017 due amount was RS. 30,15,370/-. consequences of which a legal notice was served to vacate the premises which the respondent failed to do resulting in filling of an eviction suit before the jurisdictional district court. Demand notice U/S 8 of the IBS,2016 was also served to the appellant demanding Rs. 49,51,605/-, which was postulated to be due to the appellant. Appellant refuted to the certitude of the respondent and stated he had paid the rent until December 2017, and no amount is due to the respondent It is further stated that due to slowdown in the Operations of the applicant during the period from April 2012 to July 2012 respondent agreed on a moratorium for no yearly enhancement of rent for six years.

ISSUES OF THE CASE

1. Whether a landlord by providing lease, will be treated as providing services to the corporate debtor, and hence, an operational creditor within the meaning of Section 5(20) read with Section 5(21) of the 'Insolvency and Bankruptcy Code, 2016?

2. Whether the petition filed U/S 9 of the Insolvency and Bankruptcy Code 2016 is not maintainable on account of 'pre-existing dispute

JUDGEMENT

The first issue of the case was of prime importance. As the IBC 2016 recognises two types of debtors i.e., is the operational creditor and financial creditor and these are made eligible to file petition U/S 9 of the act respectively. But with changing time and developments in the IBC code the status of the landlord as to the nature of the creditors he comes under or not clear but regarding this various judgment has been pronounced but with no clear definitions bringing vagueness in the treatment of the landlord leasing out his property to the corporate debtor.


To make the stand clearer respondent relied on the central goods and service tax Act, 2017 schedule ii which enlist the items to be treated as the supply of goods and 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."

Citing the case NCLT, New Delhi, in Parmod Yadav &Anr v. Divine Infracon (P) Ltd.1, was stated that the word operational has not been defined in the Act nor in the general clause act 1897 and has to be understood in the literal sense. Further stating section 14(2) of the act which says that essential goods and services shall not be stopped during the moratorium period and enlist the following matters as essential

1. Electricity

2. Water

3. Telecommunication Service

4. Information Technology Services


Citing these provisions nexus was created averting that these are not direct input to the output produced or supplied by the corporate Debtor(CD). 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.


Case Jindal Steel & Power Ltd. v. DCM International Ltd.2, was also cited where the landlords were excluded from the definition of the operational creditor.

SECTION 5(2) defines an operational creditor as

"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."

Any corporate fulfilling these criteria set out in the code is under the ambit of the operational creditor. If the claim does not fall under any of the following stated above it shall not be treated as operation debt.


While deciding on the status of the landlord being the operational creditor Mobilox Innovations (P) Ltd. V/s Kirusa Software (P) Ltd. reported in 2018 (1) SCC 353 and held that ‘’ it is clear that once an operational creditor has filed an application which is otherwise complete the Adjudicating Authority must reject the application U/S 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility, the Adjudicating Authority is to see whether there is a plausible contention which requires further investigation and the "dispute" is not a patently feeble legal argument or an assertion of fact, unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster.’’

CONCLUSION Accordingly, it was held that a landlord leasing out an immovable property does not fall under the supply of goods and services. When a plausible contention lies which need further investigation then the adjuvating authority shall not take up resolution application relying on the notice issued under section 106 of the transfer of property Act 1882 which was regarding the vacation of land the existence of dispute was admitted and application under section 9 of IBC, 2016 cannot be admitted the appeal was allowed the order of NCLT Hyderabad was set aside.

In this case, the importance of operational creditor was also realised and was stated that when a corporate debtor is not able to meet is operation debt which is to meet the day to day expenses of the corporate clearly signifies its inability to function properly and an insolvency resolution shall be imposed and the power to ignite that resolution has been rightly given to the operational creditor in the code.

1) New Delhi, in Parmod Yadav &Anr v. Divine Infracon [2017 SCC OnLine NCLT 11263 IT]

2) Case Jindal Steel & Power Ltd. v. DCM International Ltd

[Company Appeal (AT)(Insolvency) No 288/20

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