M. Ravindranath Reddy vs. G. Kishan and Ors - (NATIONAL COMPANY LAW APPELLATE TRIBUNAL) (17 Jan 2020)

Lease of Immoveable Property cannot be considered as supply of goods or rendering a service, and cannot fall under the definition of ‘Operational Debt’

MANU/NL/0016/2020

Insolvency

In the present case, the Appellant was the Corporate Debtor of the Respondents/ Petitioners, Lessors of industrial Premises. That tenancy of the Appellant was yearly, and the rent payable for the period from July 2011 to June 2017 was Rs. 85,67,290/- and the Corporate Debtor stopped making the payment from January 2017, after the last part payment was made, which was adjusted towards rental dues. The Adjudicating Authority held that the Corporate Debtor had taken the property of the Petitioners on rent and they were paying rent up to June 2017.

The question arose as to whether a landlord providing lease would be treated as services to the corporate debtor, making the landlord an operational creditor within the meaning of Section 5 (20) read with Section 5 (21) of the Insolvency and Bankruptcy Code, 2016. Further, whether the petition filed under Section 9 of the Code would be not maintainable on account of ‘pre-existing dispute.

The Court observed that the Code only provided for two types of debt- financial debt and operational debt. Where the debt was neither of the two, the creditor would not qualify under Sections 7 or 9. For an amount to qualify as operational debt, it should be a ‘claim’ under Section 3 (6), such claim should be ‘debt’ under Section 3(11) and such ‘debt’ should strictly fall under ‘Operational Debt’ under Section 5 (21). Only if the claim by way of debt falls within one of the three categories as under Section 5(21) of the Code, can be categorized as an operational debt.

NCLAT held that lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition of 'Operational Debt.

The Adjudicating Authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute. The Adjudicating Authority is to see whether there is a plausible contention which requires further investigation. Thus in the present case, there was a pre-existing dispute, which is proved by the issuance of notice under Section 106 of the Transfer of Property Act, 1882 much before the issuance of demand notice, under Section 8 of the Code. Based on the above, the application filed under Section 9 of the Code could not have been admitted.

Tags : OPERATIONAL DEBT IMMOVABLE PROPERTY