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Claims Originating Out Of The Grant Of An Exclusive Right And License For Using Rights To Intellectual Property Come Within The Ambit Of The Definition Of 'Operational Debt’: NCLAT New Delhi

Shvena Neendoor ,
  24 August 2022       Share Bookmark

Court :
National Company Law Appellate Tribunal, New Delhi
Brief :

Citation :
COMPANY APPEAL (AT)(INS) No. 501 of 2021

Case title: 
Somesh Choudhary v Knight Riders Sports Private Limited & Ors

Date of Order: 
18th August 2022

Bench: 
Justice Anant Bijay Singh (Judicial Member) and Ms. Shreesha Merla (Technical Member)

Parties: 
Appellant- Somesh Choudhary
Respondent- Knight Riders Sports Private Limited & Ors

SUBJECT

While hearing an appeal filed in Somesh Choudhary v Knight Riders Sports Private Limited & Ors., the National Company Law Appellate Tribunal, Principal Bench, comprised of Justice Anant Bijay Singh (Judicial Member) and Ms Shreesha Merla (Technical Member), held that claims originating out of the grant of an exclusive right and license for using rights to intellectual property come within the ambit of the definition of 'Operational Debt. 

IMPORTANT PROVISIONS

Section 9 of the Insolvency and Bankruptcy Code, 2016- Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) states that if the operational creditor does not receive the money from the corporate debtor or notice of the disagreement under Section 8(2) within 10 days from the date of delivery of the notification or invoice demanding payment under Section 8 of the IBC, the operational creditor could file an application before the Adjudicating Authority to initiate a corporate insolvency resolution process.

Section 5(21) of the Insolvency and Bankruptcy Code, 2016 – The section defines "Operational debt" as a claim for the supply of goods or services, which include employment, or a debt for the payment of dues emerging under any legislation in force at the time and due to the Central Government, any State Government, or any local authority.

OVERVIEW

  • The respondent, Knight Riders Sports Private Limited and M/s. Global Fragrances Private Limited, the appellant had decided to enter into a Licensing Agreement under which the Respondent granted the Appellant permission to (a) produce, sell, disseminate, and advertise the licensed products, namely deodorants, hair gels, as well as perfumes; and (b) to use the Respondent's rights to intellectual property namely the trademark 'Kolkata Knight Riders' Logo.
  • In exchange for the exclusive rights, the Appellant was expected to pay Minimum Guaranteed Royalties to the Respondent. The Respondent raised invoices totalling Rs.40,60,147/- for MGR payable by the Appellant, but only part payment was received. 
  • The Respondent initiated the Corporate Insolvency Resolution Process against the Appellant by filing a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016.
  • The Appellant had objected to the petition on the grounds that claims arising from non-payment of MGR did not constitute Operational Debt because they did not relate to any goods or services.
  • Aggrieved with the order by the NCLT, the appeal was filed before the NCLAT.

ISSUES RAISED

Whether the claims arising out of non-payment of the Minimum Guaranteed Royalties can amount to an ‘operational debt’?

ARGUMENTS ADVANCED BY THE APPELLANT

  • It was argued that the 'Claim' stemmed from non-payment of Minimum Guaranteed Royalties, which, understandably, did not stem from non-payment of any services or goods and thus cannot be considered an 'Operational Debt.' 
  • It was further argued that the sum claimed was not an 'Operational Debt' because there was no transaction with direct input into output levels or provided by the 'Corporate Debtor.'
  • Reliance was placed on M. Ravindranath Reddy v Mr G. Krishan & Ors. [Company Appeal (AT) (Ins.) No. 331/2019] where it was held that any 'debt' that does not have a direct link to the output produced or supplied by the 'Corporate Debtor' cannot be considered an 'Operational Debt.'
  • Further reliance was placed on Promila Taneja v Surendra Design Pvt. Ltd. [Company Appeal (AT) (Ins.) No.459/2020] wherein the Tribunal ruled that definitions of goods and services cannot be lifted from taxation statutes unless expressly authorised by the Code.
  • It was argued that the Respondent failed to demonstrate that the Appellant used the Respondent's trademark for the purposes of sale, advertising, etc., and that their claim was based on non-payment of Minimum Guaranteed Royalties, which was not an "Operational Debt."

ARGUMENTS ADVANCED BY THE RESPONDENT

  • It was argued that the respondent raised and served several Invoices on the 'Corporate Debtor' in accordance with Clause 4 of the Agreement. However, the 'Corporate Debtor' purposefully/intentionally failed to pay Respondent the overall sum owed and payable under the Agreement. 
  • The respondent claimed to have sent several reminders in this regard, but the 'Corporate Debtor' did not respond.

JUDGEMENT ANALYSIS

  • The NCLT bench determined that MGR was a fixed payment that was owed by the Corporate Debtor to the Operational Creditor as per the Agreement and that the Corporate Debtor's failure to pay for the use of the "Trademark," that is the Licensed Product of the Operational Creditor, equates to an operational debt under the IBC. 
  • The NCLT Bench determined that the Corporate Debtor had acknowledged default and there was no dispute raised regarding the existence of the debt, the quality of goods or services, or the violation of a representation or guarantee, either directly or indirectly.
  • It was held that awarding the 'Corporate Debtor' an exclusive right and licence to produce, sell, disperse, and promote the licenced products, as well as to use the trademark in affiliation with the licenced products in addition to on packaging, advertising material, has a clear nexus with company operations and sales, in addition to the actual product provided by the 'Corporate Debtor.'
  • The Bench stated that a Guaranteed Minimum Royalty is a fee paid by a licensee to a licensor on a regular basis, irrespective of sales success for a licenced product during that year. A minimum royalty is generally an agreed lump-sum payout of realistically assumed revenue from the sale of a licenced product over the specified time period, as opposed to a royalty, which is normally based on a percentage of net sales revenue.

CONCLUSION

The NCLT's decision was upheld by the Bench. The court could not locate any illegality or infirmity in the well-reasoned Impugned Judgement of the Learned Adjudicating Authority, and thus the Appeal failed and was dismissed. 

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