Supreme Court Issues Notice On Whether Non-Payment Of Rent Qualifies As Operational Debt Under IBC

OVERVIEW

One of the most mooted questions of the recent past have been whether claims towards outstanding rent qualifies as operational debt under Insolvency & Bankruptcy Code (IBC), 2016; landlord falls under the definition of ‘operational creditor’ and can approach the NCLAT or Adjudicating Authority under section 9 of IBC for license fee outstanding.

The Supreme Court issued a notice in an appeal filed against an order passed by the National Company Law Appellate Tribunal (NCLAT). 

CASE AT HAND 

The case was regarding an application filed by the landlord under section 9 the IBC which was dismissed by the Adjudicating Authority on the basis that dues in the nature of rent of immovable property do not qualify as Operational Debt as per section 5 (21) of IBC, upheld by NCLAT referring to M. Ravindranath Reddy v. G. Kishan & Ors.

In the appeal, the appellant argued that the NCLAT held two conflicting decisions, and that in the present case the demand was both, in respect of arrears of rent, as well as on account of damages for breach of lock-in period, referring to the decision made in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd. & Ors. 

BACKGROUND

In the Ravindranath Reddy case, the three-member bench (headed by Justice A.I.S. Cheema) of the Tribunal had held that if the claim of debt does not fall under any of the three categories of the operational debt – (i) provision of goods; (ii) provision of services/employment; or (iii) debt arising under any statute and payable to Government/local authority – the claim cannot be categorised as an operational debt, despite a liability or obligation be due from the corporate debtor to the creditor.

Thus, it was declared that such a creditor is disentitled from maintaining an application for initiation of Corporate Insolvency Resolution Process (CIRP) of the corporate debtor.

In the case of Anup Sushil Dubey, the two-member NCLAT bench, headed by Justice Venugopal M., held that lease rentals arising out of use and occupation of a cold storage unit that is of Commercial Purpose would qualify as an ‘operational debt’ as per sec. 5 (21) of the IBC. 

CONCLUSION 

The bench had relied on Para 5.2.1 of the report by the Insolvency & Bankruptcy Law Committee, as stated in judgement of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. It was observed by the Tribunal bench that paragraph 17 of the impugned judgement was, in fact, reiteration of the report by the Insolvency & Bankruptcy Law Reforms Committee.

The para 5.2.1 of the report had been mistakenly recorded as paragraph 17 of the judgement as an observation made by the court in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd. & Ors.

IN YOUR VIEWPOINT, SHOULD ARREARS OF RENT BE CONIDERED AS AN OPERATIONAL DEBT? LET US KNOW IN THE COMMENT SECTION!