Claim towards license fees for immovable property is an ‘operational debt’: NCLAT Full Bench

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Whether the three – member bench judgement of the NCLAT in M. Ravindranath Reddy v. G. Kishan & Ors., 2020 SCC OnLine NCLAT 84 (“M. Ravindranath Reddy”) lays down the correct law?

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Whether claims of the Licensor for payment of License Fee for the use and occupation of immovable premises for commercial purposes is an ‘Operational Debt’ within the meaning of Section 5(21) of the Code?

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M. Ravindranath Reddy does not lay down the correct law as Section 14(2) of the Code read with Regulation 32 of the (Insolvency Regulation Process for Corporate Persons) Regulations, 2016 are only for the purpose of deeming essential services after commencement of the CIRP and not to interpret what constitutes an “operational debt” under Section 5(21) of the Code. The NCLAT also overruled its own judgement in Promila Taneja v. Surendri Designs Pvt. Ltd., 2020 SCC OnLine NCLAT 1105, which placed reliance on M. Ravindranath Reddy.

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In the facts, the licence agreement required the Applicant-licensor to provide a ‘warm shell building with fittings, fixtures, electrical, flooring as per good corporate standards’ and the Respondent-licensee was liable for payment of Goods and Services Tax (GST), which sufficiently indicated the nature of services provided under the licence agreement. In doing so the NCLAT was cognizant that while Section 3(37) of the Code did not expressly provide for a direct import of definitions from the Central Goods and Service Tax Act, 2017, it was duty bound to expound definitions that find place in legal statutes when they were not provided in the Code.

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The NCLAT placed reliance on the judgement of the Supreme Court in Keshavlal Khemchand and Sons Private Limited and Ors. v. Union of India and Ors., (2015) 4 SCC 770, which observed that when a statute does not contain a definition of a particular expression employed in it, it is the duty of the court to expound the meaning of an undefined expression in accordance with the law of well-established principles of statutory interpretation. In doing so, the NCLAT placed reliance on its judgment of Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India ltd. and Anr., (2020) SCC OnLine NCLAT 674, wherein the interpretation of the term ‘service’ as contained in the Consumer Protection Act, 2019 was held to include ‘..provision of facilities towards real estate..’.  Expanding the definition of the term ‘operation’ from Iyer’s Law Lexicon, the NCLAT observed that an operational debt is a debt that  is incurred in the conduct of principal activities of an enterprise, and hence the Respondent’s debt towards license fees for an immovable property to conduct an educational enterprise would be an operational debt under Section 5(21) of the Code.

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NCLAT also referred to the Bankruptcy Law Reforms Committee Report (2015) which observed that a ‘lessor who rents out space is an operational creditor’ (para 5.2.1.).

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NCLAT distinguished the facts in the present appeal from M. Ravindranath Reddy which dealt with a claim for enhancement of lease rent in respect of which legal proceedings had been instituted prior to initiation of proceedings under the Code. .