2020 (2) TMI 56 - AT - Insolvency and Bankruptcy

Maintainability of petition - initiation of CIRP - Corporate Debtor failed to make repayment of debt - existence of debt and default or not - HELD THAT - The Insolvency and Bankruptcy Code recognises two types of debt to enable the creditors to make an application for initiating insolvency proceedings against the corporate debtor- financial debt and operational debt. If there is a debt, other than a financial debt or an operational debt, the creditor will not qualify to apply under Sections 7 or 9, as the case may be. Hence, the determination of nature of claim/debt is an important step while considering the admission of an application under the Code - While the law is still evolving, there are certain categories of dues, about which, the debate as to their classification into financial or operational debt continues. One such debt claims on account of unpaid rent payable by an entity to a landlord are in question in the present case. 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 - without going into the aspect whether an immovable property in itself constitutes stock- in- trade of the corporate debtor and has a direct nexus to its input- output, being an integral part of its operations, the Bench held that lease of immovable property cannot be considered as a supply of goods or rendering of services, and thus, cannot fall within the definition of operational debt. In case of lease of immovable property, Default can be determined, on the basis of evidence. While exercising summary jurisdiction, the Adjudicating Authority exercising its power under Insolvency and Bankruptcy Code 2016, cannot give finding regarding default in payment of lease rent, because it requires further investigation. 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 - In the case in hand, the Respondent lessor has filed the petition for the realisation of enhanced lease rent from the lessee. The alleged debt on account of purported enhanced rent of leasehold property does not fall within the definition of the operational debt in terms of Section 5(21) of the Code - Appeal allowed.

Summary

Issues Involved:
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 under Section 9 of the Insolvency and Bankruptcy Code, 2016 is not maintainable on account of 'pre-existing dispute'?

Detailed Analysis:

Issue 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?

The Tribunal examined whether the unpaid rent constitutes an operational debt. The Code recognizes two types of debt: financial debt and operational debt. An operational debt is defined under Section 5(21) 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. The Tribunal noted that the Legislature did not include rent dues in the definition of operational debt.

It was highlighted that the Central Goods and Services Tax Act, 2017, considers any lease or tenancy to be a supply of services. However, previous judgments, including Jindal Steel & Power Ltd. v. DCM International Ltd., held that tenants do not come within the meaning of 'Operational Creditor' under sub-section (20) read with sub-section (21) of Section 5 of the Code.

The Tribunal concluded that lease of immovable property does not constitute a supply of goods or services and thus cannot fall within the definition of operational debt. Therefore, the landlord cannot be treated as an operational creditor.

Issue 2: Whether the petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 is not maintainable on account of 'pre-existing dispute'?

The Tribunal addressed the existence of a pre-existing dispute, which is crucial for the maintainability of a petition under Section 9 of the Code. The Corporate Debtor contended that there was an understanding of a moratorium for no rent enhancement for six years, which was disputed by the Operational Creditor. The Adjudicating Authority must reject the application under Section 9(5)(2)(d) if there is a record of dispute.

The Tribunal referenced the Supreme Court judgment in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., which established that the Adjudicating Authority must reject the application if there is a plausible contention requiring further investigation, indicating a genuine dispute.

In this case, evidence showed that a notice to vacate the premises under Section 106 of the Transfer of Property Act, 1882, was issued before the demand notice under Section 8 of the Code, indicating a pre-existing dispute. The Tribunal concluded that the application under Section 9 could not be admitted due to the pre-existing dispute regarding rent enhancement.

Order:

The appeal was allowed, and the impugned order dated 21st January 2019 was set aside. The Tribunal declared all actions taken pursuant to the impugned order, including the appointment of the Interim Resolution Professional and the moratorium, as illegal. The application under Section 9 of the Code was dismissed, and the Corporate Debtor was allowed to function independently through its Board of Directors. The Adjudicating Authority was directed to fix the fee of the Interim Resolution Professional for the period he functioned, to be paid by the applicant. The appeal was allowed with no order as to costs.