India: NCLAT Full Bench Overturns Previous Judgements- Holds License Fees As ‘Operational Debt' Under IBC

Introduction

In a recent full bench judgement, the National Company Law Appellate Tribunal (NCLAT) overturned two of its previous judgements to clarify that claim of a licensor for payment of licence fee is an operational debt within the meaning of section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). As a result, for the purposes of the IBC, such a creditor may be categorised as an “operational creditor”.

Jurisprudential Conundrum

Claims of creditors with respect to lease and rental dues were left in the dark, due to the  National Company Law Tribunals (NCLT) having conflicting views on this, when some NCLT's considered it as operational debt¹, while some did not.² Judgements of the NCLAT further added to this confusion as judgement in Mr. M Ravindranath Reddy v. Mr. G. Kishan & Ors³ (Ravindranath case) rejected the position of lease of immovable property as an operational debt whereas the subsequent judgement in Dubey vs. National Agricultural Co-operative Marketing Federation of Indian Limited & Ors⁴ (Dubey case) departed from this view. Finally, while taking note of the conflicting decisions, the NCLAT in the case of Promila Taneja v. Surendri Design Pvt. Ltd⁵ (Promila case) upheld the view taken in Ravindranath Case.⁶

However, this conundrum is recently settled by the larger bench of NCLAT in Jaipur Trade Expocentre Private Limited vs. M/s Metro Jet Airways Training Private Limited⁷(Jaipur case) while stating that judgment in case of Ravindranath Case and Promila case does not lay the correct position of law.

Judgment

The issue for consideration before the NCLAT was whether the license granted for use of premises on warm shell building with fittings and fixtures, electrical, flooring as per good corporate standards will be considered as a service within the meaning of section 5(21) of the IBC.

NCLAT analysed the term ‘services' as the same is not defined under the IBC. While referring to the generic meaning of the term services, it referred to the P Ramanatha Aiyar- Advanced Law Lexicon (6th Edition Volume 4) and further analysed the lease agreement to note that the licensee was liable to pay the payment of GST. As payment of GST is contemplated only for ‘goods' and ‘services', the NCLAT then imported the definition of ‘services' from the Central Goods and Services Tax Act, 2017 (‘GST Act'). NCLAT took a liberal approach for the interpretation of section 3(37) of the IBC as the same does not include the GST Act, which is in stark contrast to its previous judgment in Promila case. Furthermore, it held that even if an expression is not defined in the statute, the meaning of the expression in general parlance has to be considered for finding out the meaning and purpose of the expression.

The NCLAT further distinguished the Ravindranath case and the Promila case on the basis that in the earlier case the NCLAT had interpreted the meaning of the Section 5 (21) very strictly while in the latter has not at all dwelled into the question of what is the meaning of expression ‘services' used in section 5(21) of the IBC. The NCLAT concluded that these cases lay down the incorrect position of law and the debt pertaining to unpaid license fees was fully covered within the meaning of ‘operational debt' under section 5(21).

Comment

This decision of the NCLAT is a step forward for the realisation of the claim for licensee dues under the IBC. The NCLAT has taken a liberal interpretation of section 5(21) and section 3(37) of the IBC. What remains to be seen is the Supreme Court's view on this as well as the impact of this case on the pending proceedings in connection with claims arising due to the use of the immovable property and other connected services.

Footnotes

1 Pramod Yadav v. Divine Infracon (P) Ltd., 2017 SCC OnLine NCLT 11263; Manjeera Retail Holdings Pvt. Ltd. v. Blue Tree Hospitality Pvt. Ltd., MANU/NC/6715/2019.

2 Mahesh Madhavan v Black N Green Mobile Solutions Pvt. Ltd., 2017 SCC OnLine NCLT 13134; Saiom Developers Pvt. Ltd. v. R Square Shri Saibaba Abhikaran Pvt. Ltd., MANU/NC/0186/2021.

3  Mr. M Ravindranath Reddy v. Mr. G. Kishan & Ors, [2020] 154 CLA 458.

4 Company Appeal (AT) (Insolvency) No. 229 of 2020.

5 Promila Taneja v. Surendri Design Pvt. Ltd, Company Appeal (AT) (Insolvency) No. 459 of 2020.

6 The matter is sub-judice before the Supreme Court.

7 Company Appeal (AT) (Insolvency) No. 423 of 2021.

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