NCLAT (05.07.2022) in Jaipur Trade Expocentre Pvt. Ltd. Vs. M/s Metro Jet Airways Training Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 423 of 2021] held that
As noted above the Tribunal in the above case has relied on Section 14(2) of the Code for interpreting ‘service’, which was only a very restricted meaning of service. We are thus of the view that the judgment of this Tribunal in Mr. M. Ravindranath Reddy does not lay down the correct law.
Hence, in the present case, debt pertaining to unpaid license fee was fully covered within the meaning of ‘operation debt’ under Section 5(21) and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an ‘operational debt’.
The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt’ within the meaning of Section 5(21) of the Code.
Excerpts of the order;
This larger Bench has been constituted to consider the following two questions referred to it by Three Members’ Bench vide order dated 09.03.2022:
“i. Whether the Judgment of this Tribunal in Company Appeal (AT) (Ins.) No.331 of 2019 in the matter of ‘Mr. M. Ravindranath Reddy vs. Mr. G. Kishan & Ors.’ lays down the correct law.
ii. Whether claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of ‘Operational Debt’ within the meaning of Section 5(21) of the Code.”
# 12. Section 3(37) provides that words and expressions used but not defined in this Code but defined in other statutes, shall have the meanings respectively assigned to them in those Acts. Section 3(37) reads as:
“(37) words and expressions used but not defined in this Code but defined in the Indian Contract Act, 1872(9 of 1872), the Indian Partnership Act, 1932 (9 of 1932), the Securities Contact (Regulation) Act, 1956 (42 of 1956), the Securities Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993), the Limited Liability Partnership Act, 2008 (6 of 2009) and the Companies Act, 2013 (18 of 2013), shall have the meanings respectively assigned to them in those Acts.”
# 17. Apart from definition as contained under Section 5(21), the ‘operational debt’ has not been explained in any other provisions of the Code. The definition under Section 5(21) uses the expression ‘operational’. The expression ‘services’ used in Section 5(21) has also not been defined in the Code. When an expression used in statute is not defined, the Court has to explain the meaning of undefined expression in accordance with the well-established rules of statutory interpretation. The Hon’ble Supreme Court has laid down the law on the above in (2015) 4 SCC 770 in Keshavlal Khemchand and Sons Private Limited and Ors. vs. Union of India and Ors., wherein in paragraph 53, following has been laid down:
“53. We are of the firm opinion that it is not necessary that the legislature should define every expression it employs in a statute. If such a process is insisted upon, legislative activity and consequentially governance comes to a standstill. It has been the practice of the legislative bodies following the British parliamentary practice to define certain words employed in any given statute for a proper appreciation of or the understanding of the scheme and purport of the Act. But if a statute does not contain the definition of a particular expression employed in it, it becomes the duty of the courts to expound the meaning of the undefined expressions in accordance with the well-established rules of statutory interpretation.”
# 18. When a statute does not contain a definition of a particular expression employed in it, it becomes the duty of the Court to expound the meaning of the undefined expression in accordance with law with the well- established rules of statutory interpretation. We need to explain as to what is the meaning of expression ‘services’ in general parlance. In P Ramanatha Aiyar – Advanced Law Lexicon (6th Edition Volume 4), the word ‘services’ has been defined in following words:
“SERVICE” means service which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the conveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service.”
# 25. The claim of the Operational Creditor for payment of License Fee is fully covered as ‘claim’ of the definition under Section 3, sub-section (6) and similarly liability or obligation in respect of claim becomes a debt on the part of the Corporate Debtor within the meaning of Section 3 (11), which defines debt in following words:
“(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”
# 29. Appellant has relied on judgments of this Tribunal in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India ltd. and Anr. (supra), which was a case where Operational Creditor and the Corporate Debtor had entered into a Leave and License Agreement for the usage of cold storage. On account of default in making payment of outstanding debts, notice under Section 8 was issued and Section 9 Application was filed. One of the questions framed in the aforesaid case as to whether dues, if any, arising from the Leave and License Agreement is construed as an ‘Operational Debt’?. In paragraphs 19 to 22, following have been observed:
“19. The contention of the Learned Counsel for the Appellant that Regulation 32 read with Section 14(2) is applicable to the facts of this case and that cold storage facilities cannot be construed as ‘essential service’ and, therefore, does not fall within the meaning of ‘Operational Debt’ as defined under Section 5(21), is untenable, having regard to the fact that Regulation 32 read with Section 14(2) only mentions essential goods and services whose supply cannot be terminated during the course of CIRP. The Code does not anywhere specify that the goods so mentioned under Regulation 32 are the same as those which fall within the ambit of the definition of Section 5(21). Annexure 1D of the Leave and Licence Agreement stipulates that the cold storage with the machinery and equipment has been designed for storage of all agricultural commodities. The Lessee being in need of a cold storage participated in the tender floated by the Lessor and sought for grant for the use and occupation of the cold storage unit. It is apparent from the material on record and the terms and conditions of the Leave and Licence Agreement that the Appellants have leased out the premises for ‘Commercial Purpose’, which comes within the meaning of ‘Service’ for the purpose of sub-Section (21) of Section 5 of the I&B Code, 2016.
20. At this juncture, we find it relevant to refer to the definition of ‘Service’ as defined under Section 2(42) of the Consumer Protection Act 2019;
“(42) “service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;”
21. The provisions of the Central Goods and Services Tax Act 2017. Schedule – II of the Act lists down the activities that are to be treated as supply of goods or services, and paragraph 2 of the Schedule stipulates as follows;
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.”
As the premises in the case on hand is leased out for ‘Commercial Purpose’, the cold storage owner/NAFED on collection is required to pay ‘service tax’ which is reflected in the tax invoices and ‘Ledger Accounts’ which is part of the record filed.
22. Therefore, keeping in view, the observations made by the Hon’ble Supreme Court in Para 5.2.1 of Mobilox (Supra), and having regard to the facts of the instant case this Tribunal is of the earnest opinion that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt’ as envisaged under Section 5(21) of the Code. Further, in so far as the facts and attendant circumstances of the instant case on hand is concerned, the dues claimed by the First Respondent in the subject matter and issue, squarely falls within the ambit of the definition of ‘Operational Debt’ as defined under Section 5(21) of the Code.”
# 30. The next judgment relied by learned Counsel for the Appellant is Sanjeev Kumar vs. Aithent Technologies Private limited and another (2020) SCC OnLine NCLAT 734, where the Corporate Debtor has taken on lease the basement and the ground floor of the premises and Lease Deed was executed for renting out the premises. Demand Notice was sent and then Section 9 Application was filed. One of the questions which arose for consideration in the case was as to 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(2) read with Section 5(21) of the Insolvency and Bankruptcy Code, 2016? In the above context, the Adjudicating Authority had admitted the Application, which order was upheld by this Tribunal holding that Operational Creditor had provided different type of services to the Corporate Debtor.
# 31. Next judgment relied by learned Counsel for the Appellant is Sarla Tantia v. Ramaani Hotels & Resorts Pvt. Ltd. and Anr. (supra) also a case of Leave and License Agreement entered between Operational Creditor and the Corporate Debtor. Application under Section 9 was filed claiming outstanding dues of Licence Fee, where this Tribunal took the view that the Application under Section 9 deserves admission. In paragraph 8 and 9, following has been observed:
“8. The Adjudicating Authority was not supposed to conduct a roving enquiry though it could have been within its rights to go for a limited exercise of sifting the material available before it for separating the grain from the chaff and to reject the spurious defense. The contractual relations inter-se the parties which are governed by the Leave and License Agreement do not admit of any oral agreement contrary to stipulations therein. Thus viewed, the defense raised by the Respondent that the adhoc amount was paid on the basis of reduced ‘carpet area’ of the licensed premises or that the oral agreement running parallel to the Leave and License Agreement enjoined upon the Respondent to pay rent on the basis of ‘carpet area’, which was less as compared to the ‘super built up area’, was a mere moonshine and could not be entertained as a pre-existing dispute to defeat initiation of Corporate Insolvency Resolution Process. The Adjudicating Authority has clearly landed in error in rejecting the Appellant’s version that the license fee was fixed for ‘super built up area’ and not for ‘carpet area’ as clearly stipulated in the Leave and License Agreement and the Appellant was under no obligation to reduce the rent. Reliance on irrelevant documents in coming to conclusion that there was a pre-existing dispute was uncalled for. The Adjudicating Authority also failed to notice that the Respondent never sought settlement of any dispute in regard to calculation of rent on ‘carpet area’ basis through arbitration which was the agreed mode of resolution of dispute between the parties in terms of the Leave and License Agreement. Significantly, no dispute was raised by the Respondent in reply to demand notice to which he did not at all respond.
9. Having regard for the factual matrix of the matter and the settled law on the subject, we are of the considered opinion that the impugned order suffers from serious legal infirmity and the same cannot be supported. A well merited case has been thrown out resulting in grave injustice. We accordingly, allow the appeal and set aside the impugned order. Since the debt and default is established, the Adjudicating Authority will admit the application under Section 9 of I&B Code after providing an opportunity to the Respondent — Corporate Debtor to settle the claim of Appellant, if it so chooses.”
# 32. Now, we come to the judgment relied by learned Counsel for the Respondent. The main judgment relied by learned Counsel for the Respondent is judgment of three Member Bench of this Tribunal in Mr. M. Ravindranath Reddy Vs. Mr. G. Kishan & Ors. (supra). In the above case the Corporate Debtor granted a license of industrial premises consisting of land measuring 1667 Sq. yards. The Corporate Debtor stopped making payment. A civil suit was also filed by the Corporate Debtor before the Civil Court. A Demand Notice under Section 8 was issued and Application under Section 9 was filed. The Adjudicating Authority admitted the Application against which order, the Appeal was filed by the suspended Director of the Corporate Debtor. This Tribunal took the view in the facts of the case that since the Lessor has filed the petition for the realization of enhanced lease rent from the lessee, the same does not come within the meaning of Section 5(21). Following were the observations made in the judgment:
“In the case in hand, the Respondent lessor has filed the petition for the realisation of enhanced lease rent from the lessee.
Thus understanding for not increasing the rent of a period of 6 years is a question of fact, which requires further investigation. Thus in the present case, there was a pre-existing dispute, which is proved by the issuance of notice under Section 106 of the TP Act, much before the issuance of demand notice, under Section 8 of the I&B Code. Based on the above, the application filed under Section 9 of the I&B Code could not have been admitted.
We are of the considered opinion that 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. On the above basis, it is clear that appeal deserves to be allowed.
ORDER
The appeal is allowed and the impugned order dated 21st January 2019 passed by the Adjudicating Authority/National Company Law Tribunal in CP (IB) No. 134/09/HDB/2018 Mr. G. Kishan & Ors. Vs. M/s Walnut Packaging Private Limited is set aside.
In effect, order (s) passed by Ld. Adjudicating Authority appointing “Interim Resolution Professional”, declaring moratorium, freezing of account and all other order (s) passed by the Adjudicating Authority pursuant to impugned order and action taken by the “the Resolution Professional”, including the advertisement published in the newspaper and all such orders and actions in pursuant to the impugned order are declared illegal and are set aside. The application preferred by the1st Respondent under Section 9 of the I&B Code is dismissed. The Adjudicating Authority will now close the proceeding. The 5th Respondent Company is released from all the rigour of proceedings and is allowed to function independently through its Board of Directors with immediate effect. The “Interim Resolution Professional”/“Resolution Professional” will hand over the management and records of the “Corporate Debtor”.
The Adjudicating Authority will fix the fee of “Interim Resolution Professional” for the period he has functioned, which shall be paid by the applicant. The appeal is allowed with the observation above and direction; there shall be no order as to cost.
# 33. When we perused the judgment in Mr. M. Ravindranath Reddy’s case, the observations of this Tribunal were with regard to the facts of the aforesaid case and the reply which was given by the Corporate Debtor was also with respect to the aforesaid case. We may further notice following observations of this Tribunal in Mr. M. Ravindranath Reddy’s case :
“Further, from the usage of the term “goods or services” as given under Section 14(2) of the Code, provides that “essential goods or services”, of the corporate debtor shall not be terminated or suspended or interrupted during the moratorium. What constitute essential goods and services are provided under Regulation 32 (Insolvency Resolution Process for corporate persons) Regulation 2016 wherein it is provided that; The essential goods and services referred to in Sec 14(2) shall mean:
1 Electricity
2 Water
3 Telecommunication Services
4 Information Technology Services
To the extent, these are not a direct input to the output produced or supplied by the corporate debtor.
Thus, 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.
However, 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 this regard, reliance was also placed on Col. Vinod Awasthy v. AMR Infrastructure Ltd.”
# 34. Reference has been made to Section 14(2) of the Code. Section 14, sub-section (2) is as follows:
“14(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.”
# 35. Section 14, sub-section (2) deals with supply of essential goods or services to the Corporate Debtor. The said provision has nothing to do with the extent and expense of ‘operational debt’ within the meaning of Section 5(21). The observation that ‘any debt arising without nexus to the direct input or output produced or supplied by the Corporate Debtor, cannot be considered to be operational debt’ is conclusion drawn by this Tribunal contrary to the scheme of the Code. The ‘operational debt’ as defined in Section 5(21) has meaning much wider than the essential goods and services. Essential goods and services are entirely different concept and the protection under Section 14(2) as provided for is an entirely different context. Thus, the observations made that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by scheme of the Code.
# 36. The judgment of this Tribunal in Mr. M. Ravindranath Reddy’s case does not consider the extent and expanse of the expression ‘service’ used in Section 5(21) of the Code. As noted above the Tribunal in the above case has relied on Section 14(2) of the Code for interpreting ‘service’, which was only a very restricted meaning of service. We are thus of the view that the judgment of this Tribunal in Mr. M. Ravindranath Reddy does not lay down the correct law.
# 37. Now we come to the judgment of this Tribunal in Promila Taneja (supra), which was a case again of Section 9 Application, which was dismissed by this Tribunal relying on Mr. M. Ravindranath Reddy’s case. In Promila Taneja’s case this Tribunal again reiterated the view taken in Mr. M. Ravindranath Reddy’s case. This Tribunal held that the reliance on the definition of ‘service’ in Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not relevant. In paragraph 11, following was laid down:
“11. We are finding difficulty to change the view we had taken in the matter of Mr. M. Ravindranath Reddy Versus Mr. G. Kishan & Ors. for the following reasons.
In the matter of Anup Sushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors, it does not appear that the Learned Counsel for parties duly assisted the Hon’ble Bench. In paragraph 17 of the Judgment which we have reproduced above, the Hon’ble Bench recorded that Hon’ble Supreme Court in Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited in paragraph 5.2.1 have observed as per the portion quoted and reproduced by the Hon’ble Bench. When with the assistance of Learned Counsel for parties, we have gone through the original Judgment in the matter of Mobilox Innovations Private Limited V/s. Kirusa Software Private Limited as reported in (2018) 1 SCC 353, in Paragraph 22 of the Judgment, the Hon’ble Supreme Court was reproducing portions from the final report dated November, 15 of Insolvency Law Reforms Committee and Paragraph 5.2.1 which was part of the report of the Committee was reproduced. Such paragraph 5.2.1 of report of Insolvency Law Reforms Committee has been recorded in Paragraph 17 of the Judgment as if it is observation of the Hon’ble Supreme Court in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors. This is apparently not correct.
After referring to the Report, Hon’ble Supreme Court referred to the Insolvency & Bankruptcy Bill (See Para 25 of Mobilox Judgment) and its contents as well as Notes on clauses; the Joint Committee report of April, 2016 (Para 28) and examined the provisions of IBC and observed in para 32 that “In the passage of the Bills which ultimately became the Code various important changes have taken place”. Hon’ble Supreme Court went on to hold that at the time of admitting Application under Section 9 of IBC all that Adjudicating Authority is to see is whether there is plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. Learned Counsel for Appellant, before us does not show anything that in Mobilox Judgment, Hon’ble Supreme Court has held Rent to be Operational Debt.
It appears to us that the Learned Counsel for parties did not properly assist the Hon’ble Bench in the matter of Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors.
# 38. This Tribunal relying on Section 3(37) observed that words and expression used in IBC, which have not been defined, but which have been defined under Section 3(37) can be directly imported. This Tribunal held that definition of ‘service’ in Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not covered under Section 3(37). Hence, they cannot be treated as supply of service. In paragraph 13 and 15, following has been laid down:
“13. It is clear that words and expressions used in IBC which have not been defined but which have been defined in the Acts mentioned above can be directly imported. However, the Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 do not appear to have been covered under the Section 3 (37) and thus definition of “Service” and “Activities” to be treated as supply of service cannot simply be lifted and applied in IBC. Learned Counsel for parties in Anup Shushil Dubey Vs. National Agriculture Co-operative Marketing Federation of India Limited & Ors do not appear to have brought this to Notice of Bench. For such reasons, with all due respect, we find that we are unable to have a second look at the opinion we arrived at in the Judgment in the matter of “Mr. M. Ravindranath Reddy Versus Mr. G. Kishan & Ors.”
15. It is clear that the legislature was conscious regarding liabilities arising from lease but although for particular types of lease, as mentioned in above subclause (d), legislature made specific provision to even make it Financial Debt, while dealing with Operational Debt, no such provision has been made. Thus, even on the parameters of interpretation of statutes, we are not in a position to hold that the rents due could be treated as Operational Debt. For reasons recorded in the matter of Mr. M. Ravindranath Reddy Versus Mr. G. Kishan & Ors., we do not find fault with Impugned Order.”
# 39. The observation of this Tribunal in the above case in respect of definition of ‘service’ under Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 are not covered by Section 3(37) of the Code, with regard to which observation, no exception can be taken. However, in the facts of the present case, where Agreement itself contemplate payment of GST for the services under the Agreement, on which GST is payable, the definition of ‘service’ under Central Goods and Services Tax Act, 2017 cannot be said to be irrelevant. More so, even if an expression is not defined in the statute, the meaning of expression in general parlance has to be considered for finding out the meaning and purpose of expression. After making above observation in Promila Taneja’s case (supra), this Tribunal did not dwell with the question as to what is the meaning of expression of ‘service’ used in Section 5(21) of the Code. Reference to Section 5(8)(d) regarding ‘financial debt’ by this Tribunal in the above case also was not relevant for finding out definition of expression ‘service’ under Section 5(21). We, thus, are of the view that both in Mr. M. Ravindranath Reddy and Promila Taneja this Tribunal did not dwell upon the correct meaning of expression ‘service’ used in Section 5(21) of the Code. In any view of the matter, in the above mentioned two cases, the dues were in the nature of rent of immovable property whereas the present is a case of license granted for use of premises on Warm Shell Building with fittings and fixtures, electrical, flooring as per good corporate standards. Hence, the Licnesee was licensed for a particular kind of service for use by the Licensee for running a business of Educational Institution. Hence, in the present case, debt pertaining to unpaid license fee was fully covered within the meaning of ‘operation debt’ under Section 5(21) and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an ‘operational debt’. The judgment of this Tribunal in Promila Taneja’s case reiterate the law as laid down in Mr. M. Ravindranath Reddy’s case. We having held that judgment of Mr. M. Ravindranath Reddy’s case does not lay down correct law, the judgment in Promila Taneja’s case can also not be followed.
# 40. In view of the foregoing discussion, we answer the two questions referred to the larger Bench in the following manner:
(1) Judgment of this Tribunal in Mr. M. Ravindranath Reddy (supra) as well as judgment in Promila Taneja’s case does not lay down the correct law.
(2) The claim of Licensor for payment of license fee for use of Demised Premises for business purposes is an ‘operational debt’ within the meaning of Section 5(21) of the Code.
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