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A Step Towards Recognition of Licensee Dues In Insolvency Jurisprudence

The National Company Law Appellate Tribunal “NCLAT” in the case of Jaipur Trade Expocentre Private Limited vs. M/s Metro Jet Airways Training Private Limited Jet Airways[1]” accorded the status of operational creditors to licensors by holding that license dues fall under the category of operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016, “Code”. The NCLAT by way of this judgment has also settled a long-standing conundrum in insolvency law and overturned two judgments of the National Company Law Tribunal “NCLT”.

In Jet Airways, the dispute was around the payment of licensee fee dues arising out of an agreement between the two parties for license of premises for the purposes of running an Educational Establishment with effect from 01.06.2017 for an initial period of five years; the cheques towards payments of the license fee were dishonoured and a demand notice under Section 8 of the Code was ignored, after which the Corporate Debtor initiated proceedings. The NCLT, while considering the question of whether the dues fell under the ambit of an operational debt, held that, “a claim arising out of grant of license to use of immovable property does not fall in the category of goods or services, thus, the amount claimed in Section 9[2] Application is not an unpaid operational debt”.

The Insolvency and Bankruptcy Code is unique in employing use of categories to differentiate between various types of creditors for a timely resolution process. In a shift from erstwhile definitions and mechanisms under the predecessors of the IBC like the Companies Act 2013 and the Sick Industrial Companies (Special Provisions) Act 1985 (SICA) which did not classify creditors; the IBC classifies creditors into operational or financial creditors. Operational creditors, as defined under Section 5(20) of the Code are creditors to whom an operational debt is owed; these debts can encompass different kinds of debts and sub categories of creditors. Financial creditors are creditors to whom a financial debt is owned and are generally the creditors who may initiate Corporate Insolvency Resolution Proceedings “CIRP”. The IBC does not provide for any strict division between operational and financial debt and therefore, the adjudicating authority has been entrusted with interpretation fiat to determine debts and claims of creditors.

Tribunals and adjudicating authorities have famously favoured a watertight interpretation of operational creditor under Section 5(20) of the IBC. In Col. Vinod Awasthy v. AMR Infrastructure Limited, the NCLAT held that that the framers of the IBC had not intended to include within the expression of an 'operation debt' a debt other than a financial debt[3]. Therefore, an operational debt would be confined only to “four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues”. Furthermore, the Tribunal has also restricted itself from an expansive interpretation of the IBC as it has stated that it is not viable to expand Section 5(20) and Section 5(21) of the IBC to include dues “on account of advance made to purchase a flat or a commercial site from a construction company”, especially when the aggrieved party has recourse to other legislations. Additionally, classification of creditors largely hinges on the Tribunal’s definition of goods and services and therefore, licensees have been largely left out of the ambit of operational creditors.

The present judgment marks a stark difference in the way the NCLAT has interpreted licensee dues; in the case of M Ravindranath Reddy v. Mr. G. Kishan & Ors “Ravindranath”, the Court rejected the position of lease of immovable property as an operational debt[4]. The Court changed its position in Dubey vs. National Agricultural Co-operative Marketing Federation of Indian Limited & Ors “Dubey”[5]. However, it quashed the Dubey judgment and upheld the view in Ravindranath in its judgment in Promila Taneja v. Surendri Design Pvt. Ltd “Promila” which dealt with the classification of an operational lease i.e., a lease which does not fulfil the requirements of a financial lease; it essentially is in form of a contract wherein the lessor permits the lessee to use an asset for a specific period without any transfer of ownership rights. The Court in Promila held that the rent, an operational lease, is not an operational debt and reaffirmed the findings in Ravindranath wherein the Court had said that the claim in respect of goods and services are kept in the definition of operational creditor and operational debt u/s Sec 5(20) and 5(21) of the Code and the present definition “does not give scope to interpret rent dues as operational debt”[6]. Notably, the Court refused to acknowledge the findings of the Bankruptcy Law Reforms Committee (BLRC) which, in its November 2015 report recommended that lessors and landlords be treated as operational creditors. The Court acknowledged the report but held that it was bound by the findings in Ravindranath due to lack of legislative adoption of the Report.

In the present case, the Court took a rather unique view; it relied on the definition of service as given in Pe Ramanatha Aiyar’s - Advanced Law Lexicon, and also considered the definition given under the Central Goods and Services Act CGST Act, 2017; "services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged". The case hinged on the Court’s definition of service under Article 5(21) of the Code, and it decided that the present service being rendered by the licensor qualifies as an operational debt as the transaction is a ‘service’. It quashed the findings in Promila wherein the Court had said that the inclusion of “supply of service” in its present definition, cannot be lifted from the Consumer Protection Act, 2019 and Central Goods and Services Tax Act, 2017 as these Acts have not been listed under the definitional Section 3(37) of the Code.

This marks a significant change wherein the NCLAT has taken a liberal interpretation of section 5(21) and section 3(37) of the IBC and sets the stage for the Supreme Court to evolve an encompassing regime in the IBC for licensee dues.




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