NCLAT held that under the rules of the Insolvency and Bankruptcy Code, 2016 ("IBC"), the ambiguity about the inclusion of Lease Rent dues of immovable property within the ambit of "Operational Debt" was resolved through this ruling. In the case of Mr M. Ravindranath Reddy vs. Mr G. Kishan & Ors, the NCLT concluded that lease rent dues on the immovable property do not fall within the definition of "Operational Debt" as set forth in Section 5(21) of the IBC.
In the instant case titled Mr M. Ravindranath Reddy vs. Mr G. Kishan & Ors, the issues raised before the NCLAT for clarification were:
Whether a landlord can be classified as an Operational Creditor under Section 5(20) read with Section 5(21) of the IBC for providing services to a corporate debtor by leasing his premises?
Would non-payment of utility bills/maintenance costs, as well as non-payment of the lease, be considered a violation of section 9 of the IBC?
With regard to the first issue, Operational Debt can only be classified as such if the debt claim falls into one of the three categories. Even if there is a liability or obligation due from one person, namely Corporate Debtor, to another, namely a Creditor other than the Government or local authority, such a creditor cannot categorise itself as an "Operational Creditor" as defined by Section 5(21) of the IBC. The NCLAT concluded that a lease of immovable property cannot be deemed a supply of products or a rendering of any services, and so cannot be classified as "Operational Debt."
With regard to the second issue, in order for a debt to be considered an operational debt in this context, it must meet two criteria: (i) it must be a claim; and (ii) it must be related to the performance of a service. If non-payment of utility bills/maintenance charges combined with non-payment of the lease is to be considered a debt in the character of an operational debt under Section 9 of the IBC, it must first be recognised as such. However, given the current state of the law on leases and rentals as operational debts, the NCLAT's decision points to their absence from the Code's definition of "service," as well as their nature as a financial liability. Given that no service is rendered and that the debt is not an operational obligation, any dues flowing from it would very probably not be subject to Section 9 of the Code.
Tribunals have had to deal with a slew of contradictory judgments in a variety of cases, but this one finally puts an end to the problem by concluding that transactions involving immovable property do not have a direct nexus with the corporate debtor's input-output, and thus such debts do not qualify as operational debts.