The NCLAT was asked to decide in this issue whether a landlord's grant of a lease will be considered a service rendered to a corporate debtor, making the landlord an operational creditor as defined by Section 5(20) read with Section 5(21) of the Code.
In the instant case titled M. Ravindranath Reddy v. G. Kishan & Ors., the issue raised for clarification before the NCLAT was:
Whether the definition of operational creditor gives the scope to consider rent as operational debt?
With regard to this issue, the NCLAT ruled that the Code recognises financial debt and operational debt as the two forms of debt for which creditors may file a request to begin insolvency proceedings against a corporate debtor. According to what was stated, if there is a debt that is not a financial debt or an operational debt, the creditor will not be eligible to submit an application under Section 7 or Section 9, as the case may be. For this reason, identifying the claim's nature and the debt's type is crucial when deciding whether to accept an application under the Code.
Further, it was noted that as the Code does not define products or services, one must rely on the terms' common usage in legal contexts while taking context into account. The NCLAT noted that while the Bankruptcy Law Reforms Committee had recommended that lessors and landlords be treated as operational creditors, this recommendation had not been incorporated into the Code, which only retained claims for goods and services when defining an operational creditor and an operational debt under Sections 5(20) and 5(21) of the Code. The NCLAT ruled that the definition of an operational creditor does not permit one to classify rent obligations under this category.
The NCLAT categorically stated that,
"The law has not gone into defining goods or services - hence, one has to rely on general usage of the terms so used in the law, with due regard to the context in which the same has been used. Simultaneously, it is also relevant to understand the intention of the lawmakers. The Bankruptcy Law Reforms Committee (BLRC), in its report dated November 20151, states that "Operational creditors are those whose liability from the entity comes from a transaction on operations".