In its ruling dated November 10, 2020 ("Judgement") in the case of Promila Taneja v. Surendri Design Private Limited [Company Appeal (Insolvency) No. 459 of 2020], the National Company Law Appellate Tribunal ("NCLAT") held that rent is not to be regarded as an operational debt ("Operational Debt") as defined by Section 5(21) of the Insolvency and Bankruptcy Code, 2016 ("IBC").
In the instant case titled Promila Taneja v. Surendri Design Private Limited the issue raised for clarification before the NCLAT was:
Can rent arrears be categorised as operational debt?
With regard to this issue, The NCLAT noted that the bench had made the following observations in its ruling in the case of Mr. M. Ravindranath Reddy (supra), which was supported by a reference to the Bankruptcy Law Reforms Committee Report, November 2015 ("BLR Committee Report"): While discussing the different types of creditors, the Committee points out that “enterprises have financial creditors by way of loan and debt contracts as well as operational creditors such as employees, rental obligations, …” Further, while differentiating between a financial creditor and an operational creditor, the Committee indicates “the lessor, that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease”. Hence, the BLRC recommends the treatment of lessors/landlords as operational creditors. However, the Legislature has not completely adopted the BLRC Report, and only 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. The definition does not give scope to interpret rent dues as operational debt.
The NCLAT noted that terms and phrases that are utilised in the IBC but are not defined therein but are defined in the acts referred to in Section 3(37) of the IBC may be immediately imported from them. The Consumer Protection Act of 2019 and the Central Goods and Services Tax Act of 2017 were not covered by the aforementioned Section 3(37) of the IBC, according to the NCLAT, which stated that the IBC Section 3(37) lists a number of laws. Even if the rent was assumed to be operational debt based on the e-mail the respondent wrote, the NCLAT remarked that it was still obvious that the respondent had mentioned financial strain and terminated the Agreement, which included a lock-in period, by making reference to it. The NCLAT noted that a trial between the parties would be necessary to determine whether the aforementioned Agreement's termination was valid.
The NCLAT rejected the appeal and reaffirmed that rent should not be regarded as an operational debt, basing on Mr. M. Ravindranath Reddy's decision (supra). The NCLAT also maintained the NCLT's finding that the parties are already embroiled in a dispute.
The NCLAT categorically stated that,
“It is clear that the legislature was conscious regarding liabilities arising from lease but although for particular types of lease, as mentioned in above sub- clause (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.”