NCLAT Delhi Rules: Security Deposit Refund Conditional On License Agreement Not Operational Debt Under IBC

NCLAT Delhi Rules: Security Deposit Refund Conditional On License Agreement Not Operational Debt Under IBC

The National Company Law Appellate Tribunal (NCLAT), Delhi, with Mr. Justice Yogesh Khanna (Judicial Member) and Mr. Arun Baroka (Technical Member), ruled that a demand for the refund of a security deposit, which is tied to fulfilling a contractual requirement dependent on executing a leave and license agreement, does not qualify as an operational debt under the Insolvency and Bankruptcy Code, 2016 (IBC).

Carestream Health India Private Limited (the Appellant) and Seaview Mercantile LLP (the Corporate Debtor) entered into a "Without Prejudice" Letter of Intent (WP-LOI) for leasing a unit in the Silver Metropolis building.

The appellant paid a security deposit of Rs. 25.68 lakh. However, upon conducting due diligence, the appellant discovered that the premises were ineligible for IT/ITES/STPI registration, contrary to the initial representation. Consequently, the appellant sought to terminate the LOI and requested a refund of the security deposit.

The respondent disputed the appellant's claims and asserted the right to forfeit the security deposit due to the appellant's non-compliance. Subsequently, on February 20, 2020, the appellant filed a Corporate Insolvency Resolution Process (CIRP) petition under Section 9 of the IBC.

The NCLT Mumbai dismissed the appellant's application to initiate CIRP against the corporate debtor via its order dated March 24, 2023. The NCLT determined that the appellant did not qualify as an operational creditor under the IBC because the claim did not stem from the provision of goods or services to the corporate debtor. An appeal has been filed against the said order.

The NCLAT noted that the security deposit is associated with a conditional contractual arrangement rather than the actual provision of any goods or services. Therefore, the claim does not meet the criteria for an operational debt under the IBC but is instead linked to a contractual obligation dependent on executing a leave and license agreement.

Regarding the applicability of the Jaipur Trade Expo Centre Pvt. Ltd. v. Metro Jet Airways Training Pvt. Ltd. case, the NCLAT clarified that while the judgment establishes that a claim for unpaid license fees for immovable property constitutes an operational debt under the IBC, it does not support the appellant's argument that a security deposit is akin to a license fee eligible for such adjustments.

The NCLAT emphasized that in the present case, there are no outstanding license fees, and the security deposit cannot be considered a form of license fee available for adjustments. Additionally, the judgment does not imply that a security deposit is a type of license fee. The decision was based on the fact that GST was paid on the license fee, indicating services were rendered, thereby falling under Section 5(21) of the IBC.

Furthermore, no GST was payable or paid on the security deposit. It was not an advance license fee but rather a deposit ensuring the appellant's compliance with entering into a license agreement. The deposit was not intended for adjustment against any outstanding or future license fees. No services were rendered or supplied by either party. Instead, the security deposit became subject to forfeiture due to the appellant's failure to fulfill the obligation to enter into a leave and license agreement. Thus, this situation does not involve the supply of goods or services.

In its conclusion, the NCLAT upheld the NCLT Mumbai's Order dated March 24, 2023, affirming that the definition of operational debt under the IBC does not extend to situations involving security deposits disconnected from any immediate service provision. Even if the security deposit were to be presumed to be an operational debt, as asserted by the appellant, the petition could not be accepted under Section 9 of the IBC, as discussed in subsequent paragraphs. The claimed amount fails to qualify as an operational debt under the IBC since it does not arise from the provision of goods or services. Additionally, a pre-existing dispute between the parties exists, further rendering the application under Section 9 of the IBC non-maintainable.

In conclusion, the NCLAT upheld the NCLT Mumbai's Order dated March 24, 2023, highlighting that the definition of operational debt under the IBC does not encompass scenarios involving security deposits unrelated to any immediate service provision.

The NCLAT noted that even if it were assumed that the security deposit should be categorized as an operational debt, the petition would remain unacceptable under Section 9 of the IBC. This is due to the existence of a pre-existing dispute between the parties, rendering the CIRP application non-maintainable.