Non-payment of license fees is an operational debt: NCLAT

Non-payment of license fees is an operational debt: NCLAT

"Debt pertaining to unpaid license fee was fully covered within the meaning of 'operation debt' under Section 5(21) and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an 'operational debt'."

The National Company Law Appellate Tribunal (NCLAT) recently held that payment of license fees for the use and occupation of immovable premises for commercial purposes is an operational debt within the meaning of Section 5(21) of the Insolvency & Bankruptcy Code (IBC).

The facts of the case are that the Operational Creditor entered into a license agreement with the Corporate Debtor for running an educational establishment for a license fee of around 4 Lakhs. Upon default of payment by the Corporate Debtor, the Operational Creditor applied Section 9 to initiate a Corporate Insolvency Resolution Process (CIRP). However, the application was disallowed on the grounds that license fees are not operational debts.

Before the five-member Bench headed by Chairperson Justice Ashok Bhushan, the issue in question was whether the claim of the Licensor for payment of License Fee for use and occupation of immovable premises for commercial purposes is a claim of 'Operational Debt' within the meaning of Section 5(21) of the Code.

The NCLAT was of the prima facie opinion that the application of the word 'Service' is not defined under Section 5(21) of the Code and thus the debt was an 'operational debt'.

According to the Tribunal, Section 14(2) of the IBC deals with supply of essential goods or services to the Corporate Debtor. The observation that 'any debt arising without nexus to the direct input or output produced or supplied by the Corporate Debtor, cannot be considered to be operational debt' is conclusion drawn by this Tribunal contrary to the scheme of the Code. The 'operational debt' as defined in Section 5(21) has meaning much wider than the essential goods and services.

Further, essential goods and services are entirely different concept and the protection under Section 14(2) as provided for is an entirely different context. Thus, the observations made that there has to be nexus to the direct input or output produced or supplied by the Corporate Debtor, is a much wider observation not supported by scheme of the Code.

It went on to discuss previous judgments of the NCLAT in M Ravindranath Reddy v. G Kishan & Ors and Promila Taneja v. Surendri Designe Pt Ltd, which interpreted the term 'services'. With regard to the first judgment, the Bench held,

"The judgment of this Tribunal in Mr. M. Ravindranath Reddy's case does not consider the extent and expanse of the expression 'service' used in Section 5(21) of the Code…the Tribunal in the above case has relied on Section 14(2) of the Code for interpreting 'service', which was only a very restricted meaning of service. We are thus of the view that the judgment of this Tribunal in Mr. M. Ravindranath Reddy does not lay down the correct law."

In Promila Taneja's case, the Tribunal reiterated the view taken in M Ravindranath Reddy and held that the definition of 'service' under the Consumer Protection Act, 2019 and the Central Goods and Services Tax Act, 2017 was not relevant. In the present case, it held,

"...where Agreement itself contemplates payment of GST for the services under the Agreement, on which GST is payable, the definition of 'service' under Central Goods and Services Tax Act, 2017 cannot be said to be irrelevant. More so, even if an expression is not defined in the statute, the meaning of the expression in general parlance has to be considered for finding out the meaning and purpose of expression…"

Overruling the two judgments, the Bench held,

"...in the present case, debt pertaining to unpaid license fee was fully covered within the meaning of 'operation debt' under Section 5(21), and the Adjudicating Authority committed error in holding that the debt claimed by the Operational Creditor is not an 'operational debt'."

The Bench thereby admitted the present appeal.