Unpaid licence fee is an operational debt under IBC: Five-member Bench of NCLAT decides

The National Company Law Appellate Tribunal (NCLAT) has held that a claim for payment of license fee for use and occupation of immovable premises for commercial purposes is an operational debt within the meaning Section 5(21) of the Insolvency & Bankruptcy Code (IBC) [Jaipur Trade Expocentre Private Limited v. M/s Metro Jet Airways Training Private Limited]..A five-member Bench headed by Chairperson Justice Ashok Bhushan was formed to decide the issue. It also reviewed the application of the word ‘service,’ which is not defined under the IBC, and overruled two earlier judgments while stating that they did not dwell upon the correct meaning of expression ‘service’ used in Section 5(21) of the Code.In this case, the Tribunal referred to the definition of the word ‘service’ from other existing statutes..The facts of the case were that the appellant/operational creditor entered into a license agreement with the corporate debtor for running an educational establishment for a license fee of around ₹4 lakh per month. Due to default in payment, the operational creditor filed an application under Section 9 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP). The application was disallowed by the Adjudicating Authority on the ground that the due license fee was not an operational debt under the Code. The appeal was placed before a two-member Bench, which referred it to a three-member Bench, which in turn referred the issue to a five-member Bench..The two major questions of law before the larger Bench were:1) Whether the Judgment of this Tribunal in M Ravindranath Reddy v. G Kishan & Ors lays down the correct law?2) Whether 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?.Counsel for the appellant submitted that the provision made by the agreement between the parties was a provision of ‘service’ within the meaning of Section 5 (21) of the Code, and thus, the debt was an ‘operational debt’. Counsel for the respondent, however, pleaded that the alleged dues of rent is the subject matter of a civil suit between the parties and that the present appeal was not maintainable. .The Bench at the outset noted that the expression ‘services’ used in Section 5(21) has also not been defined in 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 had 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 were not relevant. In the present case, it held,"...where Agreement itself contemplate 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 expression in general parlance has to be considered for finding out the meaning and purpose of expression...".While 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’.".Advocates Sanjana Saddy, Sanyat Lodha and Harshita Singhal represented the appellants, while Advocates Vikrant Arora and Manish Verma represented the respondents..[Read the Judgment]