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Whether the Lease rent covered under the operational creditor or not

This article written by Shivani Sharma, Law Student at Asian Law College Noida

lease rent

Insolvency and Bankruptcy Code:

Section 5(8) of Insolvency and Bankruptcy Code, 2016 define the term “financial Debt”:- As per clause (d) of the said section the amount of any liability in respect of any lease or hire purchase contract which is deemed as finance or capital lease under the Indian Accounting Standard or such other accounting standard as may be prescribed.

Meaning of Financial or Capital Lease:

A finance lease (called a capital lease in US GAAP) is a lease in which the risks and rewards inherent in the leased asset are transferred to the lessee under the lease arrangement. In this lease the Lessor is the legal owner of the asset till the duration of the lease. The ownership transfer option at the end of the lease period is available to the lessee. (If agreed). For a lessor, the financial lease is nothing but utilisation of his money. In essence, he finances the asset and earns the interest on his money.

Section 5(21) of Insolvency and Bankruptcy Code, 2016 define the term “Operational Debt”. It is divided in three parts (a) claim in respect of provision for goods and services; (b) employment or debt in respect of dues; and (c) such repayment of dues should arise under any law in force at that time.

If the lease is the finance lease then it cover under the ambit of Section 5(8) of IBC 2016 and lessor can claim as financial creditor. It will define by the term and conditions prescribed under the lease agreement.

As Per the NCLAT vide order dated 17.01.2020 in Ravindranath Reddy v. G. Kishan held that rental dues arising out of a lease agreement do not fall under the definition of “operational debt” under section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). There are various others Judgement on which it is clearly indicate that Rental dues or payment of rent of the premises leased out cannot treated as operational creditor.

These as follows:

➢1. NCLT NEW DELHI SINGLE BENCH Jindal Steel and Power Ltd. v. DCM International Ltd. Company Appeal (AT)(Insolvency) No 288/2017.

➢2. NCLT MUMBAI BENCH Citicare Super Speciality Hospital v. Vighnaharta Health Visionaries Pvt. Ltd dismissed the petition which was about arrear of licence fee.

➢3. NCLT NEW DELHI BENCH Parmod Yadav and Anr v. Divine Infracon (P) Ltd

➢4. Although it is still a disputed matter. Because different view has been expressed by authorities.

While NCLAT‘s consider only the statutory provisions. While an important ruling of Supreme Court in Mobilox Innovations Private Ltd vs Kirusa Software Private Ltd taken the view of BLRC Report which mentions the inclusion of a lessor under operational creditor. Further, the NCLAT casually uses the terms “goods and services” interchangeably with “essential goods and services”. It further negates the meaning of goods and services provided under the Central Goods and Service Tax Act, which includes lease and rental agreements as part of goods and services.

The lease rent should be paid by the RP only for the “Corporate Insolvency Resolution Process’ period i.e. commencement of insolvency process till the premises get vacated. The RP shall segregate the claim into two segment i.e. “post moratorium” and “pre moratorium” and thereafter shall make arrangement of funds to pay the Lease rent only for the period of post moratorium. The cost incurred to be treated as cost of resolution/CIRP cost.

(the provisions of the IBC to be read with Regulations 31, 32, 33 along with the definition of ‘insolvency resolution process cost’ defined u/s 5 (13)(e)

Lease can be continued after the commencement of CIRP process if RP deems fit after approval of COC as after commencement of CIRP lease rent should be paid by RP which become the part of CIRP Cost.

As per Section 14 (1) the moratorium is declared by Adjudicating Authority for prohibiting the actions of recovered, transfer of any property which is in possession or occupied by the Corporate Debtor. It is clarified that lease cannot be terminated by lessor during CIRP. Although he can moved the application before the Adjudicating Authority for praying that the direction must be issued to RP in respect of payment of Rent.

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