NCLAT reiterated that pre-CIRP rental claims were classified as operational debts, not CIRP costs.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan and Technical Member Mr. Barun Mitra reviewed an appeal and held that claims for rent or damages adjudicated before CIRP commencement, where the corporate debtor is not a going concern, do not qualify as CIRP costs but are treated as operational debts under the IBC.
This case concerns an appeal before the National Company Law Appellate Tribunal (NCLAT) challenging an order dated May 9, 2023, issued by the National Company Law Tribunal (NCLT), New Delhi Bench (Court-II), regarding the classification of rental claims and possession rights under the Insolvency and Bankruptcy Code, 2016 (IBC). The dispute centred around whether arrears of rent and damages owed to the appellant by the Corporate Debtor should be classified as costs incurred during the Corporate Insolvency Resolution Process (CIRP) or as operational debt.
The background facts indicate that the appellant's predecessor executed a lease deed on April 4, 2012, leasing an industrial shed and open space to the Corporate Debtor for a period of seven years at a monthly rent of Rs. 21,83,000. The appellant subsequently acquired ownership of the property through a settlement deed registered on March 18, 2015. After the Corporate Debtor defaulted on rent payments from December 2014, arbitration proceedings ensued, culminating in an award on September 7, 2016, directing the Corporate Debtor to pay substantial arrears and damages until possession was handed over. The appellant’s execution petitions remained pending when the CIRP commenced on February 3, 2021.
The appellant filed a Form-B claim seeking Rs. 12,18,30,000 as rent payable between May 1, 2015, and February 15, 2021. Following the liquidation order dated October 18, 2022, the Liquidator categorized these claims as operational debt rather than CIRP costs, prompting the appellant to file an appeal under Section 42 of the IBC.
The NCLAT held that the appellant’s claims did not qualify as CIRP costs under Section 5(13) of the IBC. It emphasized that the Corporate Debtor had ceased paying rent long before the CIRP began and that the lease deed had effectively expired. The Tribunal also found that the moratorium under Section 14(1)(d) did not prejudice the appellant, as the arbitral award had already provided remedies and execution proceedings had been pursued.
Rejecting the appellant's reliance on precedents such as Mack Star Marketing Private Limited v. Ashish Chhawchharia and Prerna Singh v. Committee of Creditors, the NCLAT distinguished these cases, noting that they involved ongoing license fees rather than damages already adjudicated by arbitration. Instead, the Tribunal concurred with the respondent’s reliance on precedents like JAS Telecom Pvt. Ltd. v. Eolane Electronics Bangalore Pvt. Ltd., which excluded rent claims predating the moratorium from CIRP costs.
The NCLAT reiterated criteria established in Avil Menezes, Liquidator of Sunil Hitech and Engineers Limited v. Abdul Qudduskhan and Another, REEDLAW 2024 NCLAT Del 05544, for CIRP costs, which include maintaining the corporate debtor as a going concern and CoC-approved expenses for essential goods and services. The Tribunal found that the appellant’s claims did not meet these requirements, as the Corporate Debtor was not a going concern, and no evidence existed that premises usage during the CIRP period warranted classification as CIRP costs.
In conclusion, the NCLAT dismissed the appeal, affirming the NCLT's order and upholding the classification of the appellant's claims as operational debt. The Tribunal emphasized that the appellant retained the right to recover their dues through the waterfall mechanism prescribed under Section 53 of the IBC.
Mr. Abhijeet Sinha Sr. Advocate with Mr. Abhinav Hansaria and Mr. Aditya Shukla, Advocates represented the Appellants.
Mr. Sumant Batra, Ms. Nidhi Yadav and Mr. Sarthak Bhandari, Advocates appeared for the respondent.
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