Payment of Rent during the CIRP Process – Plight of the Landlords or Relief to Corporate Debtors?
Ramsha Khan
B.A.LL.B. (Hons), Faculty of Law, Aligarh Muslim University
Introduction
Insolvency and Bankruptcy Code, 2016[1] (hereinafter referred to as “IBC”) was introduced in the Indian legal system when the companies were found to be in financial distress with nearly no way out. Since then, the policymakers, as well as the courts, have tried to harmoniously build a balance between the interests of the Creditor and the Debtor. However, the interest of third parties associated with the Corporate Insolvency Resolution Process (CIRP) has remained undefined. A third party also discussed in this write-up is the ‘Lessor of the Corporate Debtor.’ When the insolvency application is approved under Section 7 or Section 9 or under, Section 10 of the IBC, the CIRP is initiated, and a moratorium is imposed under Section 14.
Section 14 has expressed diktat that no money can be recovered from the debtor going through the CIRP, including the rent. The ongoing cost becomes the company’s money to keep the going concern, and pre-CIRP dues also become part of the corporate debtor. The only way it leaves for the claimant is to fill out Form G to raise their claim, which would be disbursed as per the Watershed mechanism enumerated under Section 53 of the IBC.
However, the central issue that languishes for the Lessor is unpaid dues and the continuum delay in payment that strikingly harms the commercial interest of the Lessor. The pre-CIRP dues and funds about the going concern could be paid back in the form of CIRP costs as highlighted by several Judgments of Hon’ble NCLAT and NCLT. However, the lessor, the operational creditor, is placed below in the disbursement of CIRP after the final approval of the resolution plan. In terms of business, the whole mechanism of IBC has put the business of Landholders on the back burner, making the commerce of Real Estate highly risky and unworthy of investment.
There must be a balancing of interest in the matters relating to the Lease and Rental obligations of the Corporate Debtor towards the owner of the leased property.
Recognition of Rent in the Code
It had been previously held in various decisions of the Hon’ble National Company Appellate Tribunal (hereinafter referred to as “NCLAT”) that the rent of the property on lease does not come under the definition of “Operational Debt” for the purpose of Sec. 5(21) of the IBC applying the “Direct Nexus Test”. However, this was overruled in Jaipur Trade Expocentre Private Limited v. M/s Metro Jet Airways Training Pvt. Ltd.[2] The reason behind this jurisprudence was that the lease was considered a “service”, and the rent was a “license fee,” which eventually fell under a claim of operational debt. Post this Judgement, the position of the rent and lease dues has been settled.
Rental dues when a Moratorium is imposed
The ability of an owner or landlord to reclaim property that they are in possession of or that a firm undergoing CIRP is occupying is impeded by Section 14 of the IBC. Section 14 (1) (d) reads as follows,
“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely;
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”
This provision somehow restricts the rights of the landlords or the owner of the property. So, to balance the interests of the landowners, an explanation to Section 14(1)(d) was inserted via the IBC (Amendment) Act, 2020[3], which stated that during insolvency, licenses, permits, and similar rights issued by authorities cannot be suspended or terminated solely due to insolvency as long as the debtor continues paying current dues.
Relevant Case Laws
The NCLT, through its various judgements, has recently tried to settle the issue of handling the rental dues after the insolvency proceedings have started. The most crucial judgement in this regard is Prerna Singh v. CoC of M/s Xalta Food and Beverages Pvt. Ltd.[4] In this case, the court clarified that the lessor cannot reclaim their property from the debtor during the moratorium period as per the IBC. Hence, the rent owned during the period must be included as a part of the CIRP costs to ensure the protection of the lessor’s financial interests, even during the insolvency process.
Similarly, in the case of Dalip Kumar Singh Boora V Super Multicolor Printers Private Limited through Mr Rajiv Khurana (Liquidator)[5], the Hon’ble NCLT, referring to Prerna Singh’s judgement, held that rent, as per the lease deed, is payable to the applicant by the respondent-liquidator. Thus, the rent should be calculated considering the percentage increase clause in the lease deed. The rent payable to the applicant should be treated as CIRP cost and will be recovered in accordance with the provisions of Section 53(1)(a) of the Code. Further, the liquidator was directed to hand over the possession of vacated premises.
In PAR Formulations Pvt. Ltd. V Print House (India) Pvt. Ltd. And others[6], the Appeal was filed against the order of the Adjudicating Authority, which approved the Resolution Plan in the CIRP, as it affected the rights of the appellant regarding the termination of the existing Leave and License Agreement. The NCLAT, in the instant case, held that the Appellant may be given time to shift its operation to another premises. Until then, the Appellant-Debtor was held to be obliged to pay the license fee, water, and electricity charges to the Successful Resolution Applicant, who would subsequently return the security deposit amount in accordance with the lease agreement to the Appellant.
In another case titled Executive Engineer Uttar Gujrat VIJ Company Ltd V Mr. Devang P Samapat RP of M/s. Kanoovi Foods Pvt. Ltd[7], the Applicant, filed an appeal before the NCLAT against an order of the Adjudicating Authority whereby the debtor was directed to pay the electricity charges during the CIRP period. In its decision, the NCLAT held that Sub-section 2A of Section 14, read with Regulations 31 and 32 of the Insolvency Resolution Process for Corporate Persons Regulations, 2016, makes it clear that if the supply is for the managing the operations of the Corporate Debtor, the supply cannot be interrupted during moratorium except where the Debtor has failed to pay the dues which arise from the supply during such period. Hence, the consumption costs will be a part of CIRP, which can eventually be recovered when the Resolution Plan is approved.
Conclusion
It is apparent from the above cases that the courts, time and again, have ensured that the tenancy costs are recoverable under the IBC. The rulings have emphasised that the rents and utility charges incurred by the debtor are included in the CIRP costs. These decisions, though, attempt to balance creditors’ rights with the need to maintain the debtor’s operations during insolvency. Still, they have yet to successfully develop a mechanism so that the interest of the real estate business is saved. The IBC mechanism, though formed to save the company at stake, also owes a public duty to consider the requirements stake of third parties.
References:
[2] (2022) ibclaw.in 209 NCLAT.
[3] Act No. 1 of 2020.
[4] (2021) ibclaw.in 610 NCLAT.
[5] 2020 SCC OnLine NCLT 1909.
[6] (2021) ibclaw.in 581 NCLAT.
[7] (2021) ibclaw.in 241 NCLAT.
