The two types of debts that are recognized by the Insolvency and Bankruptcy Code are financial and operational. According to the aforementioned provision, a financial creditor and an operational creditor can effectively and efficiently initiate a Corporate Insolvency Resolution Process, also known as CIRP, under Section 7 and Section 9 of the Code, respectively.
However, due to the restrictive definition of recognition of various debts, if there is a debt, other than an operational or financial debt, the creditor will not qualify to apply under Sections 7 or 9 of the Code. Thus determination of nature of debt becomes crucial before applying for insolvency code.
Now, this effectively gives rise to an inquisitive question that does insolvency code also covers lease and rentals dues and if they can be covered under operational debt. Given the intricacy of the situation, multiple views have been offered. The NCLT Delhi and NCLT Hyderabad have effectively or rather stringent have held that lease rent dues are not be included under operational debt.
Whereas, NCLT Kolkata, NCLT Chennai and NCLT Ahmedabad have taken a contrarian view and have maintained that such dues could qualify as operational debt. In addition to this, a landlord can be counted as an operational creditor under the Code. A landlord can be counted as an operational creditor as he provides the lease that can be treated as equal to providing services to the corporate debtor.
The intricate issue of rentals
In order to answer the question, if the Bankruptcy Law Reforms Committee Report is scrutinized, it differentiates between a financial creditor and an operational creditor. It emphatically indicates towards the fact that the lessor, that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease. Thus, here it can be noted that the BLRC’s recommendation treats lessors, also known as landlords, as operational creditors.
However, the NCLAT clearly clarified that the legislature has not completely adopted the BLRC report. Thus, it is to be noted that only the claims in respect of goods and services have been kept in the definition of operational creditor and operational debt. But why didn’t NCLAT give the BLC committee’s recommendation any heed?
This is because NCLAT believes that the definition does not give scope to interpret rent dues as an operational debt. Thus slashing hopes of rents being included in the wider definition of the IBC code, the NCLAT gave stricter interpretation to Section 5(21) of the Code. In an unadorned explanation it means, that only when a claim by way of debt falls within one of the three categories mentioned in Section 5(21) will it be effectively categorized as an operational debt.
Hence if the past judgements of NCLAT and of various other benches of the NCALT are to be scrutinized, it highlights the diverse, multiple and intricate views on the contentious subject matter. Given the intricacy of the issue and the NCALT’s stringent stand against a wider definition, the issue has now travelled up to the apex Court. As aforementioned, considering, the conflicting stands taken by various benches and courts, it has become imperative for the Supreme Court to consider the larger issue of such claims.