Jurisdiction of NCLT qua Rent Court under Insolvency and Bankruptcy Code, 2016
Associate at M/s Parimal K Shroff& Co.
Before starting the topic lets go back to the purpose for enactment of the above legislations.
I. Rent Acts/ and Laws
Pre-independence under the British rule, the first Rent Law was passed during the Bombay Presidency in 1915, and afterwards in 1939. Later on, it was replaced by the Bombay Rent, Hotel and Lodging House Rates Control Act, 1947. The said Act was amended in 1971 and again 1999. The said Act was repealed and the Maharashtra Rent Control Act, 1999 came into force on 9th March, 2009 with the assent of President of India. It has substituted all the previous Acts in an attempt to standardize the rental housing market in the State (hereinafter referred to as the said “Act”). This Act provides for a clear set of rules for both Landlords and Tenants.
Land and land related disputes are State subjects mentioned in List II of Indian Constitution, under which states have exclusive rights to make or repeal laws. Hence, states can repeal or amend existing rental laws or pass new laws to regulate rental housing, with MTA as a reference. Dispute pertaining to Land falls in Item No. 18, List II of Constitution of India.
It is necessary to refer Section 33 of the said Act which is a overriding clause:-
PROVISIONS REGARDING JURISDICTION OF COURTS, SUITS, APPEALS, PRACTICE AND PROCEDURE
JURISDICTION OF COURTS.
33. (1) Notwithstanding anything contained in, any law for the time being in force, but subject to the provisions of Chapter VIII, and notwithstanding that by reason of the amount of the claim or for any other reason, the suit or proceeding would not, but for this provision, be within its jurisdictions,-
(a) In Brihan Mumbai, the Court of Small Causes, Mumbai,
(b) In any area for which a Court of Small Causes is established under the Provincial Small Causes Courts Act, 1887, such court, and
(c) Elsewhere, the court of the Civil Judge (Junior Division) having jurisdiction in the area in which the premises are situate or, if there is no such Civil Judge, the court of the Civil Judge (Senior Division) having ordinary jurisdiction, shall have jurisdiction to entertain and try any suit or proceeding between a landlord and a tenant relating to the recovery of rent or possession of any premises and to decide any application made under this Act (other than the applications which are to be decided by the State Government or an officer authorised by it or the Competent Authority); and subject to the provisions of sub-section 2), no other court shall have jurisdiction to entertain any such suit, proceeding, or application or to deal with such claim or question.
(2) (a) Notwithstanding anything contained in clause (b) of sub-section (1), the District Court may at any stage withdraw any such suit, proceeding or application pending in a Court of Small Causes established for any area under the Provincial Small Causes Courts Act, 1887, and transfer the same for trial or disposal to the Court of the Civil Judge (Senior Division) having ordinary jurisdiction in such area;
(b) where any suit, proceeding or application has been withdrawn under clause (a), the Court of the Civil Judge (Senior Division) which thereafter tries such suit proceeding or application, as the case may be, may either re-try it or proceed from the stage at which it was withdrawn;
(c) The Court of the Civil Judge trying any suit, proceeding or application withdrawn under clause (a) from the Court of Small Causes, shall, for purposes of such suit, proceeding or application, as the case may be, be deemed to be the Court of Small Causes.”
II. Insolvency Laws
Prior to the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the said “Code”) Insolvency laws were governed by two Statute laws viz. The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency Act, 1909. The former was applicable to presidency towns such as Calcutta, Bombay and Madras, whereas the latter was applicable to the whole of India, except these towns. Thereafter Insolvency and Bankruptcy came in force. Dispute pertaining to Insolvency falls in Item No. 9, List III of Constitution of India.
It is necessary to refer Section 238 of the Code which is an overriding clause:
“238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
It is no doubt that tenancy disputes are tried before Small Causes Court who has the exclusive jurisdiction to try and decide cases arising under Rent laws and Agreements entered between the parties to the lis.
If in the interregnum, a tenant is declared as Insolvent viz. i.e proceedings are initiated under Section 7 and 9 of the Code, then what will be the fate of the eviction suit and/or remedy available to the landlord.
Can the landlord say or raise a plea before NCLT as there exists a pre-existing dispute, proceedings before the NCLT should not hamper the eviction proceeding pending in the Small Causes Court and hearing of eviction suit should not be stayed as stated under Section 14 of the Code. Can it even be said that provisions of the Code cannot prevail over the Rent Act.
IV. Definition of Dispute
The Code only define the term ‘dispute’. For this reference can be made to two relevant decisions on this issue. For deciding this fact, it is necessary to determine what does a pre-existing dispute means?
1. Ahluwalia Contracts (India) Ltd v Raheja Developers Ltd-  ibclaw.in 10 NCLAT
- In this case Ahluwalia Contracts (India) Ltd (“Operational Creditor“) entered into agreements with Raheja Developers Ltd (“Corporate Debtor“) for construction and plumbing works at Gurgaon, Haryana. The Operational Creditor served a demand notice dated 28 April, 2018 under Section 8 of the Code for unpaid invoices amounting to Rs. 3.37 Crores in respect of works performed for the Corporate Debtor.
- The Corporate Debtor instead of responding to the demand notice within the stipulated period of 10 days, but issued Notice invoking arbitration almost after one month from the date of receipt of the demand notice. The Operational Creditor preferred an application under Section 9 of the Code before NCLT.
- The NCLT observed that the dispute existed prior to the Issuance of Demand Notice to the Corporate Debtor and held that the claim raised by the Operational Creditor fell within the ambit of disputed claim and therefore, rejected the application in accordance with Section 9(5)(ii)(d) of the Code. The Tribunal relied upon the arbitration notice sent by the Corporate Debtor to the Operational Creditor after it was served with the demand notice.
- The Operational Creditor challenged the order before NCLAT wherein it was held that the existence of dispute must be pre-existing i.e. it must exist before the receipt of the Demand Notice or invoice. If it comes to the notice of the Adjudicating Authority that the operational debt is exceeding Rs. 1 lakh and the application shows that the aforesaid debt is due and payable and has not been paid, in such case, in absence of any existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt, the application under Section 9 cannot be rejected and is required to be admitted.
- The Appellate Tribunal also perused the Supreme Court’s decision in Innoventive Industries Ltd. v. ICICI Bank and Anr- (2017) ibclaw.in 02 SC and observed that a ‘claim’ means a right to payment even if it is disputed.
- The Appellate Tribunal also observed that it was not in dispute that the arbitration proceeding was initiated by the Respondent after about one month from the date of issuance of demand notice under Section 8(1). Hence, the Respondent cannot rely on the arbitration proceeding to suggest a pre-existing dispute.
2. Rajratan Babulal Agarwal vs Solartex India Pvt. Ltd. & Ors. (2022) ibclaw.in 123 SC
- In this case there was an agreement Solartex/Operational Creditor (‘OC’) to supply 500 metric tonnes coal to Corporate Debtor (“CD”) and to its sister-concern, STDPL. The purchase order was dated 27.10.2016, and CD was supplied 412 metric tonnes between 28.10.2016 and 02.11.2016. The Appellant was the ex-director of CD. Correspondence was made between CD and OC via emails on 30.10.2016 and 03.11.2016, with CD mentioning about the inferior quality of supplied coal. The OC replied to CD’s email on- 04.11.2016 stating that further supply has been stopped. Notice was raised by the OC for Rs. 21, 57,700/- against which CD demanded Rs. 4.44 crores due to coal not being of promised quality.
- The CD also filed a civil suit claiming damages against OC. Pursuant to this, the National Company Law Tribunal (“NCLT”) on 28.05.2020, admitted the application filed by OC under Section 9 of the IBC, dismissing CD’s reply which stated that there was pre-existing dispute and so application should be dismissed. The matter went in appeal before the NCLAT where it was rejected thereby affirming NCLT’s order, and hence the matter came up before Supreme Court.
- The Apex Court perused the purchase order, which mentioned that coal must be of a certain quality in terms of its characteristics. It was stated that the transaction could be treated as a ‘sale of goods by description’ as the contract for sale related to 500 metric tonnes of Indonesian coal. The Court also held that there indeed was an email dispatched to the OC on 30.10.2016 which was not considered by the NCLAT as there was no reference to purchase order dated 27.10.2016 and the concern raised in the email was qua purchase order dated 11.10.2016 which related to the sister concern of CD; and secondly, that there is no reference to the 30.10.2016 email in reply to the statutory notice under IBC. An express reference was made to the CD in the email and only thereafter were the issues relating to inferior quality of coal given; It was CD itself who ventilated the complaint about inferior quality of coal via 03.11.2016 email.
- Accordingly, Section 9 application filed by OC was dismissed.
V. issues in the past
1. An Issue has arisen in the past pertaining to conflict between RERA and the Code. The Apex Court in the case of Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors. – AIR 2019 SC 405 while examining dispute between RERA and Code held that even by a process of harmonious construction, RERA and the Code must be held to co-exist, and, in the event of a clash, RERA must give way to the Code. RERA, therefore, cannot be held to be a special statute which, in the case of a conflict, would override the general statute, viz. the Code.
Similarly, The Apex Court placed reliance in the case of Swaraj Infrastructure Private Limited v. Kotak Mahindra Bank Limited  ibclaw.in 09 SC which held that Debt Recovery Tribunal proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and Winding up proceedings under the Companies Act, 1956 can carry on in parallel streams.
2. SARFAESI ACT qua Maharashtra Rent Control Act, 1999
(1) Vishal N. Kalsaria Vs. Bank of India (2017) ibclaw.in 37 SC
In this case a two Judges Bench of the Supreme Court was confronted with the question as to whether a “protected tenant” under the Maharashtra Rent Control Act, 1999 could be treated as a lessee, and whether the provisions of the SARFAESI Act would override the provisions of the Rent Control Act. Thus the legal question before the Court was ‘How the right of the protected tenant could be preserved in cases where the debtor landlord secures a loan by offering the very same property as a security interest to the bank or financial institution?’
The Apex Court summed up as follows:-
(i)The provisions of the SARFAESI Act cannot be used to override the provisions of the Rent Act. The landlord cannot be permitted to do indirectly what he has been barred from doing under the Rent Act.
(ii)Even though Section 35 of the SARFAESI Act has a non obstante clause, it will not override the statutory rights of the tenants under the Rent Control Act. The non obstante clause under Section 35 of the SARFAESI Act only applies to laws operating in the same field.
(2) Bajarang Shyamsunder Agarwal vs Central Bank Of India (2019) ibclaw.in 129 SC
The Apex Court relied on the findings laid down in Vishal Kalsaria and held that,
- if a valid tenancy under law is in existence even prior to the creation of the mortgage, the tenant’s possession cannot be disturbed by the secured creditor by taking possession of the property. The lease has to be determined in accordance with Section 111 of the Transfer of Property Act for determination of leases. As the existence of a prior existing lease inevitably affects the risk undertaken by the bank while providing the loan, it is expected of Banks/Creditors to have conducted a standard due diligence in this regard.
- Where the bank has proceeded to accept such a property as mortgage, it will be presumed that it has consented to the risk that comes as a consequence of the existing tenancy. In such a situation, the rights of a rightful tenant cannot be compromised under the SARFAESI Act
VI. Landlord as Operational Creditor
There are number of judgments passed by NCLT and NCLAT which say Lease rents fall under the definition of Operational Debt.
1. Ravindranath Reddy v G. Kishan and others  ibclaw.in 95 NCLAT
The facts of this case are:
- Respondents were Licensors of a company named M/s Walnut Packaging Private Limited (Corporate Debtor). Appellant is the Director of the Corporate Debtor. Tenancy of the company was yearly.
- Company fell in arrears of rent and thereafter a legal notice to hand possession was served on the Company. The Company failed to hand back the possession of the property.
- An eviction suit was filed against the Corporate Debtor in a civil court.
- Two principal issues were to be considered by NCLT
(a) Whether a landlord by providing leased property to the Corporate Debtor will be deemed to be providing service and hence will fall under the definition of ‘operational debtor’? and
(b) Whether Petition filed under Section 9 of the Code by the was maintainable as there was a pre-existing dispute?
- After hearing both sides at great length and also referring the Bankruptcy Law Reform Committee report of November 2015 dated, the Tribunal held that if claim of a debit does not fall under the three categories as defined under Section 5(21) of the Code, the claim cannot be categorized as an Operational Debt.
- The Tribunal held that ‘rent dues on property’ is not included in the ‘debt in respect of re-payment of dues’ as enunciated in Section 5(21) of the Code.
- Further, in this case, Quit notice under Section 106 of Transfer of Property Act, 1882 was issued prior to Demand Notice under Section 8 of the Code.
- Therefore, Application under Section 9 was dismissed as there existed prior dispute pertaining to increase of rent amount and such question can be decided on basis of evidence and by the competent court having jurisdiction.
- Anup Dubey vs NAFED– (2020) ibclaw.in 293 NCLAT
The facts of this case are:
- NAFED and Corporate Debtor Umarai Worldwide Private Limited entered into Leave and License Agreement for period of 3 years from 1st October, 2015.
- The Corporate Debtor started defaulting in the payments as stipulated in the agreement from September 2017. The Operational Creditor contended that despite repeated reminders to pay the ‘outstanding debt’, and serving an eviction notice, the Corporate debtor did not pay the outstanding debt. Subsequently, the Operational creditor sent a demand notice under section 8 of the IB Code. The Corporate debtor, in its reply, denied all the claims and requested for renewal of the agreement.
- NCLT admitted Section 9 application on the ground that Corporate debtor had confirmed to pay the outstanding dues for rent as established by the agreement and it has committed a default by not paying the debt due to the Operational creditor.
- This decision was challenged before NCLAT.
- The Tribunal placed reliance on Bankruptcy Law Reforms Committee which says treatment of lessor/landlords as operational creditors. However, the definition only included claims relating to ‘Goods and Services’ within the purview of ‘Operational debt’. So, the Court observed that according to the terms and conditions mentioned in the Leave and License Agreement the appellants have leased out the premises for commercial purposes which comes under the meaning of ‘Service’ for the purpose of Section 5(21) of the Code.
- It was held that a prior dispute did not truly exist between the parties and the Corporate Debtor had knowledge about the ongoing proceedings. It was further held that NAFED shall be treated as operational creditor with regard to the terms and conditions of the Leave and License Agreement. The debt was due and payable as the Corporate Debtor continued to be in possession of the Storage facility even after the termination of the agreement. It was also held that no prior dispute existed between the parties. It was held there is no ‘Pre-Existing Dispute’.
- NCLAT relied upon general usage of the term ‘services’ and has even relied upon the definition contained in Section 2(42) of the Consumer Protection Act, 2019 and Schedule II of the Central Goods and Services Tax Act, 2017. The reason being that a lease out for commercial purpose is “services” as the owner of the leased premises is required to pay service tax.
3. Promila Taneja v. Surendri Design Pvt.Ltd. (2020) ibclaw.in 428 NCLAT
- Promila Taneja had entered into a Lease Agreement with a lock-in period of 36 months beginning from February 01, 2016 with Surendri Design Private Limited. It was stated that the Respondent had suffered losses due to demonetization and change in entry to the mall. The Respondent stated that the Agreement was terminated in July, 2017 due to the said change of circumstances.
- NCLT dismissed Section 9 application as there was a pre-existing dispute.
- It was contended by Appellant that the conclusion of NCLT that there was a pre-existing dispute, was baseless. It was submitted that, the Respondent had informed the Appellant that it was facing losses and wanted to vacate the premises, irrespective of the lock-in period in the Agreement. Subsequently, the Respondent had unilaterally stopped making payments of rent. Thus, it was submitted that in the given circumstances it cannot be treated as a pre-existing dispute.
- It was further submitted that subsequent to the judgment of the NCLAT in the matter of Mr. M. Ravindranath Reddy (supra), the NCLAT had in the matter of Anup Shushil Dubey v. NAFED and othersheld that when the space provided is for commercial purposes, the arrangement has to be treated as services considering the definitions as seen in the Consumer Protection Act and the Central Goods and Services Tax Act, 2017. Therefore, it was submitted that the Appellant should also get relief on parity, considering the view taken in the recent judgment of Anup Shushil Dubey (supra).
- The Respondent contended that the Appellant was informed by way of an e-mail that the lease deed had already been terminated due to change of circumstances. The Respondent contended that the notice under Section 8 of the IBC was sent on August 06, 2018 and even if it was to be presumed that rent can be considered as an Operational Debt, it shows that there was pre-existing dispute.
- The NCLAT made reference to Section 3(37) of the Code, which provides that if the undefined words and expressions used in the IBC can be found defined in the Acts mentioned in the Section, they can be directly imported.
- The NCLAT held that the definition of “Service” and “Activities” cannot be imported from the Consumer Protection Act, 2019 and the Central Goods and Services Tax Act, 2019 as both the Acts do not find a mention in Section 3(37) of the Code.
- The NCLAT observed that, in its judgment of Mr. M. Ravindranath Reddy (supra) and after referring to the Bankruptcy Law Reforms Committee Report, November concluded that lease of immovable property cannot be considered as a supply of goods or rendering of any services and thus, cannot fall within the definition or Operational Debt.
4. Jaipur Trade Expocentre Private Limited vs Metro Jet Airways Training Private Limited (2022) ibclaw.in 478 NCLAT
In this case, a Five Bench was constituted to decided whether the decision in the case of M. Ravindranath Reddy(supra) is correct and Whether claim of Licensor for use and occupation of immovable property for commercial purpose is a claim for ‘Operational Debt?’
- Jaipur Trade Expocentre Private Limited entered into a five-year license agreement with Metro Jet Airways Training Private Limited in 2017 to take on license a building for the purposes of running an educational establishment. On account of defaults of the Metro Jet i.e Licensee in paying the monthly license fee, Licensor issued a demand notice to the Respondent-licensee under Section 8 of the Code in 2019.
- Metro Jet did not respond to Demand Notice. Application under Section 9 of the Code was filed by Jaipur Trading before NCLT for the initiation of CIRP. The NCLT dismissed the application holding that a claim arising out of grant of license to use immovable property would not fall under the category of a claim in respect of providing goods or services as per the definition of “operational debt” under Section 5(21) of the Code, and therefore, a claim for unpaid licence fees was not an ‘operational debt’ being capable of adjudication under the Code.
- The said decision was challenged before NCLAT.
- During the course of hearing, NCLT placed reliance on various definitions of Service and also held that Act does not provide for definition of ‘‘services’
- The Tribunal placed reliance on Section 2(102) Central Goods and Service Tax Act, 2017, which defines the term ‘services’. The NCLAT placed reliance on the judgment of the Apex Court in Keshavlal Khemchand and Sons Private Limited and Ors. v. Union of India and Ors., (2015) 4 SCC 770, which observed that when a statute does not contain a definition of a particular expression employed in it, it is the duty of the court to expound the meaning of an undefined expression in accordance with the law of well-established principles of statutory interpretation.
- In doing so, the NCLAT placed reliance on its judgment of Anup Sushil Dubey (supra) wherein the interpretation of the term ‘service’ as contained in the Consumer Protection Act, 2019 was held to include ‘provision of facilities towards real estate..’. Expanding the definition of the term ‘operation’ referring Iyer’s Law Lexicon, the NCLAT observed that an operational debt is a debt that is incurred in the conduct of principal activities of an enterprise, and hence the Respondent’s debt towards license fees for an immovable property to conduct an educational enterprise would be an operational debt under Section 5(21) of the Code.
- NCLAT also referred to Para 5.2.1 of the Bankruptcy Law Reforms Committee Report (2015) which observed that a ‘lessor who rents out space is an operational creditor’.
- NCLAT distinguished the facts in the present appeal from M. Ravindranath Reddy (supra) which dealt that claim for enhancement of lease rent in respect of which legal proceedings are instituted prior to initiation of proceedings under the Code. .
- The Bench also overruled the judgment of Ravindranath Reddy v G. Kishan and others.
The Judgment in the case of Promila Taneja is challenged before Apex Court vide Civil Appeal No. 4237 of 2020 and is pending and matter is listed for hearing on 31st July, 2023 where the Apex Court will have to determine whether the decision either in the case of M. Ravindranath Reddy or Anup Sushil Dubey vs NAFED is correct?
- There is no such decision uptil now passed by NCLT, NCLAT, High Court and Supreme Court of India which says in case of conflict between IBC and Rent Control legislation, the latter will prevail as disputes under Insolvency falls in Concurrent List.
- The NCLAT in Jaipur Trade Expocenter Pvt. Ltd. have expanded the scope to hold that Lease Rent is operational debt but in doing so did it miss the fact that Rent Control Laws are governed by altogether different Statute law and exclusive jurisdiction vest with Court of Small Causes/ Rent Courts or Tribunal.
- It relied on BLRC Report, 2015 but did not refer overriding Clause as stated in Section 33 of Rent Act.
- So can it be said the decision in Ravindranath Reddy was rightly passed and NCLAT lost sight of the fact of the decision of Supreme Court in the case of Vishal Kalsaria(supra) which had held that provisions of SARFAESI cannot override Rent Act.
- Disputes pertaining to Landlord and tenant falls in State List and Insolvency falls in Concurrent List in Constitution of India and this is also one of the reason IBC should yield to Rent legislation
- The Apex Court while deciding Promila Taneja will also have to consider the dictum of ‘Pre-existing Dispute’ which was succinctly explained in the case of Solartex. As while deciding the case of Jaipur Trade, the Judgment in the case of Solartex was not yet passed.
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