Whether legal notice served after filing of an application under Section 9 of IBC qualifies as a pre-existing dispute - Vaibhav Aggarwal v. Mr. Sunil Sachdeva & Anr. - NCLAT, New Delhi Bench

CORAM: Hon’ble Justice Ashok Bhushan, Chairperson and Barun Mitra, Member (Technical)

INTRODUCTION

The case of Vaibhav Aggarwal v. Mr. Sunil Sachdeva & Anr.^[i] is arising out of an appeal filed by Mr. Vaibhav Aggarwal (“Appellant”) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the order (“Impugned Order”) passed by the National Company Law Tribunal, New Delhi (“NCLT”)^[ii] wherein the NCLT had admitted the application under Section 9 of IBC filed by Mr. Sunil Sachdeva (“Respondent No. 1”) and initiated corporate insolvency resolution process (“CIRP”) against Haldiram Fincap Private Limited (“HFPL”).

FACTS

The facts leading to the present case are as follows:

1. HFPL(as the lessee) had entered into a lease deed dated August 28, 2016 (“Lease Deed”), with late Shri Ram Prakash Sachdeva and late Smt. Chand Sachdeva (“Original Lessors”) in respect of the leased property situated at Paharganj, New Delhi. However, upon death of the Original Lessors, their son, the Respondent No. 1 claimed the status of the legal heir. 

2. The lease term was for a period of 12 (twelve) years from August 28, 2016 to August 27, 2028, however, on December 16, 2016, the Lease Deed was assigned, at the request of HFPL, by Respondent No. 1 in favour of Haldiram Bhujiawala Inc. (“HBI”) a sister concern of HFPL.

3. The Respondent No. 1 on February 05, 2019, served a notice to the HEPL for INR 52,64,000 (Rupees Fifty-Two Lakhs and Sixty-Four Thousand Only) for non-receipt of rent and goods and services tax (“GST”) which was followed up by a notice of termination of lease on April 28, 2019, claiming a default amount INR 85,44,000 (Rupees Eighty-Five Lakhs and Forty-Four Thousand Only). No payments were, however, received from HFPL.

4. Thereafter, the Respondent No. 1 issued a demand notice dated September 17, 2019 to HFPL under Section 8 of IBC, claiming an amount aggregating to INR 94,66,000 (Rupees Ninety-Four Lakhs and Sixty-Six Thousand Only). Since no notice of dispute was received from HFPL, the Respondent No. 1 subsequently filed an application under Section 9 of IBC on October 10, 2019.

5. On February 07, 2020, HFPL filed reply to the Respondents No.1’s application under Section 9 of IBC and also filed a civil suit against the Respondent 1 in February 2020.

6. Thereafter, on February 14, 2023, the NCLT vide the Impugned Order, allowed the application filed by Respondent No. 1 and admitted HFPL into CIRP. Aggrieved by the Impugned Order, the present appeal has been preferred by the authorised representative of the HFPL before the National Company Law Appellate Tribunal Principal Bench, New Delhi (“NCLAT”).

ISSUES

The issues in the present case are as follows:

1. Whether payment of rentals dues from the premises leased to HFPL is triggered and qualified to be treated as an operational debt?

    

2. Whether legal notice served after filing of an application under Section 9 of IBC qualifies as a pre-existing dispute?

SUBMISSIONS OF THE PARIES

Submissions of the Appellant

1. The NCLT has disregarded that HBI was not made party to the matter, even though the Lease Deed has been assigned to HBI.

2. Since the Lease Deed has been assigned to HBI after obtaining no objection certificate (“NOC”) from Respondent No. 1, HFPL can no longer be regarded as running any business on the leased premises. Thus, HFPL has no liability to pay any rent and hence the Impugned Order admitting HFPL into CIRP is in violation with the principles of natural justice.

3. No legal documentation has been provided by Respondent No. 1 to prove his ownership of the leased premises as legal heir of the Original Lessors and hence the Respondent No. 1 cannot be treated as an operational creditor to HFPL.

4. The Respondent No. 1 has failed to provide necessary details of payment of conversion charges to Municipal Corporation of Delhi (MCD) which was needed to get health license for commercial usage of the property as per Para 9.1 of the Lease Deed. In absence of such documentation, HBI was unable to commence its business in the leased premises and the leased premises was thus, not usable for commercial purposes, as intimated vide mail dated January 18, 2018. Furthermore, HFPL has sent a legal notice dated October 22, 2019, to Respondent No. 1 intimating inability to do business due to Respondent No. 1’s failure to make payment of necessary charges. In relation to the aforementioned, HBI had filed a commercial suit^[iii] before the District and Sessions Judge, Tis Hazari Courts, Delhi for recovery of INR 1,50,00,000 (Rupees One Crore Fifty Lakh Only) towards loss along with interest which substantiates the existence of pre-existing disputes between the parties.

5. In January 2019, Respondent No. 1 had taken forceful possession of the property from HFPL and filed a commercial suit before the Tis Hazari Court. The institution of the matter before the Tis Hazari pre-dated the demand notice dated September 17, 2019, and hence signifies the pre-existing dispute. It has been settled by the Hon’ble Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited^[iv](“Mobilox Case”) that an application under Section 9 of IBC is ought to be rejected in the presence of pre-existing disputes. 

6. Furthermore, since the Respondent No. 1 had forcefully possessed the property in January 2019, HFPL is not liable to pay any lease rent thereafter. In addition to the same, the Appellant vide notice dated April 28, 2019, terminated the Lease Deed with effect from May 31, 2019. 

Submissions of the Respondent

1. The payment of license fee for use of leased premises for business is an operational debt under the purview of Section 5(21) of IBC^[v] and the same has been held in the judgement of Jaipur Trade Expo Centre Private Limited v. M/s. Metro Jet Airways Training Private Limited.^[vi] Therefore the rent outstanding to the Respondent 1 is an operation debt. Furthermore, the Respondent No. 1 has rightly inherited the role of lessor vide registered wills dated October 09, 2013, and August 24, 2016.

2. The claims with respect to forcible possession of the leased premises are wrong and no police complaint or email communication has been placed on record by HFPL to substantiate the same. The possession of the leased premises has been taken only after the directions of the NCLAT on March 16, 2023.

3. With respect to the pre-existing disputes on non-payment of conversion charges, the Respondent No. 1 contended that the Lease Deed outlined the responsibility for payment of conversion charges for commercial activity is on HFPL, and hence the Respondent No. 1 cannot be blamed for such non-payment. Further, the legal notice dated October 22, 2019, which has been sent by HFPL does not qualify as evidence of pre-existing dispute since the same has been served after filing of the application under Section 9 of IBC and would qualify as an after-thought.

4. Additionally, the commercial suit filed by HFPL does not evidence pre-existing dispute since the same was filed after the demand notice and after initiation of the application under Section 9 of IBC.

ANALYSIS AND JUDGEMENT

The Apex Court has laid down the test for examining an application under Section 9 of IBC, in the Mobilox Case and stipulates that the adjudicating authority should consider: (a) whether the operational debt exceeds INR 1,00,000 (Rupees One Lakh Only); (b) whether the evidence on record establishes that the debt is due and payable, and has not been paid and (c) whether there exists any disputes amongst parties or record of pendency of suit/ arbitration proceeding filed prior to the receipt of demand notice with respect to the unpaid operational debt. It has further been laid down in the Mobilox Case that in the event that the above conditions are lacking, the application shall be rejected. Additionally, the NCLT shall follow the mandate of Section 9 of IBC and admit/ reject an application based on the factors therein.

In the instant case, the notice dated February 05, 2019, issued by Respondent No. 1 to HFPL clearly establishes that HFPL has been irregular in payment of rent since March 10, 2017, and therefore, HFPLwas called upon to make payment towards the outstanding amount aggregating to INR 94,66,000 (Rupees Ninety-Four Lakhs and Sixty-Six Thousand Only). Respondent No.1has been consistently calling upon HFPL, to pay the outstanding amounts. There are, however, no evidence on record to support the objections of HFPL towards the claims raised by the Respondent No.1prior to issuance of demand notice under Section 8 of IBC. The aforementioned findings are in line with the first two tests laid down in Mobilox Case with respect to the operational debt exceeding INR 1,00,000 (Rupees One Lakh Only) and the due amount not being paid.

With respect to the qualification for operational debt and as to whether there are any genuine pre-existing disputes, it has been held in Jaipur Trade^[vii]that payment of license fee for use of leased premises for business purpose amounts to operational debt. Furthermore, a joint reading of Section 5(20) and 5(21) of IBC establishes that tenancy and lease rent dues fall under the category of operational debt. The Respondent No.1is also entitled to claim the due amount since he has inherited the role of the Original Lessors based on registered wills dated October 09, 2013, and August 24, 2016. Also, there is no material on record, indicating that the communications by the Respondent No.1on the death of his parents were disputed by the Appellants (HFPL) earlier. Therefore, it cannot be claimed by HFPL that there has been pre-existing disputes.

Regarding the assignment of Lease Deed and the NOC granted by Respondent No. 1, it has been observed that the premises has been given on lease to HFPL. The NOC was sought on the request of HFPL for service tax registration purposes for allowing the leased premises to be used by HBI, its sister concern. Such assignment does not dilute the fact that HFPL is the lessee of the leased premises. All communication with respect to the Lease Deed has been addressed towards HFPL and therefore, HFPL shall only be deemed as the actual lessee since HFPL has, all along, been the actual lessee of the leased premises.

Furthermore, the Impugned Order has already dealt with the issue pertaining to non-payment of conversion charges for the property wherein, the NCLT had held that the same cannot be deemed as pre-existing dispute. Clauses 2.3 and 9.1 of the Lease Deed clearly highlights that the Lessee shall be solely responsible for payment of conversion charges and the Respondent No.1cannot be held liable for the same. Additionally, the legal notice dated October 22, 2019, is sent by HFPL at a much belated stage, post the issuance of demand notice under Section 8 of IBC, and the same was replied back by the Respondent No.1. Such belated issuance of letter would not qualify as a pre-existing dispute. 

With respect to the disputes arising out of the commercial suits, it is evident that the suit filed by the Respondent No. 2 is in February, 2020 i.e., after filing of the application under Section 9 of IBC and hence would not constitute as a pre-existing dispute. The mediation application filed by Respondent No. 1 on July 02, 2019, before the Mediation Centre, Tis Hazari against HFPL under Section 2(1)(c) of the Commercial Courts Act, 2015 did not commence due to non-participation of HFPL, resulting in the matter being held a ‘non-starter’. Therefore, in view of the stated reasons, the two commercial suits shall not be construed as a pre-existing dispute.

The NCLAT therefore, held that HFPL has defaulted in payment of the operational debt, and in absence of any pre-existing dispute, the Impugned Order admitting the application under Section 9 of IBC and initiating CIRP has been upheld. The interim stay granted on the CIRP proceedings vide order dated March 16, 2023 has also been vacated.

CONCLUSION

The NCLAT’s decision in the present case categorically analyses the qualifications for a pre-existing dispute in line with the settled principles of Mobilox Case. It explains purview of operational debt under IBC and analyses whether rentals due from premises leased to corporate debtor would constitute an operational debt. By upholding the decision of the NCLT, the NCLAT has preserved the rights of the operational creditors and their interests during insolvency proceedings. The case shall serve as a significant legal precedent with respect to the qualification of operational debt and pre-existing disputes.