Security Deposit In Lease Agreement If Repayable Without Any Interest Cannot Be Classified As Financial Debt U/S 5(8) Of IBC: NCLAT

The NLCAT New Delhi bench of Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member) held that security deposit given, while entering into a lease agreement cannot be classified as financial debt under section 5(8) of the IBC when it had been advanced with a condition that it would be returned without any interest once the possession of the leased premise is handed over.Brief FactsThe present appeal filed under Section 61 of Insolvency and Bankruptcy Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated 01.03.2024 (hereinafter referred to as 'Impugned Order') passed by the Adjudicating Authority. By the impugned order, the Adjudicating Authority has partially allowed the relief sought by the Appellant in IA No. 3878 of 2023. Aggrieved by the fact that all the reliefs were not granted by the Adjudicating Authority the present appeal has been filed by Corob India Pvt. Ltd.- Appellant.The Appellant- Corob India Pvt. Ltd. desired to obtain a premises on lease from Renaissance Indus Infra Pvt. Ltd.- Corporate Debtor. For this purpose, the Appellant and the Corporate Debtor executed a lease deed dated 12.12.2018. In terms of the lease deed, the Corporate Debtor agreed to provide the subject premises on lease to the Appellant for a period of 10 years commencing from 12.12.2019. In terms of the lease deed the Corporate Debtor was required to handover possession of the leased premises to the Appellant on 12.10.2019 which the Corporate Debtor failed to do. The Corporate Debtor in their e-mail dated 22.02.2022 acknowledged the delay in handing over possession of the leased premises to the Appellant. The Appellant issued a Notice of Default to the Corporate Debtor on 30.06.2022 in terms of the lease deed. Despite issue of Notice of Default, the Corporate Debtor continued to remain in breach of the lease deed. Eventually, on 12.08.2022 the Appellant issued a Termination Notice to the Corporate Debtor in terms of the lease deed. Subsequently, the Corporate Debtor was admitted into CIRP on 31.03.2023.The matter was heard by the Adjudicating Authority and the orders passed on 01.03.2024. In the impugned order, the RP was directed to return the original BG to the Appellant but the other reliefs sought by the Appellant were rejected. Aggrieved by this impugned order, the present appeal has been preferred by the Appellant.ContentionsThe appellant submitted that the Security Deposit made by the Appellant with the Corporate Debtor for the purpose of the lease deed was an asset belonging to the Appellant and not to the Corporate Debtor.That since, the leased premises were never handed over to the Appellant by the Corporate Debtor and the lease deed stood terminated, the Security Deposit should have been returned by the RP more so as the Corporate Debtor had agreed to return the Security Deposit during the meeting held with them on 07.12.2022.That commencement of CIRP does not create any new rights but only preserves the status quo. Hence, the Security Deposit which never formed part of the assets of the Corporate Debtor should be returned by the RP to the Appellant and that the Security Deposit was to be used for carrying out construction of the leased premises and hence it deserves to be treated as financial debt under the IBC framework.Reliance was placed on the Supreme Court judgment in Embassy Property Development Pvt. Ltd. Vs State of Karnataka and Ors. (2020) wherein it was held that the purpose of moratorium provided for in Section 14 of IBC is only to preserve that status quo and not create new right.Per contra, the respondents submitted that since, the Security Deposit had been advanced as interest free Security Deposit, it cannot be treated as a financial debt. The nature of transaction between the parties was such that in the event of failure to refund the Security Deposit within stipulated period, the deposit was to be returned with interest of 18% and no lease rent would be required to be paid by the Appellant till the time the deposit would be returned. That it was implicit that the Security Deposit was to be treated as payment towards lease rent and never disbursed or deposited against consideration for time value of money.That the Adjudicating Authority was right in holding that the transaction was not even an operational debt since the Appellant had not rendered any services or provided any goods for which it was entitled to claim any amount.That it is a claim for payment which has arisen out of breach of contract by the Corporate Debtor due to non-refund of the Security Deposit after termination of the lease deed. However, as the sums so involved in the Security Deposit being neither in the nature of financial debt nor an operational debt, as per the provisions of the IBC, RP had no option but to place the Appellant in the category of “Other Creditors”.NCLAT's AnalysisThe tribunal, at the outset, analysed the provisions of the IBC with respect to claim, debt etc. and observed...

Security Deposit In Lease Agreement If Repayable Without Any Interest Cannot Be Classified As Financial Debt U/S 5(8) Of IBC: NCLAT

Mohd Malik Chauhan

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