Introduction
In a recent legal decision in Smartworks Coworking Spaces P. Ltd. v. Turbot Hq India P. Ltd.[i], the National Company Law Appellate Tribunal (‘NCLAT’) upheld the significance of contractual obligations under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), reiterating that breaches of contract can constitute operational debts. This ruling highlights the NCLAT’s emphasis on substance over form in recognizing the validity of agreements, even when lacking in proper stamping or registration. By affirming the operational creditor’s (‘OCs’) right to seek remedy for premature termination of agreements, the decision strengthens protections for OCs. It reinforces adherence to contractual obligations within India’s insolvency framework.
Brief Facts
The appellant, an OC, entered into an agreement with the respondent, a corporate debtor, for coworking and flexi office space services from 01.10.2018 to 30.09.2021, involving a monthly office fee and a 36-month lock-in period. When the respondent indicated on 04.06.2019 its intent to terminate the contract prematurely by 01.09.2019, the appellant reminded them of the contractual lock-in period and requested payment for the outstanding balance.
Despite this, the respondent denied the claim when a demand notice under s. 8 of the IBC was issued in 2020. Subsequently, the appellant filed an application under s. 9 of the IBC before the National Company Law Tribunal (‘NCLT’).
However, the NCLT rejected the appellant’s application on multiple grounds: firstly, that the claimed dues did not qualify as operational debt; secondly, that the agreement lacked registration and proper stamping. In response, the appellant contested this decision before the NCLAT.
The appellant argued that the agreement included a 36-month lock-in period, meaning the respondent was not authorized to terminate it prematurely and that a breach of this contract entitled the appellant to seek a remedy, which qualifies as a claim under s. 3(6) of the IBC. Furthermore, the appellant argued that its claim involved the provision of goods and services, thereby falling under the category of operational debt. It also argued that the agreement did not necessitate registration since it did not create any rights in immovable property. Moreover, given that the proceedings under IBC are summary in nature, the s. 9 application should have been admitted, considering the evident presence of debt and default.
The respondent, on the other hand, contended that the appellant should have pursued damages for breach of agreement in a civil court and that the agreement itself was inadmissible due to its lack of stamping and registration.
Held
The NCLAT, while allowing the appeal and setting aside the NCLT’s order, held that the appellant’s claim for the breach of contract qualified as a claim under s. 3(6) of the IBC. It was noted that the definition of debt under s. 3(11) includes liabilities or obligations in respect of a claim, encompassing both financial and operational debts. The NCLAT determined that the respondent’s premature termination of the agreement gave rise to a claim for breach of contract in favour of the appellant. The claim fell within the meaning of operational debt under the IBC.
The NCLAT examined the nature of the agreement and determined that it did not need compulsory registration as it did not create any right, title, or interest in immovable or movable property. It was observed that under s. 17(1)(b) of the Registration Act, 1908, only documents that create, declare, assign, limit, or extinguish any such rights require registration. Since the agreement was purely for providing services without conferring any property rights, it did not fall within the scope of compulsory registration.
The NCLAT further held that the lack of proper stamping did not negate the agreement or affect the appellant’s claim and that the NCLT erred in determining this point against the appellant. It was noted that the respondent used the premises and paid the office fee up to a certain period, demonstrating that the agreement was operational. The NCLAT reasoned that the substantive actions taken under the agreement precede the formal defect of unstamping.
Our Analysis
This ruling is significant as it underscores the broad interpretation of ‘debt’ under the IBC, affirming that claims arising from breaches of contract can qualify as operational debts. The NCLAT’s recognition of an unstamped and unsigned agreement as valid, based on the conduct of the parties, emphasizes substance over form. This decision strengthens the position of creditors by ensuring that technical deficiencies in documentation do not undermine legitimate claims, thereby promoting fairness and equitable treatment in insolvency proceedings. Furthermore, it clarifies that premature termination of agreements can give rise to actionable claims under the IBC, reinforcing the importance of adhering to contractual obligations. This precedent provides greater certainty and protection for OCs, contributing to India's more robust and predictable insolvency framework.
End Note
[i] 2023 SCC OnLine NCLAT 234.
Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.