The treatment of lease rental dues during the Corporate Insolvency Resolution Process (CIRP) has been a highly debated issue under the Insolvency and Bankruptcy Code. A common question that arises is whether the rent payable for properties leased by a corporate debtor during the CIRP period qualifies as a CIRP cost.
A leading judgment by the National Company Law Appellate Tribunal (NCLAT) provides crucial clarity on this subject. In the matter of Mr. A. Guhan and Anr. vs. Ms. Sunita Umesh (Liquidator), Deltronix India Ltd. (Company Appeal (AT) (Insolvency) No. 1095 of 2023), decided on October 29, 2024, the Court examined the specific conditions under which lease rentals can be classified as CIRP costs.
In this case, the lessor sought to claim the lease rent and damages for the period following the initiation of the CIRP as a CIRP cost. However, the Court observed that on the date the insolvency process commenced, the lease deed had already expired, and the lessor was not receiving any rent. The lessor had also filed their claim prior to the CIRP period as an operational debt.
The NCLAT ruled that the mere fact that certain dues arise during the CIRP period does not automatically classify them as CIRP costs. For an expense to qualify as a CIRP cost, it generally must be incurred by the Resolution Professional to keep the corporate debtor running as a going concern. Since the Resolution Professional in this instance had not incurred the rent costs to run the business as a going concern, the Court concluded that the lease rent and damages could not be treated as CIRP costs and would instead remain operational debt.
This ruling emphasizes that lessors cannot automatically assume their rental dues will be prioritized as CIRP costs simply because the corporate debtor continues to occupy the premises during the insolvency period. The specific facts of the lease validity and the operational status of the debtor play a determining role.