NCLAT: the IPR constitutes an operational debt within the framework of the IBC

In a recent order issued by the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT“) in Somesh Choudhary v Knight Riders Sports Private Limited & Anr. under Company Appeal (AT) Insolvency No. 501 of 2021, the NCLAT dismissed the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Coded“) against the order dated July 5, 2021 issued by the National Company Law Tribunal, New Delhi (“NCLT Order”), and held that the claims arising out of the grant of an exclusive license to use the proprietary rights intellectual property fall within the scope of the definition of operational debt.

Background

Global Perfumes Pvt Ltd (“debtor company”) had entered into a licensing agreement with Knight Riders Sports Private Limited (“Respondent” aloneLicensed Products”). In return, the Debtor Company was required to pay Guaranteed Minimum Royalties (“MGR”) as identified in the license agreement as compensation for the enjoyment of exclusive rights.

The Respondent had issued invoices for a lump sum of INR 40,60,147 for the MGR still to be paid by the Debtor Company and only partial payment was received. Following the debtor company’s failure to pay the balance of the MGR, the respondent filed an application to initiate the company’s insolvency resolution process under Article 9 of the Code. The claim was admitted by the National Company Law Tribunal in New Delhi and aggrieved by the same, Mr. Somesh Choudhary (a shareholder of the debtor company) filed this appeal.

Debtor Company Submissions

The debtor company had opposed the petition on the grounds that claims arising from non-payment of MGR were not an operational debt as they did not relate to non-payment for goods or services. Further, building on the previous judgment of the NCLAT in Mr. Ravindranath Reddy vs. MG Kishan & Ors.1 (“Ravindranath Reddy Judgest”), who held that any “‘debt” arising unrelated to the direct contribution to the exit proceeds or provided by the “debtor company”vscannot be considered as an ‘Operating Debt’, argued that since Defendant has not demonstrated how the Debtor Company used Defendant’s trademark for sales, marketing, etc., its claim regarding non-payment of MGR cannot be characterized as an operational debt.

Publish

Do the amounts claimed by the respondent fall within the definition of an operational debt as defined in Article 5(21) of the Code?

NCLAT Conclusions and Observations

  1. To determine whether non-payment of MGR would constitute operational debt, the NCLAT considered the definition of “property” under the Sale of Goods Act 19302, in which the term “property” included all movable property other than as actionable claims and money. The NCLAT relied on the Honorable Supreme Court’s decision in Vikas Sales Corporation v. Commissioner of Sales Tax3 and concluded that the trade marks and copyrights would constitute personal property and would therefore be considered “property” under the Sale of Goods Act 1930. .
  2. The NCLAT reviewed the term “MGR” and observed that a guaranteed minimum royalty is a periodic payment made by a licensee to a licensor to use a licensed product for an agreed period of time. Further, the NCLAT observed that under Section 7 of the Central Goods and Service Act 2017, any use or enjoyment of the intellectual property rights would be considered a service provided by the intellectual property rights holder. Accordingly, the NCLAT referred to the decision of the Madras High Court in AGS Entertainment Private Limited v. Union of India4 and held that by granting the debtor company the right to use the mark “KKR” in its licensed products, the respondent had temporarily granted permission to use its mark, which would constitute the supply of a service by the respondent. Therefore, the outstanding amount of MGR due in connection with the provision of such a service would constitute an operational liability under Article 5(21) of the Code.
  3. Furthermore, the NCLAT rejected the claim of the debtor company on the basis that, in accordance with the Ravindranath Reddy judgement, there was no direct link established between the MGR to be paid and the commercial activities of the debtor company. The NCLAT referred to the decision of its largest bench in Jaipur Trades Expocentre Private Limited v. M/s. Metro Jet Airways Training Private Limited5, and said the Ravindranath Reddy judgment was set aside as it did not properly address the meaning of “service” within the meaning of section 5(21) of the Code.

The NCLAT reviewed the licensing agreement between the Debtor Company and the Respondent and found that the “KKR” trademark was used in the development, packaging and advertising of the licensed products. This established a direct link between the MGR payment and the business activities of the debtor company. Consequently, these MGR contributions constituted an operating debt within the meaning of the Code.

KCO Commentary

The above NCLAT decision ruled that the temporary licensing of an intellectual property right would also be considered a “supply of a service” and, therefore, a debt arising from non-payment. of these license fees would be considered a working debt under section 5(21) of the Code.

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