By Nihit Nagpal and Zahra Naqvi
In a recent judgment passed by the National Company Law Appellate Tribunal (NCLAT), in the case of Somesh Choudhary v Knight Riders Sports Private Limited & Anr1, it was held that claims arising out of Intellectual Property Rights would come within the ambit of Section 5 (21) of the Insolvency and Bankruptcy Code, 20162 , that defines Operational Debt3 . The definition of Operational Debt is as under:
“(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority”.
While dismissing the appeal filed by Global Fragrances Pvt. Ltd. under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code”) against the order passed by the National Company Law Tribunal, (the Appellate Tribunal) has held that the claims arising out of the grant of an exclusive license to use intellectual property rights fall within the ambit of the definition of Operational Debt.
As per Section 5 (21) of the Code, an Operational Debt can arise only in respect of the goods and service, therefore, in the present case, one of the primary issue was to determine whether ‘Intellectual Property’ can be termed as either a good or service. Answering the preceding question in affirmation, the NCLAT analysed the definition of “goods” under the Sale of Goods Act, 1930 wherein the term “goods” included all moveable property other than actionable claims and money. The Appellate Tribunal relied on the decision of the Hon’ble Supreme Court in Vikas Sales Corporation v. Commissioner of Commercial Taxes4 and held that trademarks and copyrights would constitute moveable property and accordingly would be considered as “goods” under the Sale of Goods Act, 19305 .
In the present case, the Knight Riders Sports Pvt. Ltd. (the Respondent) and Global Fragrances Pvt. Ltd. (the Appellant) had entered into a License Agreement wherein the Appellant was given the right to use the Trademark ‘KKR’ of the Respondent to manufacture and distribute and also advertise the licensed products namely deodorants, hair gels, and perfumes. In return, the Appellant was bound to pay Minimum Guaranteed Royalties (MGR) irrespective of the amount of sales made by the Appellant.
Subsequently, over time, an amount of Rs.40,60,147/– was raised towards the MGR that was payable by the Appellant under the Licensing Agreement, however, the Appellant barely could paid half of that amount.
Consequently, the Respondent filed an application for initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Code6 . The application was admitted by the National Company Law Tribunal, and aggrieved by the same, the Respondent preferred an Appeal before the Appellate Tribunal.
In the Appeal, the Appellant contended that the ‘Claim’ arising out of non-payment of MGR, which admittedly does not arise out of non-payment of any goods or services and therefore cannot be said to be an ‘Operational Debt’. Further, it was contended that the amount claimed is not an ‘Operational Debt’ as there is no transaction having a correlation of direct input into the output levels or supplied by the ‘Corporate Debtor’.
Rejecting the contentions of the Appellant, the Appellate Court held that the Respondent has established a ‘Right to Payment’ in respect of the provisions of goods and services. Further, it was held that granting an exclusive right and license to the ‘Corporate Debtor’, to use manufacture, sell, distribute and advertise the licensed products and to use the trademark in association with the licensed products as well as on packaging, promotional advertising material has a direct nexus with the business operations and sales and also with the actual product supplied by the ‘Corporate Debtor.’ Hence, the Hon’ble Court was of the view that the claim in respect of such provisions of ‘goods and services’ fell within the ambit of the definition of ‘Operational Debt’.