Article

In a recent order passed in Somesh Choudhary v Knight Riders Sports Private Limited & Anr. under Company Appeal (AT) Insolvency No. 501 of 2021, the Hon’ble National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT“)  dismissed the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code“) and upheld the order dated passed by the National Company Law Tribunal, New Delhi, and 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.

Global Fragrances Pvt Ltd (“Corporate Debtor“) and Knight Riders Sports Private Limited (“Respondent“) entered into a licensing agreement. The Respondent granted exclusive rights and allowance to the Corporate Debtor to use the trademark ‘KKR‘ to manufacture, distribute and advertise licensed products including deodorants, hair gels, and perfumes in return of payment of Minimum Guaranteed Royalties by the Corporate Debtor as compensation for enjoying the exclusive rights. On delivery of the rights, the Respondent raised invoices for an aggregate sum of Rs. 40,60,147/- towards the outstanding Minimum Guaranteed Royalties payable by the Corporate Debtor as per the agreement. The Respondent received only a part payment. Since the Corporate Debtor failed to keep its payment obligations the Respondent filed an application for initiation of the corporate insolvency resolution process under Section 9 of the Code, claiming the amount due as an operation debt under the Code. The application was admitted by the National Company Law Tribunal, New Delhi and aggrieved by the same, Mr Somesh Choudhary (a shareholder of the Corporate Debtor) filed this appeal.

The Corporate Debtor had opposed the petition on the ground that claims arising out of non-payment of Minimum Guaranteed Royalties did not pertain to non-payment of any goods or services as proided under section 5(21) of the Code and therefore Minimum Guaranteed Royalties were not operational debt. The Corporate Debtor further contented that the Respondent has failed to show that how the Corporate Debtor has used the trademark of the Respondent for sale, marketing etc. and hence does not fulfill the parameter set out in the judgment of the NCLAT in M. Ravindranath Reddy v Mr. G. Kishan & Ors. [Company Appeal (AT) (Ins.) No. 331/2019], which held that any “‘debt’ arising without nexus to the direct input to the output produce or supplied by the ‘Corporate Debtor’, cannot be considered as an ‘Operational Debt’.

In order to test the direct nexus, the NCLAT examined the licensing agreement between the parties and held that the trademark ‘KKR‘ was used in the development, packaging and advertisement of the Licensed Products which established a direct nexus between the payment of the MGR and the business operations of the Corporate Debtor. NCLAT, however, dismissed the argument advanced by the Corporate Debtor referring to M. Ravindranath Reddyjudgment and stated that Ravindranath Reddy judgment had been overturned as it did not correctly deal with the meaning of “service” under section 5(21) of the Code and referred to the judgment  by the larger  bench in Jaipur Trades Expocentre Private Limited v. M/s. Metro Jet Airways Training Private Limited  [2022 SCC OnLine NCLAT 263]. The NCLAT dismissed the appeal and upheld the order of NCLT stating that Minimum Guaranteed Royalties are operational debts to be paid against the licensing of trademarks which in turn constitute moveable property and accordingly would be considered as “goods” under the Sale of Goods Act, 1930 wherein the term “goods” includes all moveable property other than actionable claims and money. The NCLAT relied on the decision of the Hon’ble Supreme Court in Vikas Sales Corporation v. Commissioner of Sales Tax [(1996) 4 SCC 433]. Further, the NCLAT observed that pursuant to Section 7 of the Central Goods and Service Act 2017, any utilisation or enjoyment of intellectual property rights would be considered a service provided by the intellectual property rights holder. The NCLAT referred to the decision of the Madras High Court in the matter of AGS Entertainment Private Limited v. Union of India [2013 SCC Online Mad 1823] and held that by providing the Corporate Debtor with a right to utilise the trademark of ‘KKR‘ in its Licensed Products, the Respondent had temporarily provided permission to use its trademark, which would constitute the provision of a service by the Respondent. The Appellate Tribunal further reasoned that a guaranteed minimum royalty is a periodic payment made by a licensee towards a licensor to utilise a licensed product for an agreed period.