Insolvency & Bankruptcy Code Does Not Override Public Body's Statutory Authority To Regulate Its Properties: NCLAT

Brief Facts:

The Corporate Insolvency Resolution Process (“CIRP”) was commenced against Narmada Cereal Private Ltd. (“Narmada Cereal/Corporate Debtor”). After the CIRP's failure, the National Company Law Tribunal, New Delhi (“NCLT”) ordered liquidation against Narmada Cereal and appointed Mr Prabhat Jain (“Liquidator”) as the liquidator. The Liquidator tried to sell Narmada Cereal as a growing concern. However, no buyer emerged. Therefore, the Liquidator entered into a temporary sub-lease with M/s Maa Yashoda Food Grains (“Yashoda Foods”) to operate Narmada Cereal's factory and reduce expenses. However, this land was leased by MP Industrial Development Corporation Limited (“MPIDCL”) to Narmada Cereal and Punjab National Bank (“PNB”) was its sole financial creditor. Therefore, the MPIDCL issued notices against the Liquidator for a lease breach and approached the NCLT against it.

The Liquidator contended that the sub-lease agreement's purpose was to maintain Narmada Cereal as a going concern without violating the lease terms. He further argued that his actions were in line with Section 35 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and Regulation 32A of the IBBI Liquidation Regulations, which prioritize the maximization of asset value. He also contended that MPIDCL's actions amounted to the initiation of 'legal proceedings' against the corporate debtor, which was barred under Section 33(5) of the IBC.

The NCLT dismissed the Liquidator's plea and held that there was indeed a lease breach. It allowed MPIDCL to reclaim the premises after refunding the land premium paid by Narmada Cereal at the time of execution of lease deeds. Feeling aggrieved, the Liquidator filed an appeal before the National Company Law Appellate Tribunal, New Delhi (“NCLAT”).

Observations of the NCLAT:

The NCLAT perused the clauses of the lease deed entered between MPIDCL and Narmada Cereal. Clause 12 of the lease deed mentioned that the lessee cannot sub-let, assign or transfer the land or any constructed building without prior written permission from the lessor or its authorized officer. The Liquidator contended that it had only leased the plant and machinery and not the building. However, the NCLAT observed that the plant and machinery could not operate without the involvement of the building. Thus, the NCLAT held that the liquidator proceeded with the sub-lease without obtaining prior written approval and therefore, violated Clause 12 of the lease deed.

The NCLAT also referred to Rule 22 of the Madhya Pradesh State Industrial Land and Building Management Rules, 2019. This rule mandates obtaining permission for sub-leases and requires a tripartite agreement between the principal lessee, lessor and sub-lessee. It held that the Liquidator failed to comply with these rules.

The Liquidator relied on Sundresh Bhatt vs Central Board of Indirect Taxes and Customs [Civil Appeal No. 7667 Of 2021] to argue that no legal proceedings could be initiated against the Corporate Debtor due to the moratorium under Section 33(5) of the IBC. The NCLAT distinguished this case and held that the aforementioned judgement was related to customs duty recovery and not violations of lease agreements. Therefore, the NCLAT held that the notices issued by MPIDCL did not constitute legal proceedings barred by the IBC.

The NCLAT further placed reliance upon Municipal Corporation of Greater Mumbai vs Abhilash Lal [(2020) 13 SCC 234], where the Supreme Court ruled that Section 238 of the IBC cannot override a public body's statutory authority to regulate its properties. Based on this case, the NCLAT held that the Liquidator could not create sub-leases over public land without adhering to the statutory requirements.

As a result, the NCLAT upheld the decision of the NCLT and held that the Liquidator breached the lease conditions by sub-letting the land without obtaining prior permission from the lessor. The appeal was dismissed and MPIDCL was directed to refund the lease amount to Narmada Cereal to facilitate the liquidation process.

Case Title: Prabhat Jain, Liquidator of Narmada Cereal Pvt. Ltd. vs MP Industrial Development Corporation Limited and Ors.

Case No.: Comp. App. (AT) (Ins.) No. 697 of 2023 & I.A. No. 2322 of 2023

Advocates for the Appellant: Mr Saurabh Kalia and Mr Iswar Mohapatra

Advocates for the Respondents: Mr Abhishek Choudhary and Mr Aalok Kumar (for MP Industrial Development Corporation Ltd.); Mr Ankit Raj, Mr Akash Chandryan, Mr Alia Mohammed Khan (for Punjab National Bank)

Date of Pronouncement: 27.11.2024

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