Lease Hold Rights Existing In Favor Of Corporate Debtor Cannot Be Terminated During Moratorium Period U/S 14 Of IBC: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that an order terminating the lease cannot be passed during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code), particularly when leasehold rights are assets...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that an order terminating the lease cannot be passed during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code), particularly when leasehold rights are assets of the corporate debtor which were in its possession.
Brief Facts:
The Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD) commenced on an application filed under Section 7 of the Code by an order dated 02.05.2019.
The Gujarat Industrial Development Corporation (“GIDC”) had granted 99 years lease to the CD by a License Agreement dated 22.04.2004 and Lease Deed dated 06.10.2004 with respect to Plot No.301, on which CD was functioning. The CD entered into another Agreement vide allotment letter dated 20.12.2005 with respect to adjacent Plot No.338 to 341.
On 07.04.2022, a Show Cause Notice was issued by GIDC under Gujarat Public Premises (Eviction of Unauthorized Occupants) Act, 1972 with respect to Plot No.301 and Plot No.338 to 341 for non-payment of rent/instalment/ revenue charged totaling to Rs.1,22,86,283/-.
The Resolution Professional (RP) was asked to appear and show cause on 28.04.2022. By another letter of the same date, dated 07.04.2022, GIDC issued a termination order and terminated the lease.
The RP after issuance of Show Cause Notice dated 07.04.2022 and termination of lease by order of the same date, filed an IA No.461 of 2022, praying for setting aside the Show Cause Notice/ termination order dated 07.04.2022. Notices were issued in the Applications and GIDC filed its reply.
The Adjudicating Authority heard the parties and by order dated 08.04.2024 disposed of the IA No.461 of 2022, directing the RP to approach the Appellate Authority of GIDC for quashing the Notices.
By another order of the same date, i.e. 08.04.2024 in IA No.159/AHM/2020 seeking approval of the Resolution Plan, the application was considered and Adjudicating Authority by order dated 08.04.2024 remitted the Resolution Plan back to the CoC for reconsideration.
Aggrieved by the aforesaid orders dated 08.04.2024, these two Appeal(s) have been filed.
Contentions:
The Appellant in Company Appeal (AT) (Ins.) No.1103 of 2024 submitted that the action taken by the GIDC in issuing the Show Cause Notice and order terminating the lease, is hit by Section 14 of the IBC and the Adjudicating Authority committed error in not setting aside the aforesaid orders.
It was also argued that Lease hold rights are the assets of the CD, which were in possession of the CD, hence, the order passed by GIDC was in violation of Section 14 of the IBC and deserve to be set aside.
The Appellant in Company Appeal (AT) (Ins.) No.1084 of 2024 submitted that there is no violation of Section 30, sub-section (2) and the Adjudicating Authority could not have directed the Resolution Plan to be returned back to the CoC for reconsideration.
Per Contra, the Respondent Company Appeal (AT) (Ins.) No.1103 of 2024 submitted that CD having only lease hold rights, cannot claim any rights in the land, hence, GIDC was fully entitled to cancel the Lease Deed.
It was also argued that Section 14, does not override inherent consideration and statutory right of the lessor. Lease termination remains valid and independent of payment under the Resolution Plan. The Adjudicating Authority had no jurisdiction to entertain the application filed by the RP.
Observations:
The Tribunal noted that the Supreme Court in Rajendra K. Bhutta vs. Maharashtra Housing and Area Development Authority and Anr. (2020) held that “when it comes to any clash between MHADA Act and the Insolvency Code, on the plain terms of Section 238 of the Insolvency Code, the Code must prevail.
This is for the very good reason that when a moratorium is spoken of by Section 14 of the Code, the idea is that, to alleviate corporate sickness, a statutory status quo is pronounced under Section 14 the moment a petition is admitted under Section 7 of the Code, so that the insolvency resolution process may proceed unhindered by any of the obstacles that would otherwise be caused and that are dealt with by Section 14.”
Similarly, the Supreme Court while addressing the issue of the same nature in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka and Ors (2020) held that the NCLT had no jurisdiction to issue direction to Government of Karnataka to execute supplemental lease deed for the extension of the mining lease.
The Tribunal noted in the above case, the issue was with regard to deemed extension, which was denied by Government of Karnataka and the application was filed by the RP seeking declaration of deemed extension and execution of supplemental lease. In the above background, the Court held that NCLT had no jurisdiction.
Based on the above, the Tribunal observed that the above judgement in the present case, does not come to any aid to the GIDC to give it jurisdiction to cancel the lease and issue notice for eviction of the CD during the moratorium as noted above. The GIDC has already filed its claim, which was partially admitted to the extent of Rs.1.54 crores, which has also been dealt in the Resolution Plan.
The Tribunal held that issuance of show cause notice by GIDC by which the lease was terminated was clearly hit by section 14 of the Code. The Adjudicating Authority committed an error by not allowing the Interlocutory Application filed by the RP seeking setting aside of the order of show cause notice.
It further observed that when order passed by GIDC is clearly hit by Section 14(1), it was well within the jurisdiction of NCLT within the meaning of Section 60, sub section (5) (c) of the IBC to entertain the application.
The Tribunal noted that there is no quarrel with the proposition that when the Resolution Plan contravens section 30(2) of the Code, it can be sent for reconsideration. However, in the present case, no finding was recorded by the Adjudicating Authority that the plan was non compliant with section 30(2) of the code, still it remitted the plan to the CoC for reconsideration which was unwarranted.
Accordingly, both the Appeals were allowed.
Case Title: Divyesh Desai RP of GPT Steel Industries Ltd. Versus Gujarat Industrial Development Corporation Bhuj
Case Number:Company Appeal (AT) (Insolvency) No.1103 of 2024 & I.A. No.3974 of 2024
Judgment Date: 21/03/2025
For Appellants: Mr. Abhijeet Sinha Sr. Advocate with Mr. Tishampati Sen, Ms. Riddhi Sancheti, Mr. Ashish Parwani, Mr. Rajeev Nair, Mr. Anurag Anand, Ms. Gitika Makhija and Mr. Mukul Kulhari, Advocates.
For Respondent : Dr. Charu Mathur, Advocate for GIDC
