Recovery Of Corporate Debtor's Property By Owner/Landlord Is Not Permissible During Moratorium Period: NCLT Mumbai

Brief Facts

A commercial property owned by the applicant was given on lease to Home Solutions Retail Indian Ltd. in 2008. The Future Lifestyle Fashions Ltd.(corporate debtor) became the lessee after corporate restructuring and a lease agreement executed on September 17, 2008. The applicant claimed that the corporate debtor has not made any rent payment since February, 2022. A defect rectification notice was served on the corporate debtor in March, 2023 but the defect was not rectified by the corporate debtor. Thereafter, the applicant terminate the lease of the corporate debtor and demanded possession of the premise. However, the premise was not vacated by the corporate debtor and the rent amount to the tune of Rs. 11.69 crores accumulated. This amount was claimed by the applicant during CIRP of the corporate debtor which was initiated on May 4, 2023.

The second floor of the property was sub-let by the corporate debtor to Praxis Home Retail Limited. This sub-letting was also contested by the applicant on the ground that the consent of the owner was not obtained as per original lease agreement. Sub-lessee also filed an intervention application to safeguard its interest as the outcome of the case will affect its operation in the leased premise.

Contentions

The applicant contended that the failure of the corporate debtor to pay rent breached the lease agreement materially. It was contended that termination of the lease and seeking re-possession of the property was justified. It was further submitted that the rent amount and occupation charges to the tune Rs. 11.69 crores should be adjudged as CIRP costs and prioritised accordingly. It was further argued that subletting was illegal as it violated the terms of the lease agreement.

Per Contra, the respondent resolution professional contended that the leased premise is pivotal for the operations of the corporate debtor and it is a major source of revenue. It was further submitted that termination of lease was unwarranted as no notice was given to the corporate debtor. it was further argued that the applicant cannot seek possession of the lease property from the corporate debtor due to moratorium under section 14 of the IBC. It was further submitted that the claims of the applicant are still under verification therefore they cannot be classified as CIRP costs at this stage.

NCLT's Analysis

The NCLT observed that section 14 of the IBC prohibits any property occupied by it from being transferred to the owner or lessor that too when it is essential to keep the corporate debtor as going concern. The tribunal referred to the judgment of the NCLAT in Company Appeal (AT) (Insolvency) No. 323 of 2018 in M/s Navbharat Castings LLP vs. M/s Moserbear India Ltd. & Anr wherein it was held that moratorium under section 14 of the IBC aims to preserved the assets of the corporate debtor during resolution process. The tribunal further observed that in the present case revenue amounting to 80% of the total revenue of the corporate debtor is directly coming from the leased property therefore possession of the property cannot be handed over to the owner or lessor. It was held as under:

“So far as the question of handing over possession to the Applicant is concerned, Section 14(1)(d) of the Code prohibits recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor, more so when it is being used for sustaining the corporate debtor as going concern.The recovery of property by the owner/ landlord occupied by the Corporate Debtor is not permissible during the period of moratorium. The legislative intent of the moratorium is obviously to keep corporate debtors' assets together during the resolution process and to ensure that the corporate debtor continues as a going concern. Any unilateral termination of a lease deed during the moratorium period militates against the goal of keeping the corporate debtor as a going concern”.

The NCLT further noted that the applicant failed to prove the ownership of the leased premise and lease agreement executed with the corporate debtor. The tribunal further held that even if the ownership is established, the possession of the premise cannot be given due to section 14 of the IBC. It was observed as under:

“On the basis of the above discussion, the Tribunal is of the view that the applicant has failed to concretely establish its the ownership qua the leased premises and also the arrangement of lease between the Applicant and the Corporate Debtor.

Therefore, in the given circumstances, the possession of the premises in question cannot be ordered to be handed over. Even otherwise, possession of premises which is being used to keep the Corporate Debtor as a going concern cannot be disturbed in light of the moratorium u/s 14(1)1(d) of the Code”

The NCLT further directed the RP to be cautious in identifying the owner of the property. It was held as under:

“However, looking at the facts and circumstances of this case, as discussed above, the Tribunal feels it necessary to issue a note of caution to the RP to be circumspect enough while dealing with the property in question and must satisfy himself to the hilt with regard to the title of the leased premises as to whether the same legally and legitimately vests in the Applicant”

Conclusion

The NCLT concluded that the applicant was not entitled to the possession of the property during resolution process of the corporate debtor as moratorium under section 14 of the IBC was in operation. Accordingly, the present application was dismissed.

Case Title: Sudha Apparels Ltd. v. Mr. Ravi Sethia (RP)

Court: National Company Law Tribunal, Mumbai

Case Reference: Interlocutory Application No. 4147 of 2023 and Intervention Petition No. 27 of 2024 in CP(IB) No. 959(MB)/2022

Judgment Date: 01/10/2024

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