Corporate Debtor's Property Cannot Be Recovered By Owner/Lessor During Moratorium Period U/S 14 Of IBC: NCLAT

Brief Facts

Respondent Nos. 2 to 4 agreed to provide loans totaling Rs. 6 crores to CD under two Memoranda of Understanding (MOU), with each loan amounting to Rs. 3 crore, secured by mortgaging the part of White House Property which is the corporate office of the CD. The first MoU was executed on 13.02.2019 between the CD and Respondents Nos. 3 and 4, and the second MoU on 15.02.2019 between the CD and Respondent No. 2.

Following alleged defaults in repayment by the CD, two conveyance deeds dated 27.02.2020 were executed, resulting in the sale of portions of the White House Property to Respondent Nos. 2 to 4 for a total of Rs. 6 crores. On 27.02.2020, two separate Leave and License Agreements were executed, leasing the White House Property to the CD for an 11-month term, with Respondent No. 2 leasing the front portion and Respondent Nos. 3 and 4 leasing the rear. On 08.05.2020, Respondent Nos. 2 to 4 issued legal notices terminating these agreements and demanded that the CD vacate the premises.

On 04.09.2020, two civil suits were filed against the CD and its director, Mr. Suraj Kumar Gupta, in the District Judge, Commercial Court at Tis Hazari, New Delhi. The cases involved claims for recovery of possession of the White House Property and lease arrears. The Commercial Court denied a summary judgment for dispossession.

The Ld. Commercial Court, on 09.12.2021, ordered the CD to pay Rs. 6 lakh per conveyance deed as interim lease rental, with an interest return policy if the plaintiffs were found not entitled. The CD challenged this in two revision petitions. The Delhi High Court ordered the CD to deposit Rs. 12 lakh for arrears from June 2020 on 21 and 22 March 2022, but dismissed the petitions for non-compliance on 08.08.2022. Subsequently, on 30.08.2022, the Commercial Court allowed an amendment recognizing the White House Property's value exceeding Rs. 6 crore.

In the meantime, UCO Bank filed a petition for initiating CIRP against CD under Section 7 of the Code which was admitted on 20.09.2022 by NCLT. Accordingly, CP (IB) No. 1377/KB/2020 was admitted by AA and Respondent No. 1 was appointed as Resolution Professional.

During the pendency of CIRP, Respondent No. 2 (Sincere Securities Pvt. Ltd.) and Respondents Nos. 3 and 4 (Noble Dealcom Pvt. Ltd. and Jodhpur Properties and Finance Pvt. Ltd. respectively) filed eviction applications IA (IBC)/1083(KB)2023 and IA (IBC)/1082(KB)2023) concerning two office spaces in the "White House" property, which is currently occupied by the CD. The AA ordered the RP to hand over possession of the property within two weeks. Against this order, the present appeal was filed.

Contentions

The appellant submitted that this order breaches Section 14 of the Code by neglecting protections against eviction during the CIRP. and further claimed that it lacks adequate reasoning and asserting that recovery is barred under Section 14(1)(d) of the Code, which prohibits third parties from reclaiming possession while the matter is sub-judice.

That despite the suits pending when insolvency commenced on 20.09.2022, the RP admitted the claims of Respondents Nos. 2 to 4, stating CoC approval, though this is disputed. The appellants argue that the impugned order was premature and that vacating the property without a CoC resolution contravenes the Code and CIRP Regulations, specifically Sections 14 and 74, which outline necessary CoC approval for property possession recovery and set penalties for violations.

That the Impugned Order lacks adequate reasoning, the Appellant seeks a remand to the NCLT for a reasoned ruling on the Eviction Applications and IA No. 1412 of 2023.

Per contra, the respondent No. 1/RP submitted that CoC of the Corporate Debtor, with 100% voting rights in their commercial wisdom has decided to handover the Delhi property of the Corporate Debtor.

That it is the admitted position that the asset (corporate office in Delhi) does not belong to the CD and the ownership of the asset lies with Respondents No. 2 to 4. As such the appellant has does not have any locus to file this appeal and the appeal is required to be dismissed on this ground alone.

That the decision of the CoC to hand over Delhi office is not required to be approved by the CoC by way of any resolution of the CoC as the same is not contemplated under Section 28 (1) of IBC, 2016.

The respondents No.2 to 4 submitted that Respondent No. 2 and Respondent No. 3- 4 are the registered owners of the Corporate Office of CD, as evidenced by separate Deeds of Conveyance dated 27.02.2020. A registered document is presumed valid, and the burden of proof lies with those challenging it to provide substantial evidence rather than just arguments, as established in Ratan Singh & Ors. v. Nirmal Gill & Ors. (2021).

That the CD's balance sheet for the year ending March 31, 2020, does not list the front and rear properties as assets of the CD, and this balance sheet was signed by the Appellant. According to Explanation (a) to Section 18(1), assets owned by a third party but in the CD's possession do not qualify as assets of the CD.

That section 14(1)(d) allows the CoC to use its discretion to hand over possession of the property if it is in the best interest of the CD. This principle was demonstrated in the case of Sangita Fiscal Services Pvt. Ltd. v. Duncan Industries 2022, where the Tribunal permitted the CoC/Resolution Professional (RP) to hand over possession as the office space was not required by the CD.

That given the high fees and the CD's lack of need for the office, the Committee of Creditors (CoC) unanimously decided to return the office to Respondents No. 2-4.

The respondent No. 5/CoC also supported the contentions of the respondent No. 2 to 4.

NCLAT's Analysis

The tribunal while answering the first contention with respect to locus standi of the appellant observed that Hon'ble Supreme Court has held in GLAS Trust Company LLC v. BY JU Raveendran & Ors.(2024) that insolvency proceedings under the Code become proceedings in-rem from the date of admission by the Adjudicating Authority. This inter alia means that the claims/applications of all the affected parties have to be adjudicated by the AA. In this case, the appellant is an affected party as erstwhile promoter Director of CD and a Creditor of CD, so his application is very much maintainable and is covered by the Judgment of Hon'ble SC in GLAS Trust supra.

The tribunal further noted the minutes of the CoC meetings and observed that the CoC does not appear to have taken a decision about vacation of registered office even in the 6th CoC meeting after which RP gave a statement in Court that the property is not required to be held based on which AA passed the impugned order.

The tribunal further noted that CoC at this stage also stated that they are in process of seeking legal opinion and till such time voting on the agenda could not be done. It is clear from the above that the decision to release the property by the RP was his own decision, which was not confirmed by CoC. The submission of CoC at this stage, that such decision was taken with 100% voting right does not seem to be based on records.

The tribunal further referred to section 14 of the IBC which provides that no owner or lessor of a property, which is occupied by or is in possession of Corporate Debtor can recover such property from the CD. It is an express provision in the Code and there are no exceptions from the same.

The tribunal further adverted to the facts of the present case and noted that the I.As filed by Respondent No. 2 , 3 & 4 are for recovery of property from the possession of the CD have been allowed by AA on the basis of submissions by RP. It has been stated that the submission of RP was based on the decision of the CoC. It has already been noted above that CoC had not taken any decision to release the property before the RP made his submissions before AA allowing release of property by the AA to Respondents No. 2 to 4.

Based on the above, the tribunal came to the conclusion that In such a situation, where there is a prohibition on recovery of property, can the owner/lessors even file an application before the AA for recovery of such property? The tribunal answered in negative and held that such application before AA is not maintainable in terms of Section 14 (1) (d). The situation might have been different, if such a prayer was made by the RP with express consent of Committee of Creditors which is not the case.

The tribunal addressed the contention that as per explanation to Section 18 (1) of the Code to the term 'assets' does not include the assets owned by a third party but in possession of the CD therefore the respondent being the owners of the property are not covered by section 14.

The tribunal while rejecting this contention observed that this definition of the assets is confined to section 18 only and in no way is connected to section 14 therefore the corporate office being property of third parties is hit by section 14 of the IBC which could not be recovered during the CIRP.

The tribunal further reminding the AA of its duties observed that moratorium under Section 14 binds the AA also by the use of the word “shall by order declare moratorium for prohibiting all of the following” inter alia meaning that it is a mandatory action on the part of AA. The AA should have first examined, whether it is possible to allow such applications in view of express provisions in Section 14 (1) (d) even if such applications are supported by CoC. Prima facie the Code does not seem to provide such discretion to AA.

The tribunal concluded that the AA has not examined the maintainability of such application by owner/lessor in view of express provision under Section 14 (1) (d) of the Code.The issue of supremacy of commercial wisdom of CoC could not be considered at this stage as the prayer in the I.As was filed by owners/lessors and not by RP/ Respondent No.1 acting with express consent of CoC. The order of AA does not give detailed reasons for allowing the main prayer in I.As without considering the provisions of Section 14 (1) (d) of the Code.

Accordingly, the present appeal was allowed and matter was remanded back to the NCLT to examine and decide the issue in a comprehensive manner.

Case Title: Chandrakant Khemka Versus Santanu Bhattacharjee and Ors.

Case Reference: Company Appeal (AT) (Ins.) No. 1064 of 2023

Judgment Date: 12/11/2024

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