Development Rights Constitute Property U/S 3(27) Of IBC, Can Be Included In Information Memorandum By RP U/S 29 Of Code: NCLAT

Brief Facts

These two Appeals have been filed by the same Appellant challenging the order dated 30.04.2024 passed by the Adjudicating Authority.Company Appeal (AT) (Insolvency) No.1117 of 2024 has been filed challenging the order dated 30.04.2024 passed in IA No. 4648 of 2020 which was filed by the Appellant. By the impugned order the IA No. 4648 of 2020 has been disposed of.

Company Appeal (AT) (Insolvency) No.1116 of 2024 has been filed against the order dated 30.04.2024 passed in Intervention Petition IA No. 58 of 2023 by which order Adjudicating Authority has allowed the intervention application filed by M/s. Art Constructions Pvt. Ltd., the Successful Resolution Applicant (SRA). Both the Appeals have arisen out of common facts and sequence, they have been heard together and are being decided by this common judgment.

Appellants herein are the owners of land measuring 36 acres 04 Guntas situated at Kengeri Village, Kengeri Hobli, Bangalore South Taluk. Appellants along with Mr. Karar Ahmed (brother of Appellant No.1) entered into MoU dated 25.04.2008 with M/s. Upkar Developers (India) Pvt. Ltd. which company was incorporated by the Appellants themselves for development of the land.

A loan was taken from HUDCO of Rs.15 Crores mortgaging the assets. The Appellant entered with a Collaboration Agreement dated 05.07.2008 with M/s. Upkar Developers (India) Pvt. Ltd. and M/s. Era Landmarks (India) Ltd. M/s. Era Landmarks (India) Ltd. was referred to as Developer in the Collaboration Agreement who undertook to discharge the loan of HUDCO and obtain the building plan of the project land and develop the project.

The developer undertook to pay Rs.35 Crores towards interest free Refundable Security Deposit. On 25.01.2010, an Assignment Agreement was entered into by the Developer with its one of the subsidiaries namely— 'Parinda Buildcon Private Limited' assigning rights of developer to develop and carry on the project.

The developers in the Assignment Agreement had also undertaken to discharge its liabilities under the Collaboration Agreement, in event of 'Parinda Buildcon Private Limited' failed to discharge its liabilities.

The owners along with M/s. Upkar Developers (India) Pvt. Ltd. issued two legal notices dated 17.02.2012 and 22.02.2012 alleging that the corporate debtor has not been able to discharge its obligations under the Collaboration Agreement. By the legal notices, Collaboration Agreement dated 05.07.2008, addendum dated 28.10.2009, Assignment Agreement dated 25.01.2010 and General Power of Attorney dated 05.07.2008 were terminated.

Arbitrator passed a detailed order on 15.07.2015 terminating the proceedings. Against the order dated 15.07.2015 passed by the Sole Arbitrator, an application under Section 34 of the Arbitration & Conciliation Act, 1996 was filed by the developer- M/s. Era Landmarks Ltd. which came to be dismissed by the Addl. City Civil & Sessions Judge, Bengaluru on 12.10.2018. M.F.A. No. 10068 of 2018 was filed by both the Claimants before the High Court of Karnataka at Bengaluru against the order dated 12.10.2018 passed by the Addl. City Civil & Sessions Judge, Bengaluru.

The High Court dismissed M.F.A No.10068 of 2018 holding that Arbitral Award dated 6 Company Appeal (AT) (Insolvency) No. 1116 of 2024 & 1117 of 2024 15.07.2015 was passed under Section 32(2) (c) of the Arbitration & Conciliation Act, 1996 and hence could not have been subjected to challenge under Section 34 of the Arbitration & Conciliation Act, 1996.

An order was passed on 05.12.2018 by the Adjudicating Authority in an application under Section 7 of the IBC filed by Edelweiss Asset Reconstruction Company Ltd. initiating the CIRP against M/s. Adel Landmarks Ltd. (M/s. Era Landmarks Ltd. was subsequently re-named as M/s. Adel Landmarks Ltd., the Corporate Debtor herein).

A Public Notice was published on 07.08.2020 in Bangalore Edition, The Times of India qua the schedule property. Notice was issued by one M/s. Brigade Enterprises Ltd. intimated that M/s. Brigade Enterprises Ltd. intends to enter into a Joint Development Agreement for the development of the properties mentioned therein. The properties mentioned therein were the properties of 35 acres 11 Guntas which was subject to the Development Agreement.

The Resolution Professional after coming to know about the above notice dated 07.08.2020 sent objection in response to the public notice. Resolution Professional stated that the Corporate Debtor- Era Landmarks Ltd. is currently under CIRP. Reference of Collaboration Agreement executed by owners dated 05.07.2008 was made and Resolution Professional pleaded that any step dealing the property shall be violation of Moratorium under Section 14 of the IBC.

Adjudicating Authority passed an order disposing of IA No.4648 of 2020 and by the order of the same date, allowed the Intervention Petition No.58 of 2023 filed by the SRA. Aggrieved by the aforesaid two orders, these Appeals have been filed.

Contentions

The appellant submitted that the Adjudicating Authority committed error in deciding the application, the Corporate Debtor had no rights in the subject land and IRP could not have taken control and custody of the subject assets.

• That the ownership of the Appellant over the subject land is undisputed. Subject land was not in possession with the corporate debtor at the time of initiation of the CIRP. In any view of the matter, assets which are owned by third party and are in possession of the corporate debtor are excluded by virtue of Section 18(1)(f) explanation of the IBC.
• That sole Arbitrator has returned finding that 1st Claimant i.e. Era Landmarks (India) Ltd. has not retained any one of its rights which accrued to it from the Collaboration Agreement, meaning thereby, that no right could have been pursued either before the Sole Arbitrator or before the Adjudicating Authority on behalf of the Corporate Debtor.
• That the corporate debtor does not retain any rights under the Collaboration Agreement after execution of the Assignment Agreement in favour of 'Parinda Buildcon Private Limited'. Sole Arbitrator held that the Claimant No.2 has taken over the rights and duties of the Claimant No.1. Collaboration Agreement was terminated by the owners which termination has attained finality.
• That moratorium under Section 14 of the IBC is not applicable with regard to assets which are not the assets of the corporate debtor and belong to third party. An agreement to arbitrate excludes and ousts the jurisdiction of Civil Courts and, therefore, the NCLT could not have refused to exclude the subject properties from the CIRP when the issues stand decided by the Arbitrator and have attained finality.
• That the Resolution Professional's duty and power to include any asset in the Information Memorandum is subject to the determination of ownership by a Court or Authority in terms of Section 18(1)(f)(vi) of the Code. The findings of the Arbitral Tribunal are clearly determination of rights of parties and therefore enforceable and binding on parties.

Per contra, the respondents submitted that the Assignment Agreement dated 25.01.2010 was executed in favour of 'Parinda Buildcon Private Limited', the subsidiary of the corporate debtor only for operational convenience. The Corporate Debtor retained its obligation of being responsible to perform the terms of the Collaboration Agreement in case of default or failure by 'Parinda Buildcon Private Limited'

• That the Arbitrator terminated the proceedings vide order dated 15.07.2015 without determining the rights of the corporate debtor as regards the scheduled property. The order terminating the arbitration proceedings did not result in any award as contended by the Appellants. Challenge to the order dated 15.07.2015 was repelled by the District Court on technical ground of having been termed the petition as an appeal instead of arbitration suit.
• That the corporate debtor having development rights in the subject land, Resolution Professional has rightly included the same in the Information Memorandum.
• That a duly registered Collaboration Agreement dated 05.07.2008 entered into between the parties cannot be unilaterally terminated by way of a legal notice without following the due process of law. The legal notice issued by the Appellants has no consequence on registered Collaboration Agreement. The Assignment Agreement dated 25.01.2010 executed by the corporate debtor in favour of 'Parinda Buildcon Private Limited' its wholly owned subsidiary was only partial assignment of rights for operational convenience and that too limited to implementation and marketing under the Collaboration Agreement does not amount to novation of contract.
• That on account of the Moratorium imposed under Section 14 of the Code in respect of the corporate debtor, the development rights conferred on account of Collaboration Agreement cannot be taken away from the corporate debtor during the CIRP.

NCLAT's Analysis

The first question before the tribunal was whether the Adjudicating Authority had power to decide the subject land to be the assets of the corporate debtor under section 60 of the IBC and referred to the language of this provision which states that the National Company Law Tribunal is empowered to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings.

Based on the above, the tribunal noted that whether an asset is required to be reflected in the Information Memorandum or the asset belong to the Corporate Debtor are the question which arise out of or in relation to the insolvency resolution process.

The present is a case where the Corporate Debtor has claimed development rights in the land. It is no more res-integra that the development rights are property within the meaning of Section 3(27) of the IBC. We may refer to the judgment of the Hon'ble Supreme Court in Victory Iron Works Ltd. vs. Jitendra Lohia & Anr.- (2023) where the Hon'ble Supreme Court had held that the development rights created in favour of the corporate debtor constitute “property” within the meaning of Section 3(27) of the IBC, the tribunal noted.

The tribunal while answering the first question noted that the question as to whether the assets which are included in the Information Memorandum are the assets of the corporate debtor is foundation of entire CIRP process. When the inclusion of the said asset is questioned before the NCLT by the Appellant, Adjudicating Authority does not lack jurisdiction in entering into question and deciding as to whether assets are part of the CIRP or it should be excluded.

The tribunal came to the conclusion that the above question could be determined by the Adjudicating Authority and parties need not have to be relegated to the Civil Court having jurisdiction, the view of the NCLT to the contrary cannot be approved. Judgment of the Hon'ble Supreme Court in Victory Iron, as noticed above, clearly has held that the NCLT and NCLAT can exercise jurisdiction in the above facts.

The second question before the tribunal was whether the orders passed by the Sole Arbitrator is an award within the meaning of Arbitration & Conciliation Act, 1996.

The tribunal referred to section 32 of the Arbitration Act which provides that statutory scheme under section 32 provides that arbitral proceedings shall be terminated by the final arbitral award or by an order of the arbitral tribunal under sub-section (2). Thus, expressions 'final arbitral award' and 'an order of the arbitral tribunal under sub-section (2)' are two distinct natures of orders contemplated by subsection (1) of Section 32.When section 34 is analysed then it becomes clear that recourse is provided only against arbitral award.Thus, an application under Section 34 is maintainable only against an arbitral award.

The tribunal further noted that the statutory scheme under Section 35 thus, is clear that an arbitral award shall be final and binding on the parties and persons claiming under them respectively. Thus, finality has been attached under Section 35 to the arbitral award and by virtue of Section 36 arbitral award can be enforced.

In PCL Suncon vs. National Highway Authority of India- 2021 the Delhi High Court has held that an order, which terminates the arbitral proceedings as the Arbitral Tribunal finds it impossible or unnecessary to continue the arbitral proceedings, would not be an award. This is so because it does not answer any issue in dispute in arbitration between the parties; but is an expression of the decision of the Arbitral Tribunal not to proceed with the proceedings, the tribunal noted.

The while answering the second question observed that thus, in view of the fact that the Sole Arbitrator terminated the arbitration proceedings under Section 33(2)(c) by order dated 15.07.2015, the order dated 15.07.2015 cannot be held to be an award within the meaning of Arbitration & Conciliation Act, 1996, determining the rights of both the parties so as to bind both the parties in any subsequent proceedings.

The third question before the tribunal was whether the IRP/ RP could or could not have included the subject land in the Information Memorandum/ CIRP process of the corporate debtor by virtue of Section 18(1)(f) explanation.

The tribunal noted that Counsel for the Appellant referring to explanation also submits that the assets which are owned by third party and in possession of the corporate debtor held under trust or under contractual agreement are excluded from the definition of asset.

The present is a case where corporate debtor is not claiming any ownership rights over the subject land. Corporate debtor is claiming development rights and the ownership of the Appellants is not even denied by the Resolution Professional, the tribunal noted.

The tribunal further observed that the judgment of the Hon'ble Supreme Court in Victory Iron (supra) has already been noticed where it was held that the development rights is a property within the meaning of Section 3(27) and the Resolution Professional has every right to move to the NCLT to protect the interest of the corporate debtor in the land where corporate debtor claims development rights.

The tribunal further noted that now we come to the Assignment Agreement which is relied by the Appellant to support his submission that no rights are left in the corporate debtor.

The tribunal observed that the owners are also part of the assigment agreement, hence, the assignment is made in accordance with Clause 9.2 of the Collaboration Agreement and Clause 3 of the agreement has already been noted which provided “all the terms and conditions of the agreement shall continue without any change” and it was further stated that the Assignment Agreement shall form part of the agreement and shall read together with the agreement. Assignment Agreement did not cancel the Collaboration Agreement and to be read as part of the Agreement.

The tribunal further noted that Agreement at very beginning has noticed that the First Party has resolved and decided to transfer all its rights, duties and obligations under the Agreement to the Second Party for operational convenience of implementing and marketing the project envisaged in the Agreement to which the second party has agreed.

The tribunal concluded that IRP/RP has rightly included the subject land in the Information Memorandum/ CIRP and he was not precluded by virtue of Section 18(1)(f) explanation from asserting development rights in the subject land.

Case Title: K.H. Khan & Anr. Vs. Art Constructions Pvt. Ltd. & Ors.

Case Reference: Company Appeal (AT) (Insolvency) No. 1116 of 2024 and Company Appeal (AT) (Insolvency) No. 1117 of 2024

Judgment Date: 14/11/2024

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