Section 35 Of IBC | Liquidator Empowered To Recover Arrears Of Rent/Damages From Tenant In Occupation Of Corporate Debtor’s Property: NCLT Hyderabad

Further, in terms of Section 35(1)(b) and (d) of IBC, Liquidator is empowered to recover arrears of rent/damages from a Tenant, as it is incidental as well as necessary to secure the custody/control of the Corporate Debtor’s assets, which forms part of the liquidation estate.

Background Facts

M/s. Butta Infrastructure Pvt. Ltd. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (CIRP) by the NCLT. Thereafter, on 24.02.2022 the NCLT ordered Liquidation of the Corporate Debtor. The Liquidator so appointed noticed that an amount of Rs. 281,67,10,552/- as on 31.05.2022 is due from Meridian Educational Society (“Society/Tenant”) towards the monthly lease rentals for the Corporate Debtor’s properties (“Premises”).

The Premises of the Corporate Debtor were leased to the Society for running a school.

The Liquidator filed an application under Section 60(5) of IBC before the NCLT, seeking directions to the Society to pay the outstanding lease rentals amounting to Rs.281,67,10,552/-. The Liquidator argued that in 2018 the Corporate Debtor had secured loan of Rs. 310,00,00,000/- from LIC Housing Finance Limited by mortgaging the Premises.

The Society contended that the Liquidator is barred from approaching NCLT in terms of Section 33(5) and Explanation II to Section 11 of IBC and NCLT lacks jurisdiction to adjudicate the dispute concerning recovery of amount under Section 60 (5) of IBC.

NCLT Verdict

The Bench observed that Lease Deeds were executed between the Parties and when Society was unable to pay lease rentals, the same was made payable from 01.04.2021. Post execution of registered cancellation deeds dated 06.09.2019, the Society was obligated to vacate the Premises. However, the Society declined to vacate the Premises and continued to remain in possession, which changed its status from a Tenant to a ‘Tenant at sufferance’ effective from 06.09.2019.

The Bench held that the Society now being a Tenant at Sufferance, is liable to pay rent/damages/mesne profits to the Lessor, as long as it remains in the occupation of the Premises.

The Bench placed reliance on the Supreme Court judgment in Victory Iron Works Ltd. vs Jitendra Lodha & Anr, 2023 Live Law (SC), wherein it was held that the rights and interests in the immovable property are liable to be included in the Information Memorandum and the Resolution Professional is duty bound under Section 25(2)(a) of IBC to take custody and control of the same.

The Bench opined that the Liquidator, under Section 35(1)(b)(d) of IBC, is empowered to take into his custody or control all the assets, property, effects & actionable claims of the Corporate Debtor and can take measures to protect and preserve the assets of the corporate debtor as he considers necessary. Accordingly, the Liquidator is empowered to recover arrears of rent/damages from the Society as it is incidental as well as necessary to secure the custody/control of the Corporate Debtor’s assets, which form part of the liquidation estate.

“Therefore, when on the basis of the factual matrix, supra, in re.,Victory Iron Works, it has been held by the Hon’ble Supreme Court that the Resolution Professional can include the “properties in the Information Memorandum and duty bound under Section 25(2)(a) to take custody and control of the same, the liquidator, having been similarly empowered under section 35 (1) (b) (d) of IB Code, to take into his custody or control all the assets, property, effects & actionable claims of the corporate debtor and to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary, cannot be said to be lacking the power to take necessary measures for recovery of rents/arears/damages in respect of the property of the corporate debtor, as recovery of arears of rent/damages from the respondent herein is nothing but an act ancillary /incidental besides necessary, in the process of securing the custody or control of the asset of the corporate debtor forming part of the liquidation estate.”

Further reliance was placed on the NCLAT judgment in M/s. Jhanvi Rajpal Automotive Pvt. Ltd., Vs R.P. of Rajpal Abhikaran Pvt. Ltd and Anr, in CA (AT) (Insolvency) No. 1417 of 2022, wherein it has been held that, “When the Corporate Debtor has the ownership rights over the premises which premises can be taken in control by IRP/RP, we are of the view that for eviction of the Appellant especially in the event when lease in favour of the Appellant has come to an end, filing a suit is not contemplated in the statutory scheme contained in IBC.”

The Bench held that the NCLT has jurisdiction has to direct a Tenant to pay the rent, who in possession of the property of the Corporate Debtor and has defaulted in payment of rent.

“Therefore, initiation of measures for recovery of rents/arears/damages in respect of the property of the corporate debtor, being an act ancillary/incidental and in fact necessary to secure custody or control of the asset forming part of the liquidation estate of the corporate debtor, we are unable to buy the submission of the respondent that Adjudicating Authority has no jurisdiction to direct payment of rent by the tenant in possession of the property of the corporate debtor who committed default in payment of rent.”

The Society has been directed by the Bench to pay the arrears of rent and vacate the Premises.

Case Title: LIC Housing Finance Ltd. v M/s. Butta Infrastructure Pvt. Ltd.

Case No.: CP (IB) No. 325/7/HDB/2020

Counsel For Applicant: Shri Y. Suryanarayana, Advocate

Counsel for Respondent: Shri T. Niranjan Reddy, Senior Advocate assisted by Ms.Sarvani Desiraju, Advocate.

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