CoC Approval Does Not Empower Resolution Professional To Cancel Existing Leases; Issues Must Be Resolved By Competent Courts: NCLT Kolkata

Brief Facts:

H.S. Mercantile (Applicant) filed an application in the NCLT seeking several reliefs including the deletion of Clause 4.9.3 from the resolution plan, the dismissal of an application.

The facts of the case revolved around H.S. Mercantile being a lessee of a property owned by GIT Textiles Manufacturing Limited (Corporate Debtor) in Ahmedabad, Gujarat. The lease agreements between H.S. Mercantile and the corporate debtor include a Memorandum of Understanding (MoU), a Tenancy Agreement, and a registered Deed of Lease. The lease is for 99 years. H.S. Mercantile claimed to have paid Rs. One Crore for the execution of the lease deed a fact known to UCO Bank (Financial Creditor). It had previously filed an application seeking to exclude its leasehold rights from the Information Memorandum and the Resolution Plan. However, this application was dismissed as the NCLT found no infirmity in including the property as an asset of the corporate debtor in the Information Memorandum. An appeal against this order was withdrawn by H.S. Mercantile.

H.S. Mercantile contended that Clause 4.9.3 of the approved resolution plan which stated that all litigation regarding the title of the land will be extinguished and all leasehold rights of H.S. Mercantile will be canceled upon approval of the resolution plan is prejudicial to its interests. It argued that this clause, or any similar clause, should not be allowed as it results in the cancellation of its registered lease deed. The Applicant argued that NCLT under the Insolvency and Bankruptcy Code does not have the jurisdiction to approve a resolution plan that cancels a lease granted through a registered lease deed.

The Respondent countered that H.S. Mercantile's earlier application which sought to exclude the property from the Information Memorandum and to protect its leasehold interests, was dismissed, and thus, the current application was barred by the principle of "issue estoppel." The Respondent argued that the earlier order thoroughly considered the Applicant's leasehold rights and the objections raised by the RP. The Respondent argued that the subject property was mortgaged by the corporate debtor to UCO Bank, which took possession under the SARFAESI Act, and that H.S. Mercantile, being related to the corporate debtor, holds a lease agreement that is void ab initio under Section 65A of the Transfer of Property Act.

Observations by the NCLT:

The NCLT in its earlier order examined the issue concerning the inclusion of a subject property, owned by the Corporate Debtor, in the Information Memorandum. This inclusion was contested by the Applicant who claimed leasehold rights over the property. The NCLT, without delving into the merits of the lease, permitted the inclusion of the property as an asset of the Corporate Debtor. The NCLT noted that it is not a civil court and, thus, cannot resolve civil disputes related to the cancellation or extinguishment of leasehold rights.

The NCLT further reiterated that a Resolution Plan must comply with existing laws. It noted that the Resolution Applicant, after taking over the Corporate Debtor, must apply to the relevant regulatory or statutory authorities for the renewal of business permits and essential services. These authorities are expected to consider such applications in alignment with the objectives of the IBC which aims to resolve the insolvency of the Corporate Debtor. The Resolution Professional (RP) was also directed to approach the appropriate forum for the termination of the lease.

The NCLT referred to the Supreme Court's decision in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka which clarified the jurisdictional limits of the NCLT. The Supreme Court held that if the NCLT were to decide all types of property claims, certain provisions in the IBC, such as Section 18(f)(vi), would be redundant. The Supreme Court noted that assets owned by third parties but in possession of the Corporate Debtor under contractual arrangements are not included in the definition of "assets" for the purposes of the IBC. This distinction is important as it indicates that the RP cannot bypass judicial or quasi-judicial processes to resolve disputes involving such assets.

Therefore, the NCLT held that while the RP has the duty to act on behalf of the Corporate Debtor in various proceedings, including seeking the legal termination of a lease, the RP cannot shortcut the judicial process. Approval of a Resolution Plan by the Committee of Creditors (CoC) does not grant the RP the authority to cancel an existing lease. It held that such matters must be resolved by a competent court with the proper jurisdiction.

The NLCT further noted that the Successful Resolution Applicant (SRA) is responsible for pursuing the termination of the disputed lease through a competent court of law upon the approval of its plan. Accordingly, the NCLT directed the RP to delete clause 4.9.3 from the Resolution Plan or to refrain from including any clauses that contemplate the cancellation or termination of the existing registered lease in favor of the Applicant.

Case Title: UCO Bank vs GIT Textiles Manufacturing Limited

Case Number: I.A. (IB) No. 1350/KB/2024 In C.P. (IB) No. 600/KB/2019

For Applicant in IA 1350/KB/2024: Mr. Rishav Banerjee, Adv. Ms. Suranjana Chatterjee, Adv. Ms. Sweety Shaw, Adv.

For Resolution Professional: Mr. Manik Bose, Adv. Mr. Arnab Dutta, Adv. Ms. P. Choudhary, Adv.

Date of Judgment: August 02, 2024

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