No Violation of Section 14(1)(d) IBC in Auction of Subsidiary's Assets Under SARFAESI Act: NCLAT Principal Bench

Section 14(1)(d) prohibits any recovery action or enforcement of security interests by creditors, landlords, or lessors if the assets are in the possession or occupation of the corporate debtor.

Brief Facts:

Wind World (India) Limited (Appellant), referred to as the “Corporate Debtor,” is the holding company of Respondent No.2, Wind World (India) Infrastructure Pvt. Ltd., which was previously known as Enercon India Infrastructure Pvt. Ltd. Wind World (India) Infrastructure Pvt. Ltd. was tasked with constructing and operating a power switchyard ("the Facility") essential for pooling power from Enercon India Limited's existing or proposed wind energy projects. A Facility Agreement dated December 28, 2007 was entered into between the Corporate Debtor and Respondent No.2 which allowed the Corporate Debtor to use, operate, and maintain the Facility. Respondent No.2, a subsidiary of the Corporate Debtor, built the substations and switchyards that the Corporate Debtor was permitted to operate under the terms of this agreement which was amended periodically up to 2016. Respondent No.2 later entered into two loan agreements with Indian Renewable Energy Development Agency Limited (Respondent No.1) receiving loans of Rs.90 crores each under these agreements. According to the Facility Agreement, the Corporate Debtor was obligated to pay facility usage charges to Respondent No.2. Additionally, a Hypothecation Agreement was executed on July 5, 2012 and December 19, 2013 which created a charge in favor of Respondent No.1 over the substations and other assets. A Conditional Deed of Assignment was also executed which assigned all rights of Respondent No.2 to Respondent No.1. Following defaults in loan repayments by Respondent No.2, the account was declared non-performing which led to the initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. Respondent No.1 issued notices under the SARFAESI Act and began proceedings to recover the dues. On April 25, 2022, Respondent No.1 issued an Expression of Interest (EoI) seeking new contractors for the Facility which prompted the Corporate Debtor to file an application challenging the EoI on the grounds of an alleged violation of Section 14 of the IBC.

The Adjudicating Authority rejected the submission of the Corporate Debtor that EoI is hit by Section 14 of the IBC in view of the commencement of CIRP against the Corporate Debtor. Feeling aggrieved, the Appellant approached the NCLAT.

Contentions of the Parties:

The Corporate Debtor contended that the issuance of the EoI by Respondent No.1 to appoint a new operator for the Facility violated Section 14(1)(d) of the IBC which imposes a moratorium on actions against the assets of the Corporate Debtor during the CIRP. The Corporate Debtor argued that, under the Facility Agreement, it is authorized to use, operate, and maintain the Facility, and thus, the EoI should not be issued during the moratorium. The Corporate Debtor claimed that the Facility Use Agreement remains in force and should not be terminated under the SARFAESI Act while the CIRP is ongoing. Further, it was argued that the Conditional Deed of Assignment with Respondent No.1 was contrary to the Facility Use Agreement, and the Facility's continued use is vital for the Corporate Debtor's operations and recovery.

On the other hand, Respondent No.1 argued that the measures taken including issuing the EoI, do not contravene Section 14 of the IBC. Respondent No.1 argued that Section 14(1)(d) is not applicable in this scenario because Respondent No.1 is neither the owner nor lessor of the Facility; rather, Respondent No.2 is the owner. Respondent No.1 maintained that the Corporate Debtor's occupation of the Facility does not equate to ownership for the purposes of Section 14.

Observations by the NCLAT:

The NCLAT assessed the Facility Use Agreement between the Corporate Debtor and Respondent No.2 to determine whether the Corporate Debtor's operational and maintenance rights over the Facility constituted an occupation that contravened Section 14(1)(d) of the IBC. The key question was whether the Facility, although used by the Corporate Debtor, was still considered in its possession or occupation.

Upon examining the Facility Use Agreement, the NCLAT noted that the Corporate Debtor was granted only the rights to operate and maintain the Facility with ownership remaining unequivocally with Respondent No.2. It noted that Clause 2.2(d) of the Agreement stipulated that despite the Corporate Debtor's rights to operate and maintain the Facility, the ownership remained with Respondent No.2. This clause explicitly delineated the limits of the Corporate Debtor's rights which were confined solely to the operation and maintenance of the Facility without any claim to ownership.

Further, the NCLAT noted that Clause 2.1 confirmed the Corporate Debtor's rights to use, operate, and maintain the Facility. However, the NCLAT found that these operational rights did not equate to occupation or possession of the Facility under Section 14(1)(d) of the IBC. This section prohibits the recovery of any property by an owner or lessor if the property is occupied and in possession of the Corporate Debtor. The NCLAT held that the Corporate Debtor's role as an operational and maintenance contractor did not amount to occupation or possession of the Facility in the legal sense required to invoke Section 14(1)(d).

Consequently, the appeal was dismissed by the NCLAT.

Case Title: Wind World (India) Limited vs Indian Renewable Energy Development Agency Limited and anr

Case No: Company Appeal (AT) (Insolvency) No.175 of 2023

For Appellant : Mr. Sumant Batra and Ms. Nidhi Yadav, Advocates. Ms. Neha Naik and Mr. S. Laskari Advocates

For Respondent : Mr. Nakul Sachdiva, Mr. Karundeep Singh and Mr. Abhinandan Sharma, Advocates for Respondent No. 1.

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