Lease Hold Rights Existing in Favor of Corporate Debtor Cannot be Terminated During Moratorium Period u/s 14 of IBC: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) New Delhi has ruled that lease hold rights existing in favour of corporate debtor cannot be terminated during moratorium period under section 14 of the Insolvency Bankruptcy Code (IBC), 2016. In response to an application filed under Section 7 of the Code, a decision was made to initiate the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor (CD). The CD was granted a 99-year lease on Plot No.301, where it operated, by the Gujarat Industrial Development Corporation ("GIDC") under a License Agreement dated 22.04.2004 and a Lease Deed dated 06.10.2004. The CD made a second agreement with respect to adjacent Plot Nos. 338 to 341 through an allotment letter dated December 20, 2005. Read More: Zero Tax on ₹2 Crore Business from April 1st 2025? Here’s the Truth For Plot No. 301 and Plot Nos. 338 to 341, GIDC issued a Show Cause Notice in violation of the Gujarat Public Premises (Eviction of Unauthorized Occupants) Act, 1972, for nonpayment of rent, an installment, or revenue charges totaling Rs. 1,22,86,283/-. The Resolution Professional (RP) was invited to attend and offer an explanation on April 28, 2022. In a separate letter dated April 7, 2022, GIDC issued a termination order, ending the contract. Following the issuance of the Show Cause Notice and the lease termination by order on the same day, the RP filed an appeal to set aside the Show Cause Notice/termination order d. GIDC filed its response after notices in the applications were sent out. After the Adjudicating Authority heard the parties and rendered a ruling on April 8, 2024, the RP was directed to request that the Appellate Authority of GIDC quanch the Notices. On the same day that the Resolution Plan was sought to be approved, a separate order was issued to consider the application. In a subsequent order dated April 8, 2024, the Adjudicating Authority returned the Resolution Plan to the CoC for evaluation. Step by Step Handbook for Filing GST Appeals Click Here Furthermore, it was claimed that the CD owned the CD's assets, including lease hold rights; as a result, the GIDC's ruling was unlawful under Section 14 of the IBC and ought to be reversed. The appellant in the Company Appeal (AT) contended that the adjudicating body lacked the authority to order the Resolution Plan to be returned to the CoC for review and that Section 30, sub-section (2), was not breached. On the other hand, the Respondent Company Appeal (AT) (Ins.) contended that GIDC had complete jurisdiction to terminate the lease agreement because CD only had lease hold rights and could not claim any land rights. Furthermore, it was argued that the lessor's statutory rights and intrinsic consideration are not superseded by Section 14. Lease termination remains enforceable under the Resolution Plan and is not impacted by payment. The Adjudicating Authority lacked the authority to review the RP's application. Read More: No Tripartite Agreement: CESTAT Rules Services to Overseas Clients as Export, Dismisses Revenue’s Appeal The Tribunal noted that the Supreme Court in Rajendra K. Bhutta vs. Maharashtra Housing and Area Development Authority and Anr. (2020) held that “when it comes to any clash between MHADA Act and the Insolvency Code, on the plain terms of Section 238 of the Insolvency Code, the Code must prevail. This is for the very good reason that when a moratorium is spoken of by Section 14 of the Code, the idea is that, to alleviate corporate sickness, a statutory status quo is pronounced under Section 14 the moment a petition is admitted under Section 7 of the Code, so that the insolvency resolution process may proceed unhindered by any of the obstacles that would otherwise be caused and that are dealt with by Section 14.” The Tribunal bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) observed that it does not help the GIDC to have the authority to terminate the lease and give the CD notice to vacate during the above-mentioned moratorium. In addition to being addressed in the Resolution Plan, the GIDC's claim was partially admitted to the extent of Rs. 1.54 crores. The Tribunal found that GIDC's show cause notice, which was utilized to end the lease, clearly breached section 14 of the Code. By denying the RP's interlocutory request to overturn the show-cause notice order, the adjudicating authority erred. It further stated that when the GIDC order was in violation of Section 14(1), the NCLT was empowered to examine the case under Section 60, subsection (5)(c) of the IBC. Know How to Prepare Estimation and Viability for Project Reports? Know more Click here While allowing the appeal, the Tribunal stated that there is no issue with the idea that the Resolution Plan may be referred for reconsideration if it violates section 30(2) of the Code. The Adjudicating Authority did not record any findings that the plan did not comply with section 30(2) of the code; however, it sent the plan to the CoC for review, which was not justified. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates