IBC | Terminated Contract Not Corporate Debtor's Asset; Moratorium Won't Revive Extinguished Contractual Rights : Supreme Court

The Supreme Court has held that a contract which has been lawfully terminated before the initiation of insolvency proceedings cannot be treated as an “asset” or “property” of the corporate debtor, and therefore does not enjoy the protection of the moratorium under Section 14 of the Insolvency and Bankruptcy Code.The Bench observed that “once a contract stands lawfully terminated, it ceases to exist and cannot be treated as an 'asset' or 'property' of the corporate debtor. The moratorium under Section 14 does not have the effect of reviving or re-creating contractual rights that have been extinguished before insolvency.”The Court further observed that a defaulting developer cannot take refuge under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to stall the redevelopment of a housing project, especially when the agreement was lawfully terminated prior to the initiation of insolvency proceedings. Holding thus, the bench comprising Justices JB Pardiwala and R Mahadevan upheld the Bombay High Court's decision to permit the housing society to proceed with redevelopment through a newly-appointed developer and directed statutory authorities to grant all pending approvals within two months. “The Courts consistently held that a defaulting developer cannot invoke the moratorium under Section 14 of the IBC to perpetuate inaction or defeat the legitimate rights of residents.”, the Court observed, while upholding the termination of the Society's agreement with the Appellant-developer and appointment of a new developer to continue the remaining work. “The invocation of Section 14 of the IBC to obstruct rehabilitation of residents was a misconceived attempt to shield inaction under the guise of moratorium protection…. When such projects are delayed or abandoned, it is the residents – often living in hazardous or temporary conditions – who suffer the greatest hardship. In this context, the invocation of insolvency proceedings or the moratorium under the Insolvency and Bankruptcy Code, 2016 cannot become a legal device to indefinitely stall redevelopment or to obstruct the legitimate rights of slum dwellers and cooperative housing societies. The Code was never intended to be used as a shield for non-performance at the cost of human rehabilitation.”, the court added. BackgroundThe appellant, AA Estates Private Limited (“AA Estates”, the corporate debtor), represented by its Resolution Professional , was originally appointed as the developer for the redevelopment of a society named Kher Nagar Sukhsadan Co‑operative Housing Society Ltd. (“the Society”) under a registered Development Agreement dated 16.10.2005, supplemented by an agreement in 2014.Substantial investments (over ₹ 10.82 crores) were made by AA Estates: including payments for additional buildable area, infrastructure charges, compensation to allottees, and obtaining statutory approvals. Redevelopment, however, did not proceed as many society members refused to vacate, and internal disputes, litigation by dissenting members, and other defaults (non-payment of transit rent, failure to deliver vacant possession) persisted over nearly two decades.Meanwhile, a Corporate Insolvency Resolution Process (CIRP) was admitted against the developer on 06.12.2022 at the instance of a secured financial creditor.While so, the Society purported to terminate the Development Agreements (through resolutions and notices between 2019–2021), and engaged a new developer in December 2023 After termination, the Society appointed another developer-Tri Star Development LLP, which began demolition and construction. When the municipal authorities refused to process approvals due to the insolvency proceedings involving the former developer, the Respondent-society approached the Bombay High Court under Writ Jurisdiction to direct the authorities to act on Tri Star's applications.Aggrieved by the High Court's decision, the Appellant moved to the Supreme Court, contending that the High Court could not have granted the relief when insolvency procedings were pending against the original developer.Supreme Court's DecisionThe Bench held that once the underlying development agreement had been legally terminated before CIRP, it did not survive as an asset of the corporate debtor.The Court reiterated that the IBC moratorium under Section 14 cannot be used to resurrect a contract that had already come to an end due to the developer's defaults. Only subsisting rights and assets can attract protection, the Court said.Upholding the High Court's interference, the judgment authored by Justice Mahadevan ruled against the invocation of moratorium under Section 14 of the IBC, stating that “once a contract stands lawfully terminated, it ceases to exist and cannot be treated as an 'asset' or “property' of the corporate debtor. The moratorium under Section 14 does not have the effect of reviving or re-creating contractual rights that have been extinguished before insolvency.”Further, the Court...

IBC | Terminated Contract Not Corporate Debtor's Asset; Moratorium Won't Revive Extinguished Contractual Rights : Supreme Court

Yash Mittal

The Court also observed that a defaulting developer cannot take shield of IBC moratorium to block redevelopment projects.

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