IBC- Resolution Professional Entitled To Take Control Of Corporate Debtor's Rights In Assets Licensed To Third Parties : Supreme Court

The Supreme Court has held that a resolution professional is entitled to take control of the rights of a corporate debtor in assets which are licensed to third parties. Such an action of the RP will come within the ambit of Section 25 of the Insolvency and Bankruptcy Code 2016.

A Bench comprising of Justice V. Ramasubramanian and Justice Pankaj Mithal held that the assets owned by a third-party, but in the possession of the Corporate Debtor held under contractual arrangements, are excluded from the definition of “assets” in Section 18 of IBC, however, the said exclusion does not extend to Section 25 of IBC. Therefore, the Explanation to Section 18 is inapplicable to Section 25 of IBC.

BACKGROUND FACTS

M/s Energy Properties Private Limited (“Energy Properties”) is the ostensible owner of a land admeasuring 10.19 acres situated at Howrah, West Bengal (“Property”). Avani Towers Private Limited (“Corporate Debtor”) provided finance to Energy Properties for the purchase of the said Property and holds 40% of the share capital in Energy Properties. Further, a Joint Development Agreement was also executed between Energy Properties and the Corporate Debtor, whereby the latter was obliged to develop housing complex on the Property.

Subsequently, the Corporate Debtor executed a Leave and License Agreement on 19.08.2011 in favour of Victory Iron Works Ltd. (“Victory”), which was signed by Energy Properties as a confirming party. A part of the Property, admeasuring 10000 sq. ft., was licensed to Victory.

Few years later, M/s Sesa International Limited (“Financial Creditor”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The Adjudicating Authority admitted the Corporate Debtor into CIRP on 15.10.2019.

The suspended Board of Directors of the Corporate Debtor informed the Resolution Professional that Energy Properties is forcefully removing the security guards from the Property. Therefore, the Resolution Professional filed an application under Section 25 of IBC, seeking direction to Energy Properties and Victory to not to obstruct the sole and exclusive possession of the Property; and to direct the local district administration to give assistance to the Resolution Professional in taking possession of the Property.

On 12.02.2020, the Adjudicating Authority directed Energy Properties and Victory to not to obstruct the possession and activities of the Resolution Professional. It was further held that the order will not prevent Victory from carrying on its activities in the portion of the land given to it under the Leave and License Agreement.

Both Energy Properties and Victory filed appeals before the NCLAT against the order dated 12.02.2020. The appeals were dismissed on 08.04.2021, however, the NCLAT confirmed that the Property to the extent of 10000 sq. ft. shall continue to be enjoyed by Victory without any interference by the Resolution Professional. The NCLAT also directed the Resolution Professional to disclose in the Information Memorandum that the Corporate Debtor only holds development rights over the Property.

Victory filed an appeal before the Supreme Court, challenging the Order dated 08.04.2021. It was argued that by virtue of Section 18 of IBC, disputes between the Corporate Debtor and the third-party lessee/licensee are not amenable to the jurisdiction of NCLT/NCLAT. Under Section 25 of IBC, the Resolution Professional can seek custody of only the Corporate Debtor’s assets and not assets belonging to third parties, it was contended.

The RP defended the NCLT/NCLAT orders by contending that the impugned orders have not hampered the rights of Victory and what is sought to be included in the Information Memorandum are the development rights that the Corporate Debtor has over the property in question

SUPREME COURT VERDICT

Development rights come within the meaning of "property" under IBC

Deciding the first issue, the Court held that "the development rights created in favour of the Corporate Debtor constitute “property” within the meaning of the expression under Section 3(27) of IBC".

Since the expression “asset” in common parlance denotes “property of any kind”, the bundle of rights that the Corporate Debtor has over the property in question would constitute “asset” within the meaning of Section 18(f) and Section 25(2)(a) of IBC. 

The Court noted that a bundle of rights and interests were created in favour of the Corporate Debtor, by a series of documents.

"Therefore, these rights and interests in the immovable property are definitely liable to be included by the Resolution Professional in the Information Memorandum and the Resolution Professional is duty bound under Section 25(2)(a) to take custody and control of the same", the bench observed.

Explanation under Section 18 not applicable to Section 25

The main ground of attack of the appellants to the impugned orders of the NCLT and NCLAT is that by virtue of the Explanation under Section 18 of the Code and also by virtue of the judicial pronouncements, the disputes between the Corporate Debtor and the third-party lessee/licensee are not amenable to the jurisdiction of the authorities under the Code.

In this regard, the Bench observed that the Explanation under Section 18 of IBC begins with a caveat namely “for the purposes of this Section”.

“Therefore, the exclusion of assets owned by a third-party, but in the possession of the Corporate Debtor held under contractual arrangements, from the definition of the expression “assets”, is limited to Section 18. In other words, the Explanation under Section 18 does not extend to Section 25.”

 It was further observed that security guards were posted at the Property and thus NCLT and NCLAT did a delicate act of balancing, by protecting the interests of Victory to the extent of the land permitted to be occupied. Victory does not have the status of a lessee, but is merely a licensee and a license does not create any interest in the immovable property.

“Therefore, NCLT as well as NCLAT were right in holding that the possession of the Corporate Debtor, of the property needs to be protected. This is why a direction under Regulation 30 had been issued to the local district administration.”

The Bench upheld the decision of NCLT and NCLAT and dismissed the appeal.

Case Title: Victory Iron Works Ltd. v Jitendra Lohia & Anr.

Citation : 2023 LiveLaw (SC) 193

Insolvency and Bankruptcy Code 2016 -the development rights created in favour of the Corporate Debtor constitute “property” within the meaning of the expression under Section 3(27) of IBC -Since the expression “asset” in common parlance denotes “property of any kind”, the bundle of rights that the Corporate Debtor has over the property in question would constitute “asset” within the meaning of Section 18(f) and Section 25(2)(a) of IBC- these rights and interests in the immovable property are definitely liable to be included by the Resolution Professional in the Information Memorandum and the Resolution Professional is duty bound under Section 25(2)(a) to take custody and control of the same-para 37

Insolvency and Bankruptcy Code 2016 - The exclusion of assets owned by a third-party, but in the possession of the Corporate Debtor held under contractual arrangements, from the definition of the expression “assets”, is limited to Section 18. In other words, the Explanation under Section 18 does not extend to Section 25

Regulation 30 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016- NCLT as well as NCLAT were right in holding that the possession of the Corporate Debtor, of the property needs to be protected. This is why a direction under Regulation 30 had been issued to the local district administration -Para 50

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