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 FACTSM/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 questionSUPREME COURT VERDICTDevelopment rights come within the meaning of "property" under IBCDeciding 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 25The main ground of attack of the appellants to the impugned orders of the NCLT and NCLAT ...

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

Pallavi Mishra

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

Pallavi Mishra

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INR 1099+GST

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