India: Recovery Of Possession By MHADA During CIRP

Insolvency and Bankruptcy Code, 2016 (“IBC”) has been enacted by the legislature with an intent to revive and rehabilitate companies with a view to maximize value for all stakeholders. In this regard, it is obvious that the resolution of insolvency under the IBC can only be of the “assets” of the corporate debtor.

Explanation to Section 18 of the IBC specifically excludes assets that are in the possession of the corporate debtor but are owned by third parties and are only held by the corporate debtor in trust or through contractual arrangement.

Accordingly, the resolution plan proposed under the IBC cannot include such assets which are albeit in the possession of the corporate debtor but are not actually owned by such corporate debtors. However, the provisions of Section 14 (1) (d) mandate that no person can recover any property of a corporate debtor undergoing a Corporate Insolvency Resolution Process (“CIRP”) in accordance with the provisions of IBC.

It appears to be illogical that while these trust properties cannot form part of the resolution of the corporate debtor, the said assets cannot be recovered by the rightful owners from the possession/ custody of the corporate debtor.

In a recent matter of Rajendra K. Bhuta vs. MHADA, the Supreme Court has decided the issue pertaining to whether any property in which the Corporate Debtor has Development Rights in its favour pursuant to a Development Agreement with MHADA can be recovered during the moratorium period.

The Corporate Debtor had, in this case, made an Interlocutory Application to restrain the MHADA from taking possession of the land in question. The NCLT had dismissed this application stating that Section 14(1)(d) of the Code does not cover licenses to enter upon land in pursuance of Joint Development Agreements, stating that such licenses would only be “personal” and not interests created in property. An appeal was preferred to the NCLAT against this order. The NCLAT upheld the order of the NCLT and held that the land in question belongs to MHADA and has not been ‘formally transferred' in favour of the Corporate Debtor, and hence cannot be treated to be an asset of the Corporate Debtor for the purposes of Section 14(1)(d). This order of the NCLAT was under challenged before the Supreme Court in the above judgment.

Section 14 (1) (d) of the Code provides as follows:

The Supreme Court has, inter alia interpreted the expression ‘occupied by' to mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression possession, which would connote possession being either actual or symbolic.

Accordingly, the Court has held that a Corporate Debtor holding a land under a Joint Development Agreement is deemed to be in actual occupation thereof, and therefore recovery of occupation / possession of such assets would be prohibited. Accordingly, the MHADA was restrained from taking actual possession of the land pursuant to a termination of the Development Agreement.

Needless to add, the Supreme Court has also laid down in case of clash between the provisions of the MHADA Act and the Insolvency Code, MHADA Act would prevail and for this purpose has relied on its earlier judgement in the matter of Municipal Corporation of Greater Mumbai (MCGM) v. Abhilash Lal and Ors. (Civil Appeal No. 6350 of 2019).

It is a common practice for Real Estate Companies to enter into Joint Development Agreements with other developers for construction of real estate projects. The judgment in Rajendra Bhuta (supra) provides that these development rights of the Corporate Debtor under joint development agreements will be deemed to be land that the corporate debtor is in actual ‘possession' of and will be immune to any recovery action by parties during insolvency. Needless to add, that such recovery proceedings may well be initiated on liquidation.

While the Supreme Court in the present case has not considered the provisions of Section 18 and Section 36 as to what constitutes an ‘asset' of the corporate debtor. Arguably, to resolve the conflict between the Explanation to Section 18 (4) and the provisions of Section 14 (1) (d), the following propositions would hold true: (i) the assets which are sought to be excluded under Section 18 and Section 36 are only assets where the corporate debtor does not have independent rights and is only holding them in trust capacity or other similar capacities (not being ownership of any right title or interest); (ii) whereas the provisions of Section 14 aim to dissuade the corrosion of ‘assets' of the corporate debtor implying thus that the corporate debtor ought to have a legal right title or interest (not merely as trustee) in such asset.

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