Analysis of Issue of Handover of Lease Asset During CIRP.

Judgement- Chandrakant Khemka v. Santanu Bhattacharjee (RP)

Case No.: Company Appeal (AT) (Ins.) No. 1064 of 2023

Decision Date: 12-Nov-2024National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi

The primary dispute centered around the corporate office property (referred to as "White House") in possession of the Corporate Debtor (CD), Nandini Impex Private Limited. The property was leased to the CD under leave and license agreements, which were terminated pre-CIRP. During the CIRP, creditors sought possession of the property through applications before the NCLT, which directed the Resolution Professional (RP) to hand over the property. This decision was challenged on grounds that it violated the moratorium under Section 14(1)(d) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Observations by the NCLAT

1. Section 14(1)(d) and its Scope:

• Absolute Bar on Recovery: The NCLAT observed that Section 14(1)(d) creates an absolute prohibition on the recovery of any property by an owner or lessor if such property is occupied by or in possession of the CD during the moratorium. The provision ensures that third parties cannot disrupt the CD's possession of leased or licensed assets while the CIRP is ongoing.
• Mandatory Nature: The Tribunal emphasized the mandatory nature of Section 14(1)(d), binding both the Adjudicating Authority (NCLT) and the RP. The provision is designed to protect the CD’s operational stability and prevent any piecemeal recovery actions by lessors or owners during CIRP.

2. Lack of CoC Authorization:

• No Final Resolution by CoC: The NCLAT scrutinized the minutes of the 3rd, 5th, and 6th CoC meetings. It found that while the CoC had discussed the possibility of vacating the property, no conclusive resolution authorizing the handover of the premises was passed. Instead, the RP had independently conveyed to the NCLT that the property was not required for CIRP purposes.
• Role of the CoC: The Tribunal clarified that decisions to relinquish possession of lease assets must be explicitly approved by the CoC, given its commercial wisdom. Without such approval, the RP’s unilateral decision to hand over possession was procedurally flawed.

3. Differentiation from Prior Precedents:

• The Tribunal referred to the earlier NCLAT judgment in Sangita Fiscal Services Pvt. Ltd. v. Duncan Industries, where the CoC’s decision to release a vacant property (not being actively used by the CD) was upheld. In that case: The property was not necessary for the CD’s ongoing operations. No moratorium concerns under Section 14(1)(d) were raised. The decision to vacate was explicitly made in the CoC’s commercial wisdom.
• Key Distinctions: In Khemka, the Tribunal noted that: The disputed property was actively occupied and being used as the corporate office of the CD, housing statutory records and essential operations. The applications seeking possession were filed by the lessors/owners, not the RP or CoC. Section 14(1)(d) directly applied, rendering the recovery applications by lessors/owners impermissible.

4. Applications Filed by RP with CoC Approval:

• The NCLAT indicated that an RP, acting with explicit CoC approval, could potentially move an application before the Adjudicating Authority to relinquish possession of leased property if it is deemed unnecessary for CIRP purposes. However: The RP must provide robust justification for such a decision, ensuring it aligns with the CD’s interests and resolution objectives. The CoC must pass a clear resolution authorizing the handover, reflecting its commercial wisdom. The Adjudicating Authority must consider the applicability of Section 14(1)(d) and evaluate whether releasing possession would contravene the moratorium.

Findings:

1. Non-Compliance with Section 14(1)(d): The NCLAT held that the NCLT erred in allowing recovery applications filed by the property owners/lessors without examining the moratorium provisions under Section 14(1)(d).
2. Improper Delegation by RP: The RP’s decision to relinquish possession, without formal CoC approval, was deemed procedurally unsound.
3. Remand for Fresh Consideration: The Tribunal remanded the matter to the NCLT, directing it to re-examine the applications in light of Section 14(1)(d), the CoC’s role, and the procedural lapses.
4. Guidance for Future Cases: The NCLAT clarified that applications for releasing possession of lease assets during CIRP must originate from the RP, supported by the CoC’s commercial wisdom, and be justified as necessary for achieving the resolution objectives.

Takeaway

The judgment underscores the inviolability of the moratorium under Section 14(1)(d) during CIRP and reiterates the necessity of CoC approval for critical decisions impacting the CD’s assets or operations. It further highlights that such decisions must be subjected to judicial scrutiny to ensure they align with the IBC’s overarching objectives