SC: Moratorium Ineffective Once Contract Stands Terminated; No Surviving Asset

Summary:

The Supreme Court ruling primarily addresses a significant legal concern over the terminated real estate development agreement during a Corporate Insolvency Resolution Process (CIRP). In A A Estates Private Limited vs Kher Nagar Sukhsadan Co-operative Housing Society Ltd. & Ors., the Court addresses whether developmental rights, arising from a contract terminated for non-performance prior to initiation of CIRP, constitutes ‘assets’ or ‘property’ of the corporate debtor under section 3(27) of the Insolvency and Bankruptcy Code, 2016 (IBC). In doing so, the judgement clarifies that the moratorium under Section 14 of the IBC does not revive extinguished contractual rights and does not apply to non-subsisting interests. Furthermore, the court affirmed that the High Court was justified in exercising its jurisdiction under Article 226 to direct statutory authorities to process a redevelopment proposal by a new developer, as such public law directions do not infringe upon the NCLT’s insolvency jurisdiction.

Facts:

• Respondent No. 1 Society and Respondent No. 3 Maharashtra Housing & Area Development Authority, had entered into a Lease Deed dated 12.02.1996, thereby leasing a plot along with the building known as ‘Kher Nagar Sukh Sadan’ in favour of the Respondent No. 1 for a period of 99 years with effect from 01.04.1980.
• On 16.10.2005, Respondent No. 1 Society executed a registered Development Agreement with Appellant No. 1 for redevelopment of the subject project. Pursuant to the same, a Power of Attorney dated 23.12.2005 was also executed by Respondent No. 1 in favour of Appellant No. 1 and its directors. After negotiations, a supplementary development agreement dated 09.04.2014 was executed, under which Appellant No.1 was required to complete redevelopment within 40 months.
• However, redevelopment was stalled as the remaining 41 members failed to vacate the premises. Appellant No. 1 also incurred expenses to carry out necessary repairs to the existing building, but the Society persisted in attributing the delays to the developer.
• Dispute deepened in 2019, and CIRP was initiated against Appellant No.1, but was set aside on 12.06.2020. Subsequently, by an order dated 6.12.2022, CIRP was admitted against Appellant No.1 at the instance of State Bank of India, and Appellant No. 2 was appointed as the Resolution Professional.
• The Respondent No. 1 Society disregarding its own lapses and the statutory moratorium under Section 14 of the IBC, purported to terminate the Development Agreement with Appellant No. 1 and, by executing a fresh Development Agreement and Power of Attorney dated 10.12.2023, appointed Respondent No. 8 as a new developer.
• Thereafter, Respondent No. 1 Society filed WP. No. 3893 of 2024 which was disposed of by the High Court, by the impugned judgment dated 11.09.2024. Aggrieved by the same, the appellants are before this Court with the present appeal.

Issues:

1. Whether the termination of the Development Agreement dated 16.10.2005 and Supplementary Agreements dated 23.12.2005 and 09.04.2014 by Respondent No. 1 Society prior to the initiation of the second CIRP was valid and effective in law.
2. Whether the Development Agreement and the Supplementary Agreements constitute “assets” or “property” of the corporate debtor so as to attract the protection of moratorium under Section 14 of the IBC.
3. Whether the High Court was justified in allowing the writ petition filed by Respondent No. 1 Society and directing the statutory authorities to process and grant approvals in favour of Respondent No. 8 for redevelopment of the subject project.
4. Whether the proceedings before the High Court stood vitiated by breach of the principles of natural justice, as alleged by the appellants.

Judgement:

• The court held that the termination of the Development Agreement dated 16.10.2005 and the Supplementary Agreement dated 09.04.2014 by Respondent No.1 was valid, lawful and effective in law. The court reasoned that the termination was not caused by the corporate debtor’s insolvency, but by prolonged and inexcusable default and non-performance. Even under the supplementary agreement the developer failed to commence or complete any substantial portion of the redevelopment work. The termination was based on legitimate contractual grounds unrelated to insolvency. The court affirmed that NCLT’s jurisdiction under section 60(5)(c) cannot be invoked to set aside a legitimate contractual termination unless it was solely due to insolvency or if setting it aside was crucial to prevent the corporate death of debtor.
• The court held that the development agreement and supplementary agreement do not constitute assets or property of the corporate debtor so as to attract the protection of moratorium under Section 14 of the IBC. The court reasoned that the moratorium under section 14 is intended to preserve existing, enforceable and subsisting rights as of insolvency commencement date, not to revive or resurrect contracts that were lawfully terminated or rights that had creased prior to insolvency. The court distinguished from Victory Iron Works Ltd. vs Jitendra Lohia, noting that in that case, the corporate debtor possessed proprietary and financial interests. Section 14(1)(d) protects property occupied by or in possession of corporate debtor.
• The court held that the High Court was justified in entertaining the writ petition and directing the statutory authorities to process and grant approvals in favour of the new developer (Respondent No. 8) subject to compliance with the law. The constitutional jurisdiction under Article 226 of the High court is not curtailed by Section 14 of IBC. The directions of High Court fall within the public law domain. The High court rightly intervened to prevent administration paralysis and to protect the rehabilitation rights of resident.
• The court held that the proceedings before the High Court were conducted in substantial compliance with the principles of natural justice, and the appellants plea was rejected. The appellants were represented by counsel and were aware of the final hearing. The writ prayer was directed solely at the statutory authorities, not against the appellants.

Analysis:

In essence the judgment ruled that a corporate debtor cannot invoke the IBC moratorium to resurrect development contracts that were validly terminated due to pre-insolvency non-performance, especially when such inaction frustrates a project serving a critical public purpose like housing rehabilitation. The principles established that the IBC moratorium protects what is, not what was. If a contractual right has been lawfully extinguished before the date of insolvency commencement, it offers no protection to the corporate debtor.