Pranav B Prem

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that an order terminating the lease cannot be passed during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly when leasehold rights are assets of the corporate debtor (CD) in its possession. The bench comprised Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member), and Mr. Barun Mitra (Technical Member), who delivered this judgment while allowing two appeals challenging the termination of a lease during the ongoing Corporate Insolvency Resolution Process (CIRP).

Background of the Case

The CIRP against GPT Steel Industries Limited (Corporate Debtor) commenced on May 2, 2019, upon an application filed under Section 7 of the IBC. Gujarat Industrial Development Corporation (GIDC) had granted a 99-year lease to the Corporate Debtor via a License Agreement dated April 22, 2004, and a Lease Deed dated October 6, 2004, for Plot No. 301. Additionally, another agreement was executed for adjacent Plots No. 338 to 341 through an allotment letter dated December 20, 2005.

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On April 7, 2022, GIDC issued a Show Cause Notice under the Gujarat Public Premises (Eviction of Unauthorized Occupants) Act, 1972, against the Corporate Debtor concerning the non-payment of rent and other charges amounting to Rs. 1,22,86,283/-. On the same day, GIDC also issued a termination order, thereby terminating the lease.

In response, the Resolution Professional (RP) filed an Interlocutory Application (IA No. 461 of 2022) seeking the setting aside of the Show Cause Notice and termination order. However, by an order dated April 8, 2024, the Adjudicating Authority (NCLT, Ahmedabad) disposed of the IA and directed the RP to approach the Appellate Authority of GIDC while restraining GIDC from taking any coercive action during the moratorium period. Additionally, on the same day, the NCLT remitted the Resolution Plan (IA No. 159/AHM/2020) back to the Committee of Creditors (CoC) for reconsideration, despite there being no finding of non-compliance under Section 30(2) of the IBC. Aggrieved by these orders, the RP and the Asset Reconstruction Company (India) Limited filed separate appeals before the NCLAT.

Arguments by the Parties

The RP contended that the action of GIDC in issuing the Show Cause Notice and terminating the lease violated Section 14 of the IBC. It was argued that the leasehold rights constituted assets of the Corporate Debtor under the CIRP, and any attempt to terminate the lease during the moratorium period was prohibited by law.

On the other hand, GIDC argued that the Corporate Debtor only held leasehold rights and could not claim ownership over the land. GIDC further asserted that Section 14 of the IBC does not override the statutory rights of a lessor to terminate a lease and that the NCLT lacked jurisdiction to entertain the RP's application.

NCLAT's Observations

The NCLAT relied on the Supreme Court's judgment in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority & Anr. [(2020) 13 SCC 208], where it was held:  "When it comes to any clash between MHADA Act and the Insolvency Code, on the plain terms of Section 238 of the Insolvency Code, the Code must prevail. This is for the very good reason that when a moratorium is spoken of by Section 14 of the Code, the idea is that, to alleviate corporate sickness, a statutory status quo is pronounced under Section 14 the moment a petition is admitted under Section 7 of the Code, so that the insolvency resolution process may proceed unhindered by any of the obstacles that would otherwise be caused and that are dealt with by Section 14."

The Tribunal distinguished the present case from the Supreme Court's ruling in Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors. [(2020) 13 SCC 308], where the NCLT was found to lack jurisdiction to direct the execution of a supplemental lease deed. The Tribunal clarified that in the present case, the issue was not about the grant of a new lease but rather the termination of existing leasehold rights during the moratorium.

The NCLAT held that the leasehold rights of the Corporate Debtor, which were already dealt with in the Resolution Plan, could not be unilaterally terminated by GIDC during the moratorium. The Tribunal explicitly observed: "When order passed by GIDC is clearly hit by Section 14(1), it was well within the jurisdiction of NCLT within the meaning of Section 60, sub-section (5) (c) of the IBC to entertain the application."

The NCLAT further noted that since GIDC had already filed its claim, which was partially admitted to the extent of Rs. 1.54 crores and dealt with in the Resolution Plan, the issuance of the Show Cause Notice and the termination order during the moratorium was impermissible.

Ruling of the NCLAT

The NCLAT allowed both appeals and made the following directions:

1. The termination order and the Show Cause Notice issued by GIDC dated April 7, 2022, were quashed, holding them to be in violation of Section 14 of the IBC.

2. The order of the NCLT remitting the Resolution Plan back to the CoC was set aside, as there was no recorded finding of non-compliance under Section 30(2) of the IBC.

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The Tribunal further directed the Adjudicating Authority to expeditiously decide the pending application for the approval of the Resolution Plan, which had been pending for over four years.

Appearance 

For Appellants: Mr. Abhijeet Sinha Sr. Advocate with Mr. Tishampati Sen, Ms. Riddhi Sancheti, Mr. Ashish Parwani, Mr. Rajeev Nair, Mr. Anurag Anand, Ms. Gitika Makhija and Mr. Mukul Kulhari, Advocates.

For Respondent: Dr. Charu Mathur, Advocate for GIDC.

Cause Title: Divyesh Desai RP of GPT Steel Industries Ltd. Versus Gujarat Industrial Development Corporation Bhuj

Case No: Company Appeal (AT) (Insolvency) No.1103 of 2024 & I.A. No.3974 of 2024

Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Member (Technical)], Arun Baroka [Member (Technical)]

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