Leasehold rights must be legally renewed and that mere applications for renewal do not automatically grant rights
- REEDLAW
- Sep 22, 2024
- 3 min read
NCLAT upheld the Corporate Debtor's valid leasehold rights, ruling that lease renewals must meet statutory requirements and cannot be assumed automatically.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench led by Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) reviewed a bunch of appeals and observed that leasehold rights must be legally renewed and that mere applications for renewal do not automatically grant rights; consequently, expired leases cannot be claimed as assets under the Insolvency and Bankruptcy Code if statutory requirements, such as salami payment, are not fulfilled. This ruling affirms the importance of adhering to legal formalities for lease renewals to establish rightful possession during insolvency proceedings.
In the recent judgment delivered by the National Company Law Appellate Tribunal (NCLAT), multiple appeals were considered involving Ram Ratan Modi, the Resolution Professional (RP) for Duncans Industries Ltd., which is undergoing Corporate Insolvency Resolution Process (CIRP). The appeals contested various orders from the Kolkata Bench of the National Company Law Tribunal (NCLT) concerning the RP's requests for possession of several tea estates managed by the Corporate Debtor. The NCLT had consistently denied these requests, stating that the leases for the estates had expired and were not renewed, thus precluding the RP from asserting control over the properties.
The NCLAT undertook a comprehensive review of the circumstances surrounding the lease agreements for the tea estates, considering the implications of the West Bengal Estates Acquisition Act, 1953. Despite the RP's argument that the lease renewals were pending at the time the CIRP commenced, the NCLAT highlighted the necessity for a legally executed renewal to substantiate claims of ownership. Citing established precedents, including the Supreme Court's ruling in Hardesh Ores (P) Ltd. vs. Hede & Company, the tribunal clarified that mere applications for renewal do not equate to automatic renewal of leases. The legal framework stipulates that the absence of compliance with statutory requirements, such as payment of salami, invalidates the leases and, consequently, the RP’s claims.
The judgment specifically addressed key issues, including the validity of leasehold rights as assets under the Insolvency and Bankruptcy Code (IBC). While the NCLAT found that some tea estates, including Garganda, had valid lease agreements, it upheld the earlier rejections for other estates based on consistent rulings from the NCLT. It noted that the RP had failed to adequately demonstrate the continued validity of leases for estates like Kilcott and Bagarcote, as these had been subjected to expired agreements prior to the initiation of CIRP. The tribunal emphasized that operational management by third parties during the insolvency proceedings further complicated the ownership disputes.
Furthermore, the NCLAT addressed the implications of Section 14 of the IBC, which imposes a statutory moratorium on the recovery of property occupied by the corporate debtor upon the commencement of insolvency proceedings. It acknowledged that actions taken to regain possession of the tea gardens post-CIRP initiation violated this moratorium, thus reinforcing the RP's claim to control over the validly leased estates. Ultimately, the NCLAT partially allowed the appeal regarding Garganda Tea Garden while affirming the rejections concerning other estates. This ruling underscores the critical importance of maintaining clarity and adherence to legal protocols in the management of assets during the insolvency process, establishing the necessity for valid leasehold rights to facilitate effective corporate restructuring.
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