Terminated Redevelopment Agreement Not an Asset of Corporate Debtor; IBC Moratorium Cannot Revive Extinguished Contractual Rights
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling, the Supreme Court clarified that a redevelopment agreement validly terminated prior to the commencement of the corporate insolvency resolution process did not form part of the corporate debtor’s assets. The Court held that the statutory moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, could not be invoked to resurrect extinguished contractual or development rights, nor could it operate to stall independent statutory approvals granted for redevelopment activities.
The Supreme Court Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan, while adjudicating a civil appeal, held that a redevelopment agreement lawfully terminated before the initiation of CIRP ceased to have any legal existence or proprietary character in the hands of the corporate debtor. The Court categorically ruled that the moratorium under Section 14 of the Insolvency and Bankruptcy Code could not revive such extinguished contractual rights, nor could it be used as a shield to restrain statutory authorities or third parties from proceeding with redevelopment approvals under applicable municipal and planning laws.
The Supreme Court had examined a civil appeal arising from a judgment of the Bombay High Court, wherein directions had been issued to statutory authorities to grant redevelopment approvals in favour of a newly appointed developer during the pendency of the Corporate Insolvency Resolution Process of the Corporate Debtor. The appeal was preferred by the Corporate Debtor and its Resolution Professional, who had contended that the High Court’s intervention during CIRP violated the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 and adversely affected the assets of the Corporate Debtor. The writ proceedings before the High Court had originated from a request made to statutory authorities to facilitate redevelopment based on a fresh development arrangement executed after termination of earlier agreements, and were asserted to be independent of the insolvency process.
The factual matrix revealed that a registered redevelopment agreement had been executed in 2005 between the Respondent and the Corporate Debtor, followed by supplementary arrangements extending timelines and revising compensation. Despite substantial payments made towards statutory charges, approvals, and compensation, redevelopment had remained stalled for several years due to persistent disputes, delays, and litigation attributable to non-performance. Although an earlier CIRP had been initiated and subsequently set aside, a second CIRP was admitted in December 2022 at the instance of a Financial Creditor, thereby triggering the moratorium under Section 14. During this period, the Respondent had terminated the earlier redevelopment arrangements and entered into a fresh agreement with a new developer, leading to objections by the Resolution Professional and the ensuing litigation.
The Appellant had argued that the redevelopment agreements constituted valuable assets of the Corporate Debtor and were therefore protected by the statutory moratorium. It was contended that the High Court had disposed of the writ petition without affording an opportunity to file a reply, in violation of principles of natural justice. The directions permitting redevelopment through a new developer were alleged to have extinguished contractual rights of the Corporate Debtor, undermined the objective of value maximisation under the IBC, and bypassed the agreed dispute resolution mechanism. Reliance was placed on judicial precedents recognising development rights as assets capable of protection during CIRP, including decisions emphasising that subsisting contractual rights connected with insolvency could fall within the ambit of moratorium protection.
The Respondent, on the other hand, had submitted that redevelopment had remained stalled for nearly two decades due to prolonged defaults and non-performance by the Corporate Debtor. It was asserted that the redevelopment agreements had been validly and lawfully terminated prior to the commencement of the second CIRP, that no possession or proprietary interest had ever been transferred in favour of the Corporate Debtor, and that no subsisting asset existed on the insolvency commencement date to attract moratorium protection. It was further contended that the writ petition had been confined to seeking directions against statutory authorities, that redevelopment had substantially progressed under the new arrangement, and that any interference would gravely prejudice occupants awaiting rehabilitation.
Upon consideration, the Supreme Court held that the redevelopment agreements had been validly terminated prior to the commencement of the second CIRP following prolonged and inexcusable defaults by the Corporate Debtor, and that such termination was independent of insolvency proceedings and effected after due notice. The Court held that the Corporate Debtor possessed only a limited contractual licence, falling within the scope of Section 52 of the Indian Easements Act, 1882, without any proprietary or possessory interest in the subject property. Consequently, no enforceable right had subsisted on the insolvency commencement date so as to invoke the jurisdiction of the NCLT under Section 60(5)(c) of the Code. In this context, the Court applied the principles laid down in Gujarat Urja Vikas Nigam Limited v. Amit Gupta and Others, REEDLAW 2021 SC 03533, reiterating that the moratorium under Section 14 protects only subsisting rights that are integrally connected with the insolvency process and does not extend to revive rights that stood extinguished prior thereto.
The Supreme Court further held that terminated redevelopment agreements did not constitute “assets” or “property” of the Corporate Debtor for the purposes of Section 14 of the IBC. It was reiterated that the moratorium cannot be invoked to resurrect terminated contracts or shield non-performance, and that, at best, the Corporate Debtor was left with a claim for damages, which could not be equated with a proprietary interest warranting moratorium protection. Mere executory or contingent contractual rights, in the absence of possession or ownership incidents, were held insufficient to attract protection under the Code. The Court distinguished its earlier decision in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Another, REEDLAW 2020 SC 02501, observing that statutory actions affecting subsisting assets of the corporate debtor stood on a different footing from redevelopment approvals granted where no asset of the corporate debtor subsisted.
The Supreme Court also upheld the High Court’s exercise of writ jurisdiction, holding that directions issued to statutory authorities under Article 226 of the Constitution did not interfere with the CIRP or violate the moratorium. Relying upon the principles laid down in Embassy Property Developments Private Limited v. State of Karnataka and Others, REEDLAW 2019 SC 12501, the Court held that Section 60(5)(c) of the IBC could not be invoked to oust the jurisdiction of constitutional courts in matters involving public law and statutory permissions. The plea of violation of natural justice was rejected on the ground that adequate representation and notice had been afforded and that no prejudice had been demonstrated. The appeal was accordingly dismissed, with the Court emphasising that insolvency protection could not be misused as a shield to revive terminated contracts or defeat redevelopment and rehabilitation objectives, while clarifying that any monetary claims of the Appellant could be pursued in accordance with law.
Mr. Dhruv Mehta, Sr. Advocate, Mr. Vipin Kumar Jai, AOR and Mr. Kartikeya Sharma, Advocate, represented the Appellants.
Mr. CA Sundaram, Sr. Advocate with Mr. Shashwat Singh, AOR, Mr. Anshuman Srivastava, AOR, Mr. Aaditya Aniruddha Pande, AOR, Mr. Chirag M. Shroff, AOR, Mrs. Suchitra Atul Chitale, AOR, Mr. Rohan Talwar, Mr. Siddharth Dharmadhikari, Mr. Shrirang B. Varma, Mr. Bharat Bagla, Mr. Sourav Singh, Mr. Aditya Krishna, Mr. Adarsh Dubey, Ms. Chitransha Singh Sikarwar, Mrs. Mahima C. Shroff, Mr. Dhananjay Kataria, Ms. Jayati Chitale, Mr. Nirbhay Singh, Mr. Shauryapratapsinh Barhat, Mr. Madhav Chitale, Mr. R. Vishnu Kumar, Mr. Saurav Beniwal, Mr. Aman Kumar, Mr. Sidhant Verma and Ms. Manshi Vats, Advocates, appeared for the Respondents.
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