Supreme Court Upholds Inclusion of Development Rights as Corporate Assets in Insolvency: Victory Iron Works Ltd. vs. Jitendra Lohia (2023)

Introduction

Date of the Judgment: 14 March 2023
Citation: 2023 INSC 227
Judges: V. Ramasubramanian, J. and Pankaj Mithal, J.

Can a company’s right to develop a property be considered an asset during insolvency proceedings? The Supreme Court of India recently addressed this question in a case involving a dispute over land rights and the inclusion of development rights in the corporate debtor’s assets. This judgment clarifies the scope of “assets” under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court examined whether the development rights of a corporate debtor over a property should be included in the information memorandum prepared by the Resolution Professional.

The bench comprised Justices V. Ramasubramanian and Pankaj Mithal, with the judgment authored by Justice V. Ramasubramanian.

Case Background

The case revolves around a 10.19-acre land in Howrah, West Bengal. M/s Energy Properties Private Limited (Energy Properties) is the registered owner of the land. Avani Towers Private Limited (Corporate Debtor) financed the purchase of this property and held a 40% stake in Energy Properties, along with a Joint Development Agreement. M/s Victory Iron Works Ltd. (Victory) claimed possession of the entire property, based partly on a Leave and License Agreement and partly on an oral understanding.

A financial creditor initiated the Corporate Insolvency Resolution Process (CIRP) against Avani Towers. The Resolution Professional sought to include the development rights of the Corporate Debtor over the property as part of its assets. This move was contested by both Energy Properties and Victory, leading to the present dispute.

Timeline:

Course of Proceedings

The Adjudicating Authority (NCLT) admitted the insolvency petition against the Corporate Debtor on 15.10.2019. The Resolution Professional filed an application seeking a direction to Energy Properties and Victory not to obstruct the possession of the property. Both Energy Properties and Victory contested this, arguing that the NCLT lacked jurisdiction to pass an eviction order.

Despite questioning the NCLT’s jurisdiction, Victory also filed an application seeking an injunction against the Resolution Professional. The NCLT directed Victory and Energy Properties not to obstruct the Resolution Professional’s activities, while protecting Victory’s possession of the 10,000 sq. ft. of land under the Leave and License Agreement.

Aggrieved by the NCLT order, both Victory and Energy Properties appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT dismissed the appeals, confirming the NCLT’s order while directing the Resolution Professional to disclose that the Corporate Debtor only held development rights over the property. Both Victory and Energy Properties then filed independent appeals before the Supreme Court.

Legal Framework

The Supreme Court considered several provisions of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly:

• Section 3(27) of the IBC: Defines “property” to include “money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property.” This definition is crucial for determining what can be considered an asset of the corporate debtor.
• Section 18 of the IBC: Outlines the duties of the Interim Resolution Professional, including collecting information about the assets of the corporate debtor and taking control of assets over which the corporate debtor has ownership rights. The Explanation to this section excludes certain assets from the definition of “assets,” such as those owned by a third party and held under contractual arrangements.
• Section 25 of the IBC: Specifies the duties of the Resolution Professional, including preserving and protecting the assets of the corporate debtor and taking custody and control of all its assets.

The Court also referred to Section 3(37) of the IBC, which states that words and expressions not defined in the Code but defined in other statutes like the Indian Contract Act, 1872, shall have the meanings assigned to them in those Acts.

Arguments

Arguments by Victory Iron Works Ltd.:

• ✓ The land is owned by Energy Properties, not the Corporate Debtor.
• ✓ Under Section 25(2)(a) of the IBC, the Resolution Professional can only take control of the Corporate Debtor’s assets, not third-party assets.
• ✓ The application by the Resolution Professional under Regulation 30 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, was misconceived.
• ✓ The Adjudicating Authority lacks jurisdiction to order eviction of a tenant/lessee/licensee, citing Embassy Property Developments Private Limited vs. State of Karnataka and Others, (2020) 13 SCC 308, Gujarat Urja Vikas Nigam Limited vs. Amit Gupta and Others, (2021) 7 SCC 209, and Tata Consultancy Services Limited vs. SK Wheels Private Limited Resolution Professional, Vishal Ghisulal Jain, (2022) 2 SCC 583.

Arguments by Energy Properties:

• ✓ The Corporate Debtor is not in possession of the property, so the IBC mechanism cannot be used to recover possession.
• ✓ Section 18(f) of the IBC excludes assets owned by a third party in the possession of the Corporate Debtor under contractual arrangements.
• ✓ The decisions in Embassy Property Developments Private Limited, Gujarat Urja Vikas Nigam Limited, and Tata Consultancy (supra) support their case.

Arguments by the Resolution Professional and Committee of Creditors:

• ✓ The impugned orders do not affect Victory’s rights under the Leave and License Agreement.
• ✓ The Corporate Debtor was given possession of the entire land under the Development Agreement and subsequent MoUs.
• ✓ The development rights are intangible assets of the Corporate Debtor.
• ✓ The decision in Sushil Kumar Agarwal vs. Meenakshi Sadhu & Others, (2019) 2 SCC 241, establishes that development rights are an intangible asset of the developer.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. What is the nature of the right or interest that the Corporate Debtor has over the property in question, for the purpose of deciding the inclusion of the same in the Information Memorandum prepared by the Resolution Professional under Regulation 36 of the Regulations?
2. Whether NCLT and NCLAT have exercised a jurisdiction not vested in them in law by seeking to recover/protect the possession of the Corporate Debtor?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court distinguished Embassy Property Developments Private Limited vs. State of Karnataka and Others, (2020) 13 SCC 308*, stating that it did not apply to the facts of the case as it dealt with mining lease renewal and not development rights.
• The Court distinguished Gujarat Urja Vikas Nigam Limited vs. Amit Gupta and Others, (2021) 7 SCC 209*, stating that it dealt with the termination of a Power Purchase Agreement and not rights arising from financial accommodations and agreements.
• The Court distinguished Tata Consultancy Services Limited vs. SK Wheels Private Limited Resolution Professional, Vishal Ghisulal Jain, (2022) 2 SCC 583*, stating that it dealt with the termination of a contract based on grounds unrelated to insolvency.
• The Court followed Sushil Kumar Agarwal vs. Meenakshi Sadhu & Others, (2019) 2 SCC 241* to establish that development rights are an intangible asset of the developer.
• The Court followed Rajendra K. Bhutta vs. Maharashtra Housing and Area Development Authority & Anr., (2020) 13 SCC 208* to support the view that the Corporate Debtor’s rights over the property should be protected during CIRP.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the Corporate Debtor had a bundle of rights and interests in the property, which arose from a series of financial transactions and agreements. The Court emphasized that the Corporate Debtor had provided financial assistance for the purchase of the property and was granted exclusive development rights. These rights, the Court reasoned, constituted an intangible asset of the Corporate Debtor and should be included in the Information Memorandum.

The Court also highlighted that the definition of “property” under Section 3(27) of the IBC is inclusive and covers every description of interest, including present, future, vested, or contingent interests. The Court noted that the Explanation under Section 18 of the IBC, which excludes certain assets from the definition of “assets,” is limited to that section and does not apply to Section 25.

The Court further noted that the NCLT and NCLAT had correctly balanced the interests of all parties by protecting Victory’s possession of the 10,000 sq. ft. of land under the Leave and License Agreement while also preserving the Corporate Debtor’s development rights.

Logical Reasoning:

The Supreme Court considered alternative interpretations but rejected them, concluding that the Corporate Debtor’s development rights constituted an asset under the IBC. The Court reasoned that the definition of “property” under Section 3(27) of the IBC is inclusive and covers all kinds of interests in property. The Court also emphasized that the Explanation under Section 18 of the IBC, which excludes certain assets from the definition of “assets,” is limited to that section and does not apply to Section 25.

The Court’s decision was based on a careful analysis of the facts, the relevant provisions of the IBC, and the legal precedents. The Court concluded that the NCLT and NCLAT had correctly balanced the interests of all parties by protecting Victory’s possession of the 10,000 sq. ft. of land under the Leave and License Agreement while also preserving the Corporate Debtor’s development rights.

The Court’s reasoning can be summarized as follows:

• ✓ The Corporate Debtor had a bundle of rights and interests in the property, including development rights.
• ✓ These rights were created for valid consideration and were not merely contractual arrangements.
• ✓ The definition of “property” under Section 3(27) of the IBC is inclusive and covers all kinds of interests.
• ✓ The Explanation under Section 18 of the IBC is limited to that section and does not apply to Section 25.
• ✓ The NCLT and NCLAT had correctly balanced the interests of all parties.

The Court quoted the following from the judgment:

“…the development rights created in favour of the Corporate Debtor constitute “ property” within the meaning of the expression under Section 3(27) of IBC.”

“Since the expression “asset” in common parlance denotes “ property of any kind”, the bundle of rights that the Corporate Debtor has over the property in question would constitute “ asset” within the meaning of Section 18(f) and Section 25(2)(a) of IBC.”

“Therefore, NCLT as well as NCLAT were right in holding that the possession of the Corporate Debtor, of the property needs to be protected.”

There were no dissenting opinions in this case.

Key Takeaways

• ✓ Development rights of a corporate debtor over a property are considered an asset under the IBC and should be included in the Information Memorandum.
• ✓ The definition of “property” under Section 3(27) of the IBC is inclusive and covers all kinds of interests in property.
• ✓ The Explanation under Section 18 of the IBC is limited to that section and does not apply to Section 25.
• ✓ The NCLT and NCLAT have the jurisdiction to protect the possession of the Corporate Debtor over the property.

This judgment clarifies the scope of “assets” under the IBC and provides guidance on the treatment of development rights during insolvency proceedings. It may impact future cases involving similar disputes over property rights and insolvency.

Directions

The Supreme Court did not issue any specific directions in this case. The appeals were dismissed, and the orders of the NCLT and NCLAT were upheld.

Specific Amendments Analysis

The judgment notes that the Explanation to Section 18 was amended by Act 26 of 2018, substituting the word “sub-section” with “section.” This amendment clarified that the exclusion of certain assets from the definition of “assets” is limited to Section 18 and does not extend to other sections, such as Section 25.

Development of Law

The ratio decidendi of this case is that development rights of a corporate debtor over a property are considered an asset under the IBC and should be included in the Information Memorandum. The Court clarified that the definition of “property” under Section 3(27) of the IBC is inclusive and covers all kinds of interests in property. The Court also clarified that the Explanation under Section 18 of the IBC is limited to that section and does not apply to Section 25.

This judgment clarifies the position of law regarding the treatment of development rights as assets under the IBC, reinforcing the importance of including all such rights in the CIRP process.

The judgment provides crucial guidance for Resolution Professionals, creditors, and other stakeholders involved in insolvency proceedings, ensuring that all relevant assets of a corporate debtor, including intangible assets like development rights, are considered during the CIRP. The Court’s decision underscores the importance of protecting the interests of the Corporate Debtor and creditors while also balancing the rights of third parties.

This landmark judgment is expected to have a significant impact on future insolvency cases, particularly those involving property rights and development agreements, setting a precedent for the treatment of such rights as assets under the IBC.