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

Date of the Judgment: 14 March 2023

Citation: 2023 INSC 230

Judges: V. Ramasubramanian, J., Pankaj Mithal, J.

Can a corporate debtor’s development rights over a property be considered an asset during insolvency proceedings? The Supreme Court of India recently tackled this question in a dispute involving Victory Iron Works Ltd., Energy Properties Private Limited, and the Resolution Professional of Avani Towers Private Limited. This case clarifies the scope of ‘assets’ under the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment was delivered by a two-judge bench comprising Justice V. Ramasubramanian and Justice Pankaj Mithal, with the majority opinion authored by Justice V. Ramasubramanian.

Case Background

The case revolves around a 10.19-acre property in Howrah, West Bengal. M/s Energy Properties Private Limited (Energy Properties) is the registered owner of the land. Avani Towers Private Limited, the Corporate Debtor, financed the purchase of the property and holds 40% of Energy Properties’ share capital. Avani Towers also has a Joint Development Agreement with Energy Properties for the same land. M/s Victory Iron Works Ltd. (Victory) claims possession of the entire property through a Leave and License Agreement and an oral understanding.

A financial creditor initiated Corporate Insolvency Resolution Process (CIRP) against Avani Towers. The Resolution Professional, during the CIRP, found that Energy Properties was forcefully removing security guards from the property. Consequently, the Resolution Professional filed an application before the National Company Law Tribunal (NCLT) to secure possession of the property. Victory contested this, arguing that the NCLT lacked jurisdiction to order eviction and that the property did not belong to the Corporate Debtor.

Timeline:

Course of Proceedings

The NCLT directed Victory and Energy Properties not to obstruct the Resolution Professional’s activities, while protecting Victory’s possession of 10,000 sq. ft. of land under the Leave and License Agreement. The NCLT also stated that this order would not affect the activities of Victory on the portion of the land given to them under the Leave and License Agreement dated 11.08.2011 until the original owner of the property decides further course of action as far as leave and license agreement is concerned.

Aggrieved by the NCLT order, both Victory and Energy Properties filed appeals before the National Company Law Appellate Tribunal (NCLAT). The NCLAT dismissed the appeals, upholding the NCLT’s decision. The NCLAT also directed the Resolution Professional to disclose in the Information Memorandum that the Corporate Debtor only holds development rights over the property. Both Victory and Energy Properties then appealed to the Supreme Court.

Legal Framework

The Supreme Court examined several sections of the Insolvency and Bankruptcy Code, 2016 (IBC). Key provisions include:

• Section 3(27) of 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.“
• Section 18 of IBC: Outlines the duties of the Interim Resolution Professional, including collecting information about the Corporate Debtor’s assets and taking control of assets over which the Corporate Debtor has ownership rights. The Explanation to Section 18 clarifies that “assets” do not include assets owned by a third party in possession of the Corporate Debtor under contractual arrangements.
• Section 25 of 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.
• Section 3(37) of IBC: States that words and expressions used but not defined in the Code, but defined in other acts such as the Indian Contract Act, 1872, the Indian Partnership Act, 1932, etc., shall have the meanings assigned to them in those Acts.

The Court also referred to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, which defines “property” in Section 2(jb) to include immovable property, movable property, debts, receivables, and intangible assets like know-how, patents, and trademarks.

The court also noted that the word “asset” is not defined in the IBC. However, it referred to Section 102(2) of the Income Tax Act, 1961, which defines “asset” to include “property or right of any kind.”

Arguments

Arguments by Victory Iron Works Ltd.:

• The land is owned by Energy Properties, not the Corporate Debtor, and therefore, the Resolution Professional cannot take control of it under Section 25(2)(a) of the IBC.
• The Resolution Professional’s application under Regulation 30 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, was misconceived as it sought assistance from the local administration beyond the scope of the Code.
• Victory is in possession of the entire land, and the Adjudicating Authority lacks jurisdiction to order eviction, citing the judgments in 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 Private Limited:

• The Corporate Debtor is not in possession of the property and cannot use IBC mechanisms to recover possession.
• Section 18(f) of the IBC allows the Interim Resolution Professional to take control of assets owned by the Corporate Debtor, but the Explanation excludes assets owned by a third party held under contractual arrangements.
• The decisions in Embassy Property Developments Private Limited, Gujarat Urja Vikas Nigam Limited, and Tata Consultancy (supra) support their position.

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 handed over possession of the entire land under the Development Agreement and subsequent MoUs.
• The development rights held by the Corporate Debtor are intangible assets that should be included in the Information Memorandum.
• The decision in Sushil Kumar Agarwal vs. Meenakshi Sadhu & Others [(2019) 2 SCC 241] establishes that development rights are intangible assets.

Summary of Submissions

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

Cases Relied Upon by the Court:

• Sushil Kumar Agarwal vs. Meenakshi Sadhu & Others [(2019) 2 SCC 241] – Supreme Court of India: This case was cited to support the view that development rights are an intangible asset of the developer.
• Rajendra K. Bhutta vs. Maharashtra Housing and Area Development Authority & Anr. [(2020) 13 SCC 208] – Supreme Court of India: This case was cited to emphasize the distinction between occupation and possession of a property and to support the view that the Corporate Debtor had a right in the property.

Legal Provisions Considered by the Court:

• Section 3(27) of the Insolvency and Bankruptcy Code, 2016 (IBC): Defines “property” to include various interests.
• Section 18 of the IBC: Outlines the duties of the Interim Resolution Professional, including taking control of assets.
• Section 25 of the IBC: Specifies the duties of the Resolution Professional, including preserving and protecting the assets of the Corporate Debtor.
• Section 3(37) of the IBC: Refers to other Acts for definitions of terms not defined in the IBC.
• Section 2(jb) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993: Defines “property” to include intangible assets.
• Section 102(2) of the Income Tax Act, 1961: Defines “asset” to include “property or right of any kind.”

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The court emphasized the financial contribution of the Corporate Debtor in the purchase of the property. The Corporate Debtor’s financial accommodation enabled Energy Properties to purchase the land.
• The court gave importance to the bundle of rights and interests created in favor of the Corporate Debtor, including development rights and the transfer of 40% shareholding.
• The court highlighted that the Corporate Debtor was granted exclusive development rights over the property, with actual physical possession handed over under the Development Agreement and subsequent MoUs.
• The court also emphasized that the definition of “property” under Section 3(27) of the IBC is inclusive and covers various interests, including present or future, vested or contingent interests.
• The court distinguished between the facts of the present case and the cases relied upon by the appellants, particularly Embassy Property Developments Private Limited, Gujarat Urja Vikas Nigam Limited, and Tata Consultancy Services Limited.

Fact:Law Ratio: The court’s decision was influenced more by the factual matrix of the case (60%), particularly the financial arrangements and agreements between the parties, and less by the legal interpretations (40%).

Logical Reasoning:

The court’s reasoning was based on the interpretation of the IBC and the specific facts of the case. It emphasized that the Corporate Debtor had more than just a contractual right; it had a significant interest in the property due to its financial contribution and development rights.

The court rejected the appellants’ reliance on Embassy Property Developments Private Limited, Gujarat Urja Vikas Nigam Limited, and Tata Consultancy Services Limited, stating that those cases did not involve similar facts.

“The creation of these bundle of rights and interests was actually for a valid consideration. But for the payment of such consideration, Energy Properties would not even have become the owner of the property in dispute.”

“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. This is why a direction under Regulation 30 had been issued to the local district administration.”

Key Takeaways

• Development rights of a Corporate Debtor over a property can be considered an asset under the IBC, especially when the Corporate Debtor has contributed financially to the property’s purchase and holds exclusive development rights.
• The Explanation to Section 18 of the IBC, which excludes assets owned by a third party under contractual arrangements, is limited to Section 18 and does not extend to Section 25.
• The NCLT and NCLAT have the power to protect the assets of the Corporate Debtor, even if those assets are not in the Corporate Debtor’s direct possession.
• Third-party rights under a Leave and License Agreement are protected to the extent of the agreement, but the Corporate Debtor’s development rights over the remaining property must be preserved.
• This judgment clarifies the scope of “assets” under the IBC and provides guidance on how to treat development rights in insolvency proceedings.

Directions

The Supreme Court did not give any specific directions other than dismissing the appeals. The orders of the NCLT and NCLAT were upheld, which means the Resolution Professional is entitled to take control of the development rights of the corporate debtor.

Development of Law

Ratio Decidendi: The Supreme Court held that the development rights of a Corporate Debtor over a property, where the Corporate Debtor has a financial interest and exclusive development rights, constitute an “asset” under the Insolvency and Bankruptcy Code, 2016. This includes the right to be included in the Information Memorandum and to be protected by the Resolution Professional.

Change in Previous Positions of Law: This judgment clarifies the interpretation of “assets” under the IBC, particularly in the context of development rights. While previous cases like Embassy Property Developments Private Limited, Gujarat Urja Vikas Nigam Limited, and Tata Consultancy Services Limited had limited the jurisdiction of the NCLT in certain contractual disputes, this case establishes that the NCLT can protect the Corporate Debtor’s development rights as an asset, even if the property is not in the Corporate Debtor’s direct possession. The court also clarified that the Explanation to Section 18 does not limit the scope of Section 25.

Conclusion

The Supreme Court dismissed the appeals of Victory Iron Works Ltd. and Energy Properties Private Limited, upholding the decisions of the NCLT and NCLAT. The Court held that the development rights of the Corporate Debtor, Avani Towers Private Limited, over the property in question constitute an asset under the IBC. This decision clarifies that the Corporate Debtor’s financial interest and development rights create a bundle of rights that must be protected during the insolvency resolution process. The Court emphasized that the Explanation to Section 18 of the IBC does not limit the scope of Section 25, and the NCLT and NCLAT have the jurisdiction to protect the Corporate Debtor’s assets, including development rights, even if the Corporate Debtor is not in direct possession of the property.

Category

• Insolvency and Bankruptcy Code, 2016
  • Section 3(27), Insolvency and Bankruptcy Code, 2016
  • Section 18, Insolvency and Bankruptcy Code, 2016
  • Section 25, Insolvency and Bankruptcy Code, 2016
  • Corporate Insolvency Resolution Process
  • Assets of Corporate Debtor
  • Development Rights
• Contract Law
  • Leave and License Agreement
  • Development Agreement
  • Memorandum of Understanding

FAQ

Q: What are development rights in the context of insolvency?
A: Development rights refer to the legal rights a company has to develop a piece of land. In insolvency cases, these rights can be considered an asset of the company if they have a financial interest and exclusive development rights.

Q: Can a company’s development rights be included in its assets during insolvency?
A: Yes, the Supreme Court has clarified that development rights can be considered an asset of a company undergoing insolvency, especially if the company has a financial stake and exclusive development rights.

Q: What is the significance of Section 18 and Section 25 of the IBC?
A: Section 18 outlines the duties of the Interim Resolution Professional, while Section 25 specifies the duties of the Resolution Professional. The court clarified that the Explanation to Section 18 does not limit the scope of Section 25, allowing the Resolution Professional to protect the Corporate Debtor’s assets, including development rights.

Q: What does the judgment mean for third parties holding a Leave and License Agreement?
A: The judgment protects the rights of third parties to the extent of their Leave and License Agreement. However, the Corporate Debtor’s development rights over the remaining property must be preserved and included in the Information Memorandum.

Q: How does this judgment impact future insolvency cases?
A: This judgment provides clarity on the scope of “assets” under the IBC and establishes that development rights can be considered an asset, especially when the Corporate Debtor has a financial interest and exclusive development rights. It also clarifies that NCLT has the power to protect these assets.