Supreme Court Upholds Lessor’s Right to Forfeit Lease in Liquidation Case: Stressed Assets Stabilization Fund vs. West Bengal Small Ind. Development Corporation Ltd. (21 October 2019)

Introduction

Date of the Judgment: 21 October 2019
Citation: Civil Appeal No. 4139 of 2008
Judges: Arun Mishra, J., Vineet Saran, J., S. Ravindra Bhat, J.

Can a mortgagee of a leasehold property claim rights superior to the lessor when the lease has been terminated due to the lessee’s failure to adhere to the lease conditions? The Supreme Court of India addressed this critical question in a case involving the Stressed Assets Stabilization Fund (SASF) and the West Bengal Small Industries Development Corporation Ltd. (WBSIDC). This case revolves around the rights of a mortgagee versus a lessor when the lessee company goes into liquidation and the lease is terminated for breach of conditions. The judgment clarifies that a mortgagee cannot have rights greater than the mortgagor (lessee) and upholds the lessor’s right to forfeit the lease. The bench was composed of Justices Arun Mishra, Vineet Saran, and S. Ravindra Bhat, with the judgment authored by Justice S. Ravindra Bhat.

Case Background

The case involves a dispute over industrial property leased by the Government of West Bengal to Wellman Smith Owen Engineering Corporation (later Wellman Incandescent India Ltd., referred to as “Wellman”). Wellman obtained loans from the Industrial Development Bank of India (IDBI), securing them by mortgaging the leased properties. These loans and securities were later transferred to the Stressed Assets Stabilization Fund (SASF). Due to financial difficulties, Wellman was referred to the Board for Industrial and Financial Reconstruction (BIFR) and subsequently ordered to be wound up by the Calcutta High Court. Meanwhile, WBSIDC, to whom the lease rights were assigned by the West Bengal government, terminated the lease due to Wellman’s cessation of manufacturing activities. WBSIDC then sought possession of the properties, which were then under the control of the Official Liquidator.

Timeline

Course of Proceedings

The single judge of the Calcutta High Court ruled in favor of WBSIDC, stating that as the lessor, WBSIDC was entitled to possession due to the breach of lease conditions by Wellman. The court noted that manufacturing activities had ceased for over six months, violating the lease agreement. SASF appealed this decision, but the Division Bench of the Calcutta High Court upheld the single judge’s ruling, leading to the current appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of lease agreements and the rights of lessors and mortgagees under the Companies Act, 1956. The relevant legal provisions include:

• Section 535 of the Companies Act, 1956: This section deals with the powers of the court to order the release of property in the possession of the company under liquidation, when such property belongs to another party.
• The West Bengal Government Premises (Tenancy Regulation) Act, 1976, was also considered by the single judge of the Calcutta High Court.

Arguments

Arguments by SASF (Appellant):

• SASF argued that the lease agreement allowed the lessee to mortgage the property to IDBI, which was valid.
• They contended that if the High Court’s judgment was upheld, it would result in a significant loss of public funds (over Rs. 42 crores).
• SASF submitted that since the lease was for a substantial period (90 years), a minor violation should not lead to the forfeiture of valuable property.

Arguments by WBSIDC (Respondent):

• WBSIDC argued that the High Court’s reasoning was sound and that the lease forfeiture was never challenged by the lessee or the official liquidator.
• They emphasized that SASF, being a mortgagee, could not have superior rights than the mortgagor (Wellman).
• WBSIDC relied on the judgment in Phatu Rochiram Mulchandani v. Karnataka Industrial Areas Development Board [(2015) 5 SCC 244], arguing that they acted within the law by seeking the release of the property after the lease forfeiture.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

• Whether the mortgagee (SASF) of a leasehold property can claim superior rights over the lessor (WBSIDC) when the lease has been validly terminated due to the lessee’s breach of lease conditions.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following case:

• Phatu Rochiram Mulchandani v. Karnataka Industrial Areas Development Board [(2015) 5 SCC 244] – Supreme Court of India: This case was used to support the argument that a lessor is within their rights to seek possession of the property after a valid lease termination, and that the mortgagee cannot claim superior rights than the lessee.

Judgment

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

How each authority was viewed by the Court?

• Phatu Rochiram Mulchandani v. Karnataka Industrial Areas Development Board [(2015) 5 SCC 244]: The Supreme Court followed this authority, stating that it applied to the facts of the present case. It supported the view that the lessor’s right to terminate the lease is valid, and the mortgagee cannot claim superior rights.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that a mortgagee cannot have rights superior to the mortgagor. The Court emphasized that the lease termination by WBSIDC was valid and unchallenged, and therefore, SASF, as a mortgagee, could not claim rights greater than those of the lessee (Wellman). The Court also considered the fact that the lease was terminated due to a breach of a significant condition, i.e., the cessation of manufacturing activities.

Logical Reasoning:

The Court rejected the argument that the long duration of the lease should prevent forfeiture, emphasizing the importance of adhering to the lease conditions. The Court’s reasoning was based on established legal principles and precedents, ensuring consistency in the interpretation of lease agreements and mortgagee rights.

The Supreme Court quoted the following from the judgment in Phatu Rochiram Mulchandani v. Karnataka Industrial Areas Development Board [(2015) 5 SCC 244]:

“…the Board was very well within its right to terminate the lease as provided in the lease agreement.”

“…prior permission of the Court is required in respect of any attachment, distress or execution put in force or for sale of the properties or effects of the Company…no such prior permission was required before cancelling the lease.”

“…the land was allotted to the Company for a specified project which the Company failed to establish.”

The Court did not have any minority opinions.

Key Takeaways

• A mortgagee’s rights are always subject to the rights of the mortgagor.
• A lessor has the right to terminate a lease if the lessee breaches the lease conditions.
• In cases of company liquidation, the lessor’s right to forfeit the lease is upheld, and the mortgagee cannot claim superior rights.
• This judgment reinforces the importance of adhering to lease conditions and the limitations of mortgagee rights.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that a mortgagee of leasehold rights cannot claim superior rights than the mortgagor (lessee) when the lease has been validly terminated by the lessor due to a breach of lease conditions. This reaffirms the existing legal position that the rights of a mortgagee are always subject to the rights of the mortgagor and that a lessor has the right to terminate a lease if the lessee breaches the conditions of the lease. This case does not change the previous position of law but reinforces it.

Conclusion

The Supreme Court dismissed the appeal, affirming the Calcutta High Court’s decision. The Court held that the mortgagee (SASF) could not claim rights superior to the lessee (Wellman) and upheld the lessor’s (WBSIDC) right to forfeit the lease due to the lessee’s failure to continue manufacturing activities. This judgment reinforces the principle that a mortgagee’s rights are limited by the mortgagor’s rights and that lessors have the right to terminate leases for breach of conditions.