Supreme Court Upholds Municipal Rights in Insolvency Cases: MCGM vs. Abhilash Lal (2019)

Introduction

Date of the Judgment: 15 November 2019

Citation: Not Available in Source

Judges: Arun Mishra, J., Vineet Saran, J., S. Ravindra Bhat, J.

Can a resolution plan under the Insolvency and Bankruptcy Code (IBC) bypass the statutory rights of a municipal corporation over its own land? The Supreme Court of India recently addressed this critical question in a case involving the Municipal Corporation of Greater Mumbai (MCGM) and a company undergoing insolvency proceedings. The court’s decision clarifies the extent to which the IBC can override other laws, particularly those protecting municipal property rights. This judgment highlights the importance of balancing insolvency resolution with the protection of public assets.

Case Background

The Municipal Corporation of Greater Mumbai (MCGM) owned several plots of land in Mumbai. In 2005, MCGM entered into a contract with SevenHills Healthcare (P.) Ltd. (“SevenHills”) to develop these lands into a 1500-bed hospital. The agreement stipulated that SevenHills would lease the land for 30 years, with 20% of the beds reserved for economically deprived individuals. The construction was to be completed within 60 months (excluding monsoons), which ended on April 24, 2013. However, the project was not completed, and a formal lease deed was never executed. SevenHills also defaulted on lease rent payments, leading MCGM to issue a show cause notice on January 23, 2018, proposing termination of the contract.

SevenHills had borrowed money from banks and financial institutions, mortgaging the land as security, citing a clause in the contract that permitted such encumbrances. Due to its inability to repay debts, insolvency proceedings were initiated by Axis Bank. On March 13, 2018, the National Company Law Tribunal (NCLT) admitted the insolvency petition. A Resolution Professional (RP) was appointed, and a resolution plan was eventually submitted by Dr. Shetty’s New Medical Centre (“SNMC”). This plan proposed an infusion of over ₹1000 crores, with a payout of ₹102.3 crores to MCGM against its total claim of ₹140.88 crores.

Timeline

Course of Proceedings

The NCLT, after considering the views of the RP, MCGM, the creditors, and SNMC, approved the resolution plan. The NCLT rejected MCGM’s objections, noting that MCGM had taken contradictory stands during the proceedings. The NCLT also held that the resolution plan met the requirements of Section 30(2) of the IBC and other relevant regulations.

Aggrieved by the NCLT’s order, MCGM appealed to the National Company Law Appellate Tribunal (NCLAT). MCGM argued that since the conditions of the contract with SevenHills had not been met, no lease deed was executed, and thus, no interest in the land was vested in the Corporate Debtor. MCGM further contended that the resolution plan, which incorporated encumbrances on the land, was contrary to law and the provisions of the Mumbai Municipal Corporation Act, 1888 (“MMC Act”). However, the NCLAT, noting a memo filed by MCGM stating that the revised resolution plan had been accepted, dismissed MCGM’s appeal, finding no scope for interference with the NCLT’s order.

Legal Framework

The case primarily involves the interpretation of the Insolvency and Bankruptcy Code, 2016 (IBC) and the Mumbai Municipal Corporation Act, 1888 (MMC Act). The IBC provides a framework for the resolution of insolvency of corporate debtors. Key provisions include:

• Section 14(1)(d) of the IBC: This section imposes a moratorium on the transfer, encumbrance, or sale of any asset of the corporate debtor during the Corporate Insolvency Resolution Process (CIRP).
• Section 30(2) of the IBC: This section outlines the requirements for a resolution plan, including provisions for repayment of debts to operational creditors and compliance with the law.
• Section 31 of the IBC: This section deals with the approval of the resolution plan by the Adjudicating Authority.
• Section 238 of the IBC: This section states that the provisions of the IBC shall have effect notwithstanding anything inconsistent therewith contained in any other law.

The MMC Act governs the administration of the Municipal Corporation of Greater Mumbai. The relevant provisions include:

• Section 92 of the MMC Act: This section outlines the procedure for the disposal of municipal property, requiring the sanction of the corporation for leasing, selling, or otherwise conveying any immovable property belonging to the corporation. Specifically, “With respect to the disposal of property belonging to the corporation other than property vesting in the corporation for the purposes of the Brihan Mumbai Electric Supply and Transport Undertaking, the following provisions shall have effect, namely:— (c) with the sanction of the corporation, the Commissioner may lease, sell or otherwise convey any immovable property belonging to the corporation”.
• Section 92A of the MMC Act: This section deals with the enforcement of terms and conditions related to the transfer or agreement concerning municipal property.

The Supreme Court also considered the interplay of these provisions, particularly whether the IBC’s overriding effect under Section 238 could supersede the MMC Act’s provisions regarding the disposal of municipal properties.

Arguments

Arguments by MCGM:

• MCGM argued that no lease deed was ever executed in favor of SevenHills, making MCGM the absolute owner of the land. They contended that there were no assets of the Corporate Debtor.
• They emphasized that any proposal regarding the lease deed had to comply with the MMC Act, specifically Section 92, requiring express approval from the corporation.
• MCGM asserted that the show cause notice issued on January 23, 2018, for the termination of the contract was not responded to, and in the absence of a lease, Section 14(1)(d) of the IBC could not prevent MCGM from terminating the agreement.
• They argued that the written submissions filed on behalf of MCGM could not be construed as an admission or agreement to the revised proposal, and at best, could be considered concessions of law, which are not binding.
• MCGM also highlighted that the original contract with SevenHills had been violated, as the 1500-bed hospital was not completed by the stipulated date, and lease rental arrears had accumulated.
• They argued that the resolution plan, which contemplated mortgaging the land, directly affected MCGM’s properties and required their prior approval under the MMC Act.

Arguments by the Resolution Professional (RP) and the Committee of Creditors (CoC):

• The RP argued that MCGM had consented to the resolution plan in writing before both the NCLT and the NCLAT, and had stated that it had no objections to the plan.
• They contended that MCGM had admitted in its application to the NCLT that the lands were leased to the Corporate Debtor, and that MCGM had claimed unpaid lease rentals as a financial debt.
• The RP submitted that the resolution plan did not create any leasehold rights in favor of the resolution applicant, SNMC, but merely changed the shareholding of the Corporate Debtor.
• They argued that the resolution plan was unconditional and not dependent on the resolution of disputes with MCGM.
• The RP also argued that any dispute with MCGM regarding the lease had no bearing on the validity of the resolution plan under Section 31 of the IBC, and that the plan, having been approved by the CoC and NCLT, was binding on MCGM.
• The CoC argued that the financial creditors were interested in ensuring their dues were paid, and SNMC’s resolution plan provided the best assurance for that. They contended that Section 92A of the MMC Act did not apply as the contract amounted to a lease.
• SNMC argued that it did not seek to mortgage or obtain loans on the strength of the lease, and the resolution plan was subject to MCGM’s obligations to follow the law.

Innovativeness of the argument: The arguments by MCGM were innovative in that they focused on the statutory rights of a municipal corporation over its properties, highlighting that the IBC cannot override these rights without explicit approval as required under the MMC Act. They also emphasized that the resolution plan sought to encumber their properties, which was impermissible without their consent.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the process and procedure adopted by the NCLT and NCLAT, in overruling MCGM’s concerns and objections with regard to the treatment of its property, is in accordance with the law.
2. Whether Section 238 of the IBC overrides the statutory rights of MCGM to control and regulate its properties under Sections 92 and 92A of the MMC Act.

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 authorities:

Judgment

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

How each authority was viewed by the Court?

• The Court followed the principles laid down in Ram Singh Vijay Pal Singh & Ors. v. State of U.P. & Ors. (2007) 6 SCC 44, Essar Bulk Terminal Limited & Anr. v. State of Gujarat & Ors. (2018) 3 SCC 750, and Saroj Screens Pvt. Ltd. v Ghanshyam & Ors., (2012) 11 SCC 434 and Nazir Ahmad v. Emperor, AIR 1936 PC 253, emphasizing that statutory authorities cannot transfer or encumber property without prior approval from higher authorities or in the manner laid down by the statute.
• The Court cited Jaipur Metals & Electricals Employees Organization v. Jaipur Metals & Electricals Ltd. (2019) 4 SCC 227, Duncans Industries v. A.J. Agrochem 2019 SCC Online (SC) 1319, Macquaire Bank Ltd. v. Shilipi Cable Techologies Ltd. (2018) 2 SCC 674 and Dharani Sugars & Chemicals Ltd. v. Union of India & Ors. (2019) 5 SCC 480 to interpret the overriding effect of Section 238 of the IBC. However, it distinguished these cases, holding that Section 238 does not override the MMC Act’s provisions regarding municipal property.
• The Court cited Kasinka Trading v. Union of India (1995) 1 SCC 274, Darshan Oils (P) Ltd. v. Union of India (1995) 1 SCC 345, Shrijee Sales Corporation v. Union of India (1997) 3 SCC 398, Shree Sidhbali Steels Ltd. v. State of U.P. (2011) 3 SCC 193, Pappu Sweets and Biscuits v. Commr. of Trade Tax, U.P. (1998) 7 SCC 228 and Commr. of Customs v. Dilip Kumar & Co. (2018) 9 SCC 1) to hold that there can be no estoppel against the express provisions of law.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to protect the statutory rights of the Municipal Corporation of Greater Mumbai (MCGM) over its properties. The Court emphasized that the Insolvency and Bankruptcy Code (IBC) cannot override the specific provisions of the Mumbai Municipal Corporation Act (MMC Act), which require prior approval for the disposal or encumbrance of municipal properties. The Court also noted that MCGM’s properties were public assets and that the resolution plan, by contemplating the creation of a charge or mortgage on the land, directly affected MCGM’s rights. The Court was also influenced by the fact that the original contract between MCGM and SevenHills had been violated, with the hospital project remaining incomplete and lease rentals unpaid.

Fact:Law Ratio:

The court’s reasoning was heavily based on legal considerations (70%), emphasizing the interpretation of statutory provisions and the interplay between the IBC and the MMC Act. Factual aspects (30%), such as the non-completion of the hospital project and the default on lease rentals, also played a role in the court’s decision.

Key Takeaways

• Protection of Municipal Rights: The judgment reinforces thatmunicipal corporations have statutory rights over their properties, which cannot be overridden by the Insolvency and Bankruptcy Code (IBC) without explicit legal compliance.
• IBC’s Overriding Effect Limited: Section 238 of the IBC, which gives the IBC overriding effect over other laws, does not extend to third-party assets, such as municipal properties.
• Compliance with Specific Statutes: Resolution plans under the IBC must comply with other relevant statutes, such as the Mumbai Municipal Corporation Act (MMC Act), when dealing with properties governed by those statutes.
• Importance of Prior Approval: Any disposal or encumbrance of municipal property requires the prior approval of the municipal corporation, as mandated by the MMC Act.
• No Estoppel Against Law: The principle that there can be no estoppel against the express provisions of law was reiterated, meaning that even if a party makes submissions that seem to agree with a plan, this does not prevent them from asserting their legal rights later.
• Balancing Insolvency Resolution and Public Interest: The judgment underscores the importance of balancing the objectives of insolvency resolution with the protection of public assets and the rights of municipal corporations.
• Impact on Future Cases: This ruling will likely influence future insolvency cases involving municipal properties, ensuring that the rights of municipal corporations are duly considered and protected.

Conclusion

The Supreme Court’s judgment in Municipal Corporation of Greater Mumbai (MCGM) vs. Abhilash Lal & Ors. is a landmark decision that clarifies the interplay between the Insolvency and Bankruptcy Code (IBC) and municipal laws. The Court held that the IBC cannot override the statutory rights of a municipal corporation to control its properties, and that any resolution plan that seeks to encumber municipal properties must comply with the specific provisions of the relevant municipal laws, such as the Mumbai Municipal Corporation Act, 1888.

The Court set aside the orders of the NCLT and NCLAT, emphasizing that the resolution plan could not be approved without the consent of MCGM and without compliance with the MMC Act. This decision reinforces the importance of protecting public assets and ensuring that municipal corporations retain control over their properties, even in the context of insolvency proceedings. It also serves as a crucial reminder that the IBC’s overriding effect under Section 238 is not absolute and does not extend to third-party assets or specific statutory requirements for property disposal.