Introduction
The Hon’ble National Company Law Tribunal (‘NCLT’), Kolkata Bench, delivered a significant judgment in UCO Bank v. GIT Textiles Manufacturing Limited[i], addressing the rights of a lessee in the context of the Corporate Insolvency Resolution Process (‘CIRP’). The case revolved around the resolution plan approved by the Committee of Creditors (‘CoC’), which sought to unilaterally extinguish the leasehold rights of the lessee of the corporate debtor. The NCLT addressed 'whether the clause of the resolution plan ('Plan'), which sought to cancel the leasehold rights of the lessee over a property leased by the corporate debtor ('CD'), was legally valid and enforceable under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), and whether the NCLT had the jurisdiction to adjudicate such a matter?'
Brief Facts
In 2007, H.S. Mercantile Ltd (‘Applicant’) and GIT Textiles Manufacturing Limited, the CD, entered into a Memorandum of Understanding (‘MoU’) for leasing industrial land. Subsequently, a Tenancy Agreement was executed, followed by a registered Deed of Lease in 2012, granting a 99-year lease for the property. The lease terms allowed for a renewal for an additional 99 years. The Applicant paid Rs. 1 crore to the CD as consideration for the lease. The agreement was recorded in the Revenue Records, ensuring its validity under property laws.
During the CIRP, the resolution professional (‘RP’) included the leased property in the Information Memorandum (‘IM’), categorizing it as an asset of the CD. Following this, the Applicant filed an interim application to exclude the leased property from the IM and prevent the RP from dealing with its leasehold rights. On 23.04.2024, the NCLT dismissed the application, holding that the CD remained the owner of the property and that the inclusion of the leased property in the IM was valid. The Applicant appealed this order but subsequently withdrew the appeal.
A Plan was approved, containing Clause 4.9.3, as per which-
All litigation concerning the title of the land would be extinguished upon the approval of the Plan.
The leasehold rights of the Applicant would be terminated.
Revenue authorities were directed to remove the Applicant’s name from the Revenue Records.
The Applicant was thereafter compelled to file the present appeal under s. 60(5) of the IBC, challenging Clause 4.9.3 of the Plan. The applicant contended against Clause 4.9.3 and prayed for (i) the deletion of Clause 4.9.3 and any other clause in the Plan which affected the applicant's leasehold and tenancy rights, (ii) rejection of the Plan and (iii) an interim stay on proceedings related to I.A. (IB) No. 680/KB/2023 or deferral of the final order until the present application is resolved.
Held
The NCLT ruled in favour of the Applicant, stating that Clause 4.9.3 of the Plan was invalid and ought to be deleted. The tribunal mentioned that the adjudicating authority does not possess the jurisdiction of a civil court to resolve civil disputes. Consequently, the NCLT cannot cancel registered leases or adjudicate issues related to their validity; a competent civil court must address such matters.
In its observations regarding Clause 4.9.3, the NCLT held that its inclusion in the Plan was impermissible. Provisions bypassing established legal processes or unilaterally extinguishing leasehold rights cannot be upheld. Hence, the leasehold rights of H.S. Mercantile remain intact unless contested and determined by a civil court.
Our Analysis
This case reaffirms the jurisdictional limitations of the NCLT as a quasi-judicial body. The NCLT cannot adjudicate disputes requiring the determination of property ownership or the cancellation of registered leases. This aligns with the Supreme Court’s decision in Embassy Property Developers Pvt. Ltd. v. State of Karnataka[ii].
It emphasizes that registered leasehold rights, even when disputed, cannot be extinguished without due process of law. While s. 25 of the IBC obligates the RP to represent the CD and act in its best interests, including pursuing lease termination, when necessary, such actions must be undertaken through the proper legal process.
The order underscored that the RP and the CoC cannot bypass statutory safeguards or override vested rights by including provisions in a Plan that unilaterally cancel an existing lease. Approval by the CoC does not validate actions that contravene established property and contract law principles. Thus, a critical balance must be maintained between the objectives of the IBC, which ensure the resolution of insolvency, and the principles of property law, which protect contractual and statutory rights.
End Notes
[i] (2024) ibclaw.in 681 NCLT.
[ii] MANU/SC/1661/2019.
Authored by Shreya Manchanda, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.