VICTORY IRON WORKS LTD. VS JITENDRA LOHIA (CASE SUMMARY)

 

Insolvency Proceedings has been initiated under Section 7 of the Insolvency & Bankruptcy code, 2016 in the matter of Avani Towers Pvt. Ltd. vide order of Hon’ble NCLT dated 15.10.2019.

The Corporate Debtor has vide   MOU dated 24.01.2008 has granted financial assistance of Rs. 2.70 Crore to Energy Property towards purchase of the land.  This was in addition to financial assistance of Rs. 9.30 Crore. The consideration against these financial  assistance was 40% of shareholding in Energy Properties and exclusive development rights in the purchased property. The Land was purchased vide sale certificate dated 29.01.2008 for a consideration of Rs. 2,97,03,484/-. Vide agreement dated 16.06.2008, the Corporate Debtor was given exclusive rights of development of the property. Physical possession was also given to the Corporate Debtor.

Corporate Debtor executed a Leave and License Agreement on 19.08.2011, granting licence to Victory Irom Works Ltd.  for use of 10,000 sq. ft. of  land out of 10.19 acres. Victory claimed that they got permission to used whole of land by paying additional license fee of Rs. 5000/-

After initiation of CIRP, the IRP was of the view that development rights owned by the Corporate Debtor were part of intangible assets of the Corporate Debtor. The Resolution Professional filed an Application  to take into custody of the land of about 10.19 acres at Ramrajatala Station Road, Howrah, West Bengal. The claim of IRP was objected by the Energy Properties on the ground that land does not belong to the Corporate Debtor. The claim of the IRP was also objected by the Victory on the ground that the land is in their possession and the Adjudicating Authority does not have power to evict a tenant/lessee/licensee.

NCLT and NCLAT protected the interest of Victory to the extent of Land of 10000 sq. ft. covered by Leave and License Agreement but refused to acknowledge that Victory is in possession of the entire land.

Findings of NCLT & NCLAT were challenged before Hon’ble NCLAT by Energy Properties in CA No. 1782 of 2021 and by Victory Iron Works in CA 1743/2021 before the Hon’ble Supreme Court.

ISSUES

There were two issues before the Hon’ble Supreme Court for consideration. (1)  what was nature or right or interest that the Corporate Debtor has over the property in question?   and (2)   Whether NCLT & NCLAT has jurisdiction to not vested in them by seeking to recover the possession of the Corporate Debtor?

FINDINGS OF THE SUPREME COURT

Issue (1):

what was nature or right or interest that the Corporate Debtor has over the property in question?

The Supreme Court analysed the meaning to term “assets” used under Section 18 and Section 25 of the Code. The Supreme Court noted that the term “asset” has not been defined in the Code. 

As per Section 3 (37) of the Code ,  words and expression used but not defined in this Code but defined in the Indian Contract Act, 1872, the Indian Partnership Act, 1932, The Security and Exchange Board of India Act, 1992, the Recovery of Debts due to Banks and Financial Institution Act, 1993, the Limited Liability Partnership Act, 2008 and the Companies Act, 2013 shall have the meanings respectively assigned to them in those acts.  But asset has not been defined even in aforesaid Acts.

The Court relied on the definition of “asset” defined under Section 102 as “property or right of any king”.

The Code has defined  the term “property” under Section 3 (27).  According to Section 3 (27) “property” includes 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.

The Supreme Court held that a bundle of rights and interest in form of development rights  have been created in favour of the Corporate Debtor. These bundle of rights have been created for a valid consideration. Development rights created in favour of the Corporate Debtor constitute “property” within the meaning of the expression under Section  3(27) of the Code. 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.

Issue (2)

Whether NCLT & NCLAT has jurisdiction to recover the possession of the Corporate Debtor?

The Appellant has claimed that they are covered under explanation under Section 18 of the Code having third party rights over the land in question. The Court observed that the exclusion of assets owned by a third party, but in the possession of the Corporate Debtor held under the contractual arrangements, covered under the expression “assets” is limited to Section 18. In other words, the explanation under Section 18 does not extend to Section 25.

The Supreme Court also held that the bundle of rights and interests created in favour of the Corporate Debtor may even tantamount to creation of an implied agency under Chapter -X of the Indian Contract Act, 1872 and such agency may not even be amenable to termination in view of Section 202 of the said Act, since the creation of the same in favour of the Corporate Debtor was coupled with flow of consideration.

Supreme Court observed that there was no whisper about the fact that Victory was occupying any land in excess of what they were permitted to occupy under the Lease and License Agreement.

The Supreme Court did not find any reason to interfere with orders of NCLT & NCLAT. The Appeals were dismissed by the Hon’ble Supreme Court.

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