Are Land Owners Sacrificial Lamb in Insolvency ?

In a Joint Land Development Agreeent, (JDA), what right exists for land owner, is the question, we need to pose in the light of a few developments recently. The questions needs to be answered here are:

1) What if Corporate Insolvency Resolution Process (“CIRP”) is initiated against the Developer of the said project. Would the JDA property in question be included within the purview of the moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016 (“IBC”)?

2) What rights would accrue to Landowners under IBC, if the JDA property is included within the purview of moratorim under Section 14 of Insolvency and Bankruptcy Code, 2016 ?

3) Can the owner terminate the rights created in favour of the Developer wherein IBC proceedings have already been initiated against the Developer and such Developer is in possession of the concerned JDA property?

Let's discuss this aspect in details here in the backdrop of various Supreme Court and the National Company Law Tribunals (“NCLTs”)/ National Company Law Appellate Tribunals (“NCLATs”) judgements.

This question of land owner cancelling the right of developer created in the property was placed before the Supreme Court in the year 2020 before Justice Rohinton Fali Nariman, in the case Rajendra K. Bhutta v State of Maharashtra. 

In the aforesaid case, the Corporate Debtor defaulted on a loan entered into and executed between it and the Union Bank of India for a sum of Rs. 200 Crores. An application was filed by the Financial Creditor (Union Bank of India) under Section 7, and a moratorium was declared accordingly under Section14.

The issue that arose more specifically was – whether, in light of a moratorium under IBC, it was permissible to recover JDA property by the Landowner by the virtue of a termination notice where such property is “occupied by” the Corporate Debtor (Developer). The relevance of “Possession” and “Occupation” of the property in the course of IBC proceedings was further discussed at length.

The Apex Court at first went through the JDA and established that the said JDA granted to the Developer (i.e. the Corporate Debtor) the right to enter upon the land, demolish the existing structures, construct and erect new structures, and allot new tenements.

Thereby, the Corporate Debtor was in “possession” of the requisitioned land parcel. The apex court declared it unnecessary to read into any interests if they are being created through the concerned JDA. Further, it stated that it can be understood from a bare reading of Section 14(1)(d) of the Code that it does not dwell upon any of the assets, legal rights or beneficial interest in such assets of the corporate debtor.

The court further held that what is referred to therein (Section 14) was “recovery of any physical property.” Furthermore, the bench stated that the expression “occupied by” would mean, or be synonymous with, being in “actual physical possession”. This is principally because the expression “possession” would connote possession being either constructive or actual and which, in turn, would include legal possession, even when factually there is no physical possession.

The same question has been posited before the courts/tribunals in numerous matters, and the judiciary has always followed a strict interpretation of the IBC to prohibit the termination of development rights granted to the corporate debtor to develop the immovable property. In Vijaykumar V Ayer v. Union of India, the NCLT held that Section 14(1)(d) of the IBC provides for an express bar on the rights of third parties to terminate licenses or contracts where such rights have been granted to the Corporate Debtor with respect to immovable property.

Do the rights accruing to JDA Landowners through their respective statutes supersede the moratorium under Section 14 of IBC?

Another question that was presented before the Court in the same case was the existing clash between Maharashtra Housing and Area Development Act, 1976 (“MHADA”) and the Insolvency Code. The Court, without any qualms, held that a plain reading of Section 238 of the Insolvency Code made it quite clear that the Code must prevail. The single bench was of the view that when a moratorium is spoken of by Section 14 of the Code, the idea is to alleviate corporate sickness, so that the CIRP may proceed unhindered by any of the obstacles that would otherwise be caused.

A statutory status quo is pronounced under Section 14 the moment a petition under Section 7 of the code that is dealt with by Section 14 is admitted. The statutory freeze that is thus made is limited by Section 31 (3) of the Code from the date of admission of an Insolvency petition up to the date that the adjudicating authority either allows a resolution plan to come into effect or states that the Corporate Debtor must go into liquidation.

For this temporary period, at least, all the prerequisites referred to under Section 14 must be strictly observed so that the Corporate Debtor may finally be put back on its feet albeit as per CIRP prescribed under IBC. Accordingly, the provisions of IBC are to supersede all the other acts.

Can JDA Landowners be considered Operational Creditors?

Before answering this question, there’s another issue that needs to be addressed. What recourse do JDA Landowners have under the preview of IBC? Landowners might find themselves tangled in this web under two possible scenarios; either by themselves trying to initiate CIRP or by submitting their claims to the Resolution Professional (“RP”) once the Resolution Proceedings have begun against someone else’s petition under Section 7 or Section 9 of IBC. Either way, what would be the status of their claim? Would 

it be an operational debt?

This question was answered by the NCLT in 2019, in the case of S. M. Builders and Developers vs Ramee Constructions Private Limited. There existed a JDA wherein the Petitioner (Landowner) granted development rights to the Corporate Debtor in respect of a plot of land. The Corporate Debtor was allowed to carry out the construction work in the plot of land by utilizing the development rights provided by the Petitioner.

The Corporate Debtor (Developer) had to make a series of payments to the Landowner, and on default of such payments, the petitioner approached the NCLT to set in motion CIRP under Section 8 and 9 of the IBC, claiming to be the Operational Creditor.

The NCLT bench clarified the scope of Operational Creditor as defined under Section 5(20). Through a bare reading of the section, it is understood that “Operational Creditor” is a person to whom an “Operational Debt” is normally owed, and it is to include any person to whom such debt has been legally assigned or transferred. The bench further expatiated on the scope of Section 5(21) to define Operational Debt as a claim in respect of the “provision of goods or services” including employment, or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

The bench finally held that the Petitioner was a Joint Venture Partner with the Corporate Debtor and had not made any claim in respect of the provision of goods or services. Furthermore, the debt claimed therein did not arise under any law for the time being in force payable to Central Government or State Government. Therefore, it was of the view that the Petitioner did not come within the meaning of “Operational Creditor” as defined under sub-section 20 read with sub-section 21 of Section 5 of the Code which is a prerequisite for triggering insolvency under the Code. In another case titled M/s SreeSankeshwara Foundation and Investments vs. M/s Dugar Housing limited, the NCLAT made a similar observation that both the Resolution Applicant and Corporate Debtor being parties to a joint venture project, the Applicant could not claim to be ‘Operational Creditor’ as the debt claimed did not relate to supply of goods nor service rendered by the Appellant. The Appellate bench further held that if the joint venture is under any service to the allottees for which it must pay service tax, it does not mean that the parties of the joint venture will render service to each other.

The Goodwill Theaters vs Suntech Reality case: A Conundrum

The juxtaposition of the aforesaid judicial pronouncements with the decision of the NCLT in Goodwill Theaters vs Suntech Reality case highlights the different approach adopted by the court vis-à-vis the rights of the Corporate Debtor in a joint development agreement. In this case, a token amount of Rs. 2.51 Crore was paid by the developer to the Landowner under a joint development agreement, but the Landowner failed to refund the said amount post termination of the agreement. Thereafter, the developer invoked Section 9 of the IBC to initiate CIRP against the Landowner. The NCLT held that the amount advanced by the developer for acquiring development rights vis-à-vis the immovable probably shall be classified as operational debt. However, the same reasoning seems contradictory considering the decision of the Tribunal in the abovementioned cases wherein it was held that the grant of development rights in JDA cannot be considered as operational debt. If it is a well-established principle that granting of development rights by the Landowner does not amount to ‘supply of goods or services, then how can the consideration advanced by the developer for acquiring the same be classified as an ‘operational debt’? It can be concluded that the courts have adopted a myopic approach towards the rights of Landowners in a JDA while giving ample leeway to the developer.

Conclusion

In the end, it can be safely concluded that Landowner’s rights vis-à-vis joint development agreements continues to remain unclear. The various judgements on this issues have often The myriad cases dealing with the same issue often offered contradictory or incompatible stances. Under IBC, the role of RP is limited to maximising the security of the Corporate Debtor (Developer) and this seems to happen at the cost of Land Owners.

Dr. Ajay Kummar Pandey

( LLM, MBA, (UK), PhD, AIMA, AFAI, PHD Chamber, ICTC, PCI, FCC, DFC, PPL, MNP, BNI, ICJ (UK), WP, (UK), MLE, Harvard Square, London, CT, Blair Singer Institute, (USA), Dip. in International Crime, Leiden University, the Netherlands )

Advocate & Consultant, Supreme Court of India & High Courts

4C Supreme Law International, Delhi, NCR. Mumbai & Dubai

Tel: M- 91- 9818320572. Email: editor.kumar@gmail.com

Website: www.ajaykr.com, www.4Csupremelawint.com

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