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Third-party Assets not liable to be included in the CIRP Process initiated against the Corporate Debtor

Introduction

In a significant judgment titled Mrs. Durdana Aabid Ali v. Vijay Kumar V Iyer[i], the National Company Appellate Law Tribunal (‘NCLAT’) held that assets belonging to third parties, possessed by the corporate debtor (‘CD’) cannot be included as assets of CD during the corporate insolvency resolution process (‘CIRP’), in the absence of a valid contract, between the CD and the third party, establishing the same.  third party.

Brief Facts

  • The subject property was leased out by the Appellant to M/s Food World Supermarkets Pvt. Ltd. (‘FWSL’), for a period of three years, which was due to expire on 14.11.2021. However, during the subsistence of the original lease deed, the subject property was, through a subsequent deed, assigned by FWSL to Future Retail Limited, the CD (‘FRL’)

  • Subsequent to the expiry of the original lease deed, the CD was admitted to CIRP, and a resolution professional (‘RP’) was appointed.

  • The RP sent a notice to the Appellant, seeking to access and inspect the subject property and the assets lying therein.

  • The Appellant filed an interim application (‘IA’) to the adjudicating authority (‘AA’) to set aside the notice of the RP, as the original lease deed had expired, and no agreement was subsisting between the Appellant and the CD had expired. However, the said IA s dismissed by the AA. Hence, the Appellant preferred an appeal to the NCLAT.

Issues

  1. Whether assets owned by a third party in possession of CD are excluded from the scope of CIRP and moratorium as per Explanation (a) to s. 18 of Insolvency and Bankruptcy Code, 2016 (‘IBC’)?

  2. Whether the subject property could not be included in the list of assets of CD as there was no subsisting contract between CD and the appellant.

  3. Whether the RP could take possession of the leased property as per s. 14(1)(d) IBC if CD was not in clear possession of the property?

Held

The NCLAT, while allowing the said appeal and setting aside the order of the AA made the following observations :-.

i. Regarding issue no. 1, the NCLAT observed that the assets owned by a third party, which is in possession of the CD, are excluded from the scope of a moratorium in view of the exemption provided under Explanation (a) of s. 18 of IBC.

ii. Regarding issue no. 2, the NCLAT observed that the subject property could not have been included in the list of assets in the absence of a subsisting contract.

iii. For issue no. 3, the NCLAT observed that since the assignment of the lease deed was disputed, the original lease term had expired, and there was no proof of extension of the lease deed or the CD having possession of the subject property, the RP could not have decided on the possession based on assumptions and presumptions, and while taking the recourse to s. 14 of the IBC.

iv. The NCLAT also, while deciding on the propriety of the RP, observed that since the RP was acting in furtherance of his duties and responsibilities, no action was to be taken against him.

Our Analysis

This judgment exemplifies the scope of liability and associated remedies available to third parties that are unwilling, for no fault of theirs, to be caught up in CIRP proceedings. The NCLAT has examined and balanced the rights and liabilities of both the CD and the third party, observing that any action taken by the RP has to mandatorily be covered under the rigours of the IBC. While it is imperative to protect the interests of the CD, the rights of third parties ought not be compromised by the RP, and such rights have to be governed as per terms agreed by contracting parties.




End Notes

[i] (2024) 162 taxmann.com 208





Authored by Aditya Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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