Resolution Professional's possession of property upheld during insolvency proceedings despite unregistered sale deed

NCLAT dismissed the appeal challenging the Resolution Professional's possession of property during CIRP proceedings. The appellant, a sole proprietorship firm owner, executed a Take Over Agreement transferring property to the Corporate Debtor company. Despite the formal sale deed not being registered, the tribunal held that the property belonged to the Corporate Debtor as evidenced by financial statements and the takeover agreement. The Resolution Professional lawfully possessed the property during insolvency proceedings. The Resolution Plan was approved with 80.43% voting share, and the Successful Resolution Applicant would pursue civil remedies to perfect title. The appellant's claim for restoration of possession was rejected.

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Issues Presented and Considered

1. Whether the immovable property originally owned by the appellant's sole proprietorship firm vested in the Corporate Debtor by virtue of the Take Over Agreement dated 16.12.2016 despite the absence of a registered sale deed transferring title.

2. Whether the Resolution Professional (RP) had the authority under the Insolvency and Bankruptcy Code (IBC) to take possession of the subject property during the Corporate Insolvency Resolution Process (CIRP).

3. The legal effect and applicability of Explanation to Section 18 of the IBC concerning assets owned by third parties but in possession of the Corporate Debtor.

4. The impact of prior orders by the National Company Law Tribunal (NCLT) and this Appellate Tribunal on the ownership and possession rights over the subject property.

5. Whether the appellant is entitled to restoration of possession of the property despite having received consideration in the form of equity shares under the Take Over Agreement.

6. The scope of civil remedies available to parties disputing ownership or possession rights over the property in the context of insolvency proceedings.

Issue-wise Detailed Analysis

1. Vesting of Property in the Corporate Debtor Without Registered Sale Deed

Legal Framework and Precedents: Section 54 of the Transfer of Property Act, 1882 mandates that transfer of immovable property worth more than Rs.100 requires a registered sale deed to pass title. The Supreme Court has consistently held that an agreement for sale does not transfer ownership or create any charge on the property. The NCLT in its order dated 27.09.2021 relied on this principle, holding that mere agreements do not vest title in the Corporate Debtor and the RP must seek civil remedies for specific performance.

Court's Interpretation and Reasoning: The Appellate Tribunal recognized the legal requirement of registration but emphasized the commercial and contractual intent evidenced by the Take Over Agreement. The agreement explicitly stated that all assets and liabilities, including the immovable property, of the appellant's proprietorship firm were to vest in the Corporate Debtor. The appellant had received equity shares as consideration and had not challenged the agreement since 2016.

The Tribunal reasoned that although the registered sale deed was absent, the possession and control of the property had effectively passed to the Corporate Debtor under the Take Over Agreement. The absence of formal registration was treated as a defect in title that could be remedied through civil litigation but did not invalidate the transfer of possession or the Corporate Debtor's control over the property during CIRP.

Application of Law to Facts: The Tribunal distinguished the instant case from precedents strictly enforcing the need for registration by highlighting the unique facts: the property was shown in the Corporate Debtor's audited financial statements, the appellant had accepted equity shares as consideration, and the property was mortgaged by the appellant as collateral for the Corporate Debtor's credit facilities. These facts demonstrated the appellant's acquiescence to the transfer and the Corporate Debtor's de facto ownership.

Treatment of Competing Arguments: The appellant relied on the absence of a registered sale deed and prior NCLT orders rejecting the RP's application for registration. The Tribunal acknowledged these but held that those orders did not negate the contractual transfer of possession and control under the Take Over Agreement. The appellant's later change in stance was viewed skeptically, particularly as it coincided with adverse orders and financial considerations.

Conclusion: The Tribunal concluded that the property vested in the Corporate Debtor for the purposes of CIRP and the RP was entitled to possession despite the lack of registered sale deed. The defect in title did not entitle the appellant to possession or to frustrate the insolvency process.

2. Authority of Resolution Professional to Take Possession During CIRP

Legal Framework: Section 18 of the IBC and its Explanation clarify the scope of assets under CIRP and the moratorium. Assets owned by third parties but in possession of the Corporate Debtor under trust or contractual arrangements are excluded from CIRP assets. The RP's powers include taking custody and control of the Corporate Debtor's assets to manage the insolvency process.

Court's Interpretation: The Tribunal found that the subject property was the Corporate Office of the Corporate Debtor and was reflected as its asset in financial statements. The Take Over Agreement and conduct of parties established that the property was not owned by a third party but had effectively vested in the Corporate Debtor. Therefore, the RP was empowered to take possession and manage the property as part of CIRP.

Key Evidence and Findings: The appellant's admission in CoC meetings that the property was part of the Corporate Debtor's assets, the inclusion of the property in the Resolution Plan, and the appellant's failure to transfer title due to financial constraints were significant. The appellant's prior cooperation in handing over possession to the RP further supported the RP's authority.

Competing Arguments: The appellant argued that under Explanation to Section 18, the property was a third-party asset and thus outside CIRP. The Tribunal rejected this, emphasizing the contractual transfer and practical control vested in the Corporate Debtor.

Conclusion: The RP's possession of the property was lawful and necessary for CIRP, and the appellant was not entitled to possession during the insolvency process.

3. Effect of Prior Orders by NCLT and Appellate Tribunal

Legal Framework: The NCLT's order dated 27.09.2021 dismissed the RP's application for registration of sale deed, holding that civil remedies were appropriate for title perfection. The Appellate Tribunal's order dated 02.12.2021 affirmed this view and dismissed the appeal.

Court's Interpretation: The Tribunal clarified that these orders did not negate the Corporate Debtor's possession or the RP's authority during CIRP. The orders merely held that the RP could not compel registration through insolvency proceedings and must seek civil remedies for title perfection.

Application to Facts: The appellant's reliance on these orders to claim restoration of possession was rejected. The Tribunal held that possession and title are distinct; possession had passed to the Corporate Debtor, while title could be perfected later through civil litigation.

Conclusion: Prior orders did not entitle the appellant to possession or hinder the RP's control over the property during CIRP.

4. Entitlement to Possession and Unjust Enrichment

Legal Reasoning: The appellant had received consideration in the form of equity shares aggregating Rs. 29.74 Lakhs against the transfer of the proprietorship firm's assets, including the subject property. The Tribunal considered that restoring possession to the appellant at this stage would amount to unjust enrichment, as the appellant would retain consideration without the corresponding asset.

Application of Law: The principle preventing unjust enrichment was applied to deny the appellant's claim for possession despite the lack of registered sale deed. The appellant's prior conduct and admissions weighed heavily against his entitlement.

Conclusion: The appellant was not entitled to restoration of possession, and such restoration would be inequitable.

5. Availability of Civil Remedies

Legal Framework: The Tribunal repeatedly emphasized that disputes over title and ownership are to be resolved through civil courts by invoking appropriate remedies such as specific performance or declaratory suits. Insolvency proceedings do not substitute civil litigation for title perfection.

Court's Interpretation: The Tribunal granted liberty to the parties to pursue civil remedies to perfect title or seek possession once the insolvency resolution process concludes or as permissible under law.

Conclusion: The insolvency process does not preclude civil litigation for ownership or possession disputes, and parties retain their rights to pursue such remedies.

Significant Holdings

"Merely there was an agreement to transfer the property, it does not create any right or any interest in favor of the Corporate Debtors." (NCLT order dated 27.09.2021)

"The remedy available to the Resolution Professional is to file an application before the Competent Court for the specific performance of contract." (NCLT order dated 27.09.2021)

"Assets owned by a third party in possession of the Corporate Debtor is excluded from the scope of CIRP and moratorium in view of Explanation (a) to Section 18 of the IBC." (NCLAT in Mrs Durdana Abid Ali)

"The absence of a registered sale deed can be treated as a defect in the title of the property which defect may be perfected by the Resolution Professional/Corporate Debtor in civil litigation and this imperfect title in peculiar facts of this case would not entitle the appellant the restoration of its possession." (Appellate Tribunal's reasoning)

"Reversing the possession to the appellant at this stage, would unjustly enrich him, especially when he had maintained a contrary stand from 2016 till filing of IA No.3085/2022." (Appellate Tribunal's conclusion)

"The proceedings before the Ld. NCLT are still pending and the parties are at liberty to resort to civil remedies to perfect title and/or to seek possession." (Appellate Tribunal's directive)

Core Principles Established

- A contractual Take Over Agreement transferring business assets, including immovable property, can vest possession and control in the Corporate Debtor during CIRP even if formal registered sale deed is absent.

- The RP is empowered to take possession of such property as part of the insolvency process, and the property forms part of Corporate Debtor's assets unless clearly owned by a third party under trust or bailment.

- The absence of registered sale deed is a defect in title that must be remedied through civil litigation and does not invalidate the RP's possession during CIRP.

- Prior orders refusing directions for registration under insolvency proceedings do not preclude the RP or Corporate Debtor from pursuing civil remedies for title perfection.

- Restoration of possession to a party who has received consideration for transfer would amount to unjust enrichment and is not permissible during CIRP.

- Disputes over ownership and possession during insolvency must ultimately be resolved through civil courts; insolvency proceedings do not substitute for civil remedies.

Final Determinations

The Tribunal dismissed the appeal and refused to restore possession of the subject property to the appellant, holding that the property vested in the Corporate Debtor under the Take Over Agreement and was lawfully in possession of the RP during CIRP. The appellant's reliance on absence of registered sale deed and prior NCLT orders was rejected as insufficient to disturb possession. The appellant was not entitled to possession as it would unjustly enrich him having accepted equity shares as consideration. The parties were granted liberty to pursue civil remedies for title perfection and possession rights outside the insolvency proceedings.

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