NCLAT upholds liquidator's power to disclaim onerous leave and license agreement under Regulation 10 of Liquidation Regulations

NCLAT dismissed the appeal challenging a liquidator's disclaimer of a leave and license agreement as onerous property under Regulation 10 of the Liquidation Regulations, 2016. The appellant argued there was divergence between Technical and Judicial Members' opinions and that Regulation 10 was ultra vires to IBC. NCLAT held both members agreed the agreement was onerous, noting the rent increased from Rs.5,000 to Rs.2.25 lakhs monthly and the transaction lacked bona fides. The tribunal ruled Regulation 10 operates within IBC's framework under Section 35(1)(o), empowering liquidators to disclaim onerous contracts, and is not ultra vires.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether the Leave and License Agreement dated 07.06.2019 entered into by the corporate debtor during the pendency of CIRP qualifies as an onerous contract under Regulation 10 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations) and can therefore be disclaimed by the liquidator;
• Whether the transaction under the Leave and License Agreement constitutes an undervalued transaction under Section 45 of the Insolvency and Bankruptcy Code, 2016 (IBC), and if so, whether the liquidator can avoid it;
• Whether Regulation 10 of the Liquidation Regulations, 2016, empowering the liquidator to disclaim onerous contracts, is ultra vires or inconsistent with the provisions of the IBC;
• Whether the adjudicating authority erred in rejecting the appellant's challenge to the public auction notice issued by the liquidator for sale of the corporate debtor's assets;
• Whether the adjudicating authority erred in directing the liquidator to reconsider the appellant's claim of Rs. 1.15 crore after due verification.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the Leave and License Agreement is an onerous contract under Regulation 10 of the Liquidation Regulations and can be disclaimed by the liquidator

Relevant legal framework and precedents: Regulation 10 of the Liquidation Regulations, 2016, empowers the liquidator to disclaim onerous property or contracts that impose a heavy burden on the corporate debtor during liquidation. The concept of an onerous contract is also explained in Accounting Standard (AS) 29, which defines an onerous contract as one where the unavoidable costs of fulfilling the contract exceed the economic benefits expected to be received. The Supreme Court judgment interpreting Section 535 of the Companies Act, 1956, which is pari materia to Regulation 10, was cited to emphasize that disclaimer powers are to protect creditors from onerous covenants and must be exercised with due circumspection.

Court's interpretation and reasoning: The adjudicating authority, through both the Technical Member and Judicial Member, examined whether the Leave and License Agreement was onerous. Both members concluded that the agreement was unprofitable and burdensome. The agreement was entered at a nominal rent of Rs. 5,000 per month for 12 years, which was significantly below market rates. The appellant later proposed a rent of Rs. 2.25 lakhs per month, confirming the inadequacy of the original rent. The security deposits and advance payments made by the appellant were already utilized by the erstwhile management, providing no benefit to creditors during liquidation. The Judicial Member clarified that although the agreement may not strictly fall under the definition of onerous contract as per AS 29, it qualifies as an unprofitable contract under Regulation 10(1)(b) of the Liquidation Regulations, which allows disclaimer of such contracts.

Key evidence and findings: The facts established included the date of the agreement (post initiation of CIRP), the nominal rent, the size and nature of the premises, the advance payments made by the appellant, and the appellant's own admission of willingness to pay higher rent later. The liquidator's letter asking the appellant to vacate and enter into a fresh agreement was ignored initially. The adjudicating authority found the transaction was not bona fide and was entered without good faith, adversely affecting the liquidation process and value maximization.

Application of law to facts: The Tribunal held that the Leave and License Agreement imposed a heavy burden on the corporate debtor and its creditors, qualifying as onerous property under Regulation 10. The liquidator was justified in disclaiming the agreement to protect the interests of creditors and facilitate liquidation.

Treatment of competing arguments: The appellant argued that the agreement was not onerous but merely unprofitable, and that there was a divergence of opinion between the Technical and Judicial Members on this point. The appellant also contended that the reference to Illustration 10 of AS 29 by the Judicial Member was misplaced as it is not part of Regulation 10. The Tribunal rejected these arguments, clarifying that both members agreed on the agreement being onerous or unprofitable under Regulation 10, and that the Judicial Member's reference to AS 29 was for illustrative purposes only and not part of the Regulation.

Conclusion: The Tribunal upheld the adjudicating authority's decision allowing the liquidator to disclaim the Leave and License Agreement under Regulation 10 as onerous property.

Issue 2: Whether the transaction is an undervalued transaction under Section 45 of the IBC and can be avoided

Relevant legal framework: Section 45 of the IBC defines undervalued transactions and empowers the liquidator to avoid such transactions. However, the adjudicating authority held that the Leave and License Agreement was not covered by Section 45 and rejected the liquidator's prayers under this provision.

Court's interpretation and reasoning: The adjudicating authority found no applicability of Section 45 to the transaction, and the Tribunal did not interfere with this finding. The liquidator's claim for recovery under Section 48(1) based on undervalued transaction was also rejected.

Conclusion: The transaction was not held to be an undervalued transaction under Section 45 of the IBC.

Issue 3: Whether Regulation 10 of the Liquidation Regulations is ultra vires or inconsistent with the IBC

Relevant legal framework: Section 34(2) of the IBC vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator upon appointment. Section 35(1)(d) and (o) empower the liquidator to protect assets and perform functions specified by the Board. Section 3(32) defines "specified" as those specified by regulations made by the Board under the Code. Regulation 10 is framed under these powers. Section 240(2)(y) authorizes the Board to make regulations regarding functions of the liquidator under Section 35.

Court's interpretation and reasoning: The Tribunal held that Regulation 10, empowering the liquidator to disclaim onerous contracts, is a valid exercise of the powers conferred by the IBC. The regulation is consistent with the objectives of the Code, including value maximization and efficient liquidation. The Tribunal distinguished the appellant's argument that only transactions enumerated in Sections 43 to 51 can be avoided, clarifying that disclaimer of onerous contracts is a separate power vested in the liquidator through regulations. The Tribunal also referred to the Supreme Court's interpretation of Section 535 of the Companies Act, 1956, which is analogous to Regulation 10, to support the validity of such disclaimer powers.

Conclusion: Regulation 10 of the Liquidation Regulations is intra vires the IBC and is not ultra vires or inconsistent with the Code.

Issue 4: Whether the adjudicating authority erred in rejecting the appellant's challenge to the auction notice

The appellant challenged the public notice issued by the liquidator for auction of the premises. The adjudicating authority dismissed this challenge, allowing the auction to proceed. The auction was successfully conducted for Rs. 4.21 crore. The Tribunal found no error in this decision.

Issue 5: Whether the adjudicating authority erred in directing the liquidator to reconsider the appellant's claim

The appellant had submitted a claim of Rs. 1.15 crore before the liquidator, which was initially rejected for non-compliance with prescribed format. The adjudicating authority directed the liquidator to reconsider the claim after due verification and allowed the appellant to submit the claim in the prescribed format within 30 days. The Tribunal upheld this direction as just and proper.

3. SIGNIFICANT HOLDINGS

"The intention of disclaiming a contract or property as onerous is to protect the creditors of the Corporate Debtor and releasing the Corporate Debtor from a heavy burden imposed by such a contract or property."

"The Leave and License Agreement dated 07.06.2019 is 'unprofitable' and 'burdensome' and attracts the provisions under Regulation 10 of the Liquidation Regulations, 2016."

"The power vested in the liquidator by Regulation 10 i.e., disclaimer of the onerous property is thus fully covered by provisions of the IBC and cannot be held to be beyond IBC or ultra vires to the IBC."

"Section 34(2) vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator; Section 35(1)(o) empowers the liquidator to perform such other functions as may be specified by the Board; Regulation 10 of the Liquidation Regulations is framed under these provisions."

"The Liquidator is justified in disclaiming the Leave and License Agreement dated 07.06.2019 as onerous contract under Regulation 10 of the Liquidation Regulations, 2016."

"There is no divergence of opinion between the Technical Member and Judicial Member; both have concluded that the transaction is onerous/unprofitable and can be disclaimed."

"The adjudicating authority rightly rejected the challenge to the auction notice and allowed the auction to proceed."

"The liquidator was rightly directed to reconsider the appellant's claim after due verification and submission in prescribed format."

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