2025 (11) TMI 780 - AT - IBC

Leasehold rights included in liquidation estate; Section 36(4)(a)(iv) bar inapplicable where merger transferred intangible lease interest

West Bengal Housing Infrastructure Development Corporation Ltd. Versus Kshitiz Chhawchharia (Liquidator of M/s Concast Steel and Power Ltd.), Kolkata

NCLAT dismissed the appeal, holding the liquidator lawfully included leasehold rights (not the underlying land) in the corporate debtor's liquidation ... CIRP - Inclusion of the demised leased land in the Liquidation Estate of the CD - failure to consider the fact that lease hold rights could not be transferred to CSPL in violations of terms of the lease deed and without the consent of the appellant - HELD THAT:- The Ld. Tribunal has rightly did not enter into the area of adjudicating the correctness or illegality of the Amalgamation/ Merger scheme as firstly the appellant has given an implied consent by not raising any objection, for inclusion of demised leased property in the list of properties which was being transferred by CIL to CSPL (under the short description of leasehold property) at the time of correction proceedings and secondly the lease granted in favour of CIL was never revoked and when the lease property was transferred to the CD, suddenly the termination of lease appears to have been made by the appellant vide notice dated 30.05.2019, when the moratorium was already declared under Section 14 of the Code. There are no illegality in the approach of the Tribunal in not entering into the correctness or validity of the merger scheme. However, it is also clarified at this stage that by virtue of the amalgamation deed or merger scheme it were only the leasehold rights in the land which were transferred to the CSPL by the CIL and since the leasehold rights were connected with the beneficial enjoyment of the land that land was also transferred to the CSPL only for the purpose of enjoying the leasehold rights of the land, while the ownership of the land remains with the appellants. The lease hold rights created in favour of the CIL which were transferred to the CSPL by a merger scheme duly approved by the Order of the Hon'ble High Court of Calcutta as rectified by the Tribunal are the assets of the CD and the question, as to whether the assets which are included in the Information Memorandum or liquidation estate are the assets of the corporate debtor, goes to the core of the CIRP process and when the inclusion of the said asset is questioned before the Ld. NCLT by the Appellant, Adjudicating Authority or this Appellate Tribunal does not lack jurisdiction in entering into the question and deciding as to whether the leasehold assets are part of the Liquidation Estate of the CD or should be excluded therefrom. The leasehold rights with regard to the leased property are also the assets of the Company in favour of which these lease hold rights have been created by the owner or transferred and these rights could very well be enjoyed and may also be transferred and has been validly transferred to the CSPL/CD by the CIL by virtue of duly approved merger/amalgamation scheme. Whether these lease hold rights may be included in the liquidation estate of the CD having regard to the bar contained under Section 36 (4) (a) (iv) and could be sold in auction? - HELD THAT:- Perusal of the impugned order would reveal that the IA filed by the appellant was not found favour of the Tribunal on the score that no notice under Section 111(G) of the transfer of property act has been given and the lease has not been determined and secondly, that the appellant was aware of the amalgamation order including its rectification order of 14.09.2018, having regard to the correspondence exchanged between the parties and the appellant has chosen not to challenge such amalgamation at an appropriate forum. The Leasehold Rights accrued to the Corporate Debtor vide the Lease Deed in favour of CIL and transferred to CSPL vide merger deed are rights vested in and owned by the Corporate Debtor and is its Intangible Asset and this ownership is to the extent of these Leasehold Rights only. It is also significant to mention that the Appellant has never initiated any proceedings or chosen to exercise their rights to invoke any of the Clauses of the Lease Deed mentioned above, for cancellation of the subject Lease Deed before the initiation of the CIRP against the CD. In these facts and circumstances the Liquidator, was legally empowered under the Code to take control and custody of the Asset over which the ‘Corporate Debtor’ has the ‘Ownership Right’. At the cost of repetition, we clarify that the 'Asset' in the instant case are only the ‘Leasehold Rights’ and not the ‘land’ per se and the advertisement issued by the Liquidator dated 26.12.2018 would also reveal that it has been clearly mentioned therein that the land in question is a leased land. Therefore, the ownership of lease hold rights is clearly in favour of the CD and could not be said to be owned by any third party and therefore the bar contained under section 36(4) (a) (iv) of the Code will not attract in the background of peculiar factual matrix of this case. The liquidator has not committed any illegality in including the demised leased land in the Liquidation Estate of the CD and consequently the Tribunal has also not committed any error in dismissing the IA No. 1763 of 2019 moved by the appellant. Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether leasehold rights purportedly transferred to the corporate debtor by an amalgamation/merger (as rectified) vested in the corporate debtor and therefore form part of the liquidation estate under the Insolvency and Bankruptcy Code (IBC). 2. Whether the Adjudicating Authority/Appellate Tribunal lacked jurisdiction to examine the legality or validity of the amalgamation/rectification order in the course of deciding inclusion of alleged leasehold rights in the liquidation estate. 3. Whether absence of prior determination of the lease under Section 111(g) of the Transfer of Property Act (TPA) precludes recognition of leasehold rights as assets of the corporate debtor or requires interlocutory notice/termination before inclusion in liquidation estate. 4. Whether the bar contained in Section 36(4)(a)(iv) of the IBC excludes the leased land (or leasehold rights) from the liquidation estate and prevents auction/sale by the liquidator. 5. Whether a party's belated contention of being a secured creditor (and related failure to file claims within prescribed time) can be entertained on appeal when not pleaded before the Adjudicating Authority. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Vesting of Leasehold Rights in Corporate Debtor and Inclusion in Liquidation Estate Legal framework: Section 3(27) IBC defines 'property' to include every description of interest; Sections 18 and 25 deal with assets and custody/control during CIRP; neither 'asset' nor 'ownership' is narrowly confined and prior decisions recognise development/leasehold rights as property/asset. Precedent treatment: The Court followed and relied on a line of authorities (including Victory Iron Works, Rajendra K. Bhutta, New Okhla decisions and Supreme Court reasoning in Victory Iron Works and related cases) holding that a bundle of rights created in favour of a corporate debtor (including leasehold/development rights) constitute 'property' under Section 3(27) and thereby 'assets' under Sections 18/25 IBC. Interpretation and reasoning: The tribunal analysed the registered lease terms, the amalgamation/rectification orders and correspondence showing knowledge and implied acquiescence by the lessor. It distinguished transfer of ownership from transfer of leasehold rights: amalgamation conveyed the lessee's leasehold rights (beneficial enjoyment) to the corporate debtor while the lessor retained title. The Court held that leasehold rights constitute intangible assets owned by the corporate debtor to the extent of those rights and may be included in liquidation estate. Ratio vs. Obiter: Ratio - leasehold rights, even where land ownership remains with a third party, can constitute assets of the corporate debtor and be included in the liquidation estate; established by applied precedents. Obiter - factual observations about the precise nature of rights in the present lease (e.g., extent of beneficial enjoyment) and their characterization as intangible assets. Conclusion: The leasehold rights vested in the corporate debtor and could validly be included in the liquidation estate; no illegality in the liquidator taking control of those assets. Issue 2 - Jurisdiction to Adjudicate Validity of Amalgamation/Rectification Order Legal framework: Adjudicating Authority's power under IBC to determine whether assets included in information memorandum / liquidation estate belong to the corporate debtor; limits on revisiting high court-sanctioned schemes subject to IBC's regime and remand/rectification principles. Precedent treatment: The Court applied Supreme Court dicta (Miheer H. Mafatlal and subsequent IBC jurisprudence) and Tribunal/Supreme Court decisions (Victory Iron Works, Rajendra K. Bhutta, New Okhla) to hold that NCLT/NCLAT may examine whether contested assets are part of CIRP/liquidation estate even if the underlying meritorious challenge to a merger could be beyond their remit. Interpretation and reasoning: The Court noted that the original amalgamation was sanctioned by the High Court and later rectified by NCLT post-IBC, and that parties had actual knowledge and conduct amounting to implied consent. It held that the Adjudicating Authority did not err in declining to re-open the merits of the amalgamation scheme where the lessor's conduct negated objection and where the rectification related back to the original order. However, the Tribunal emphasized that jurisdiction exists to determine inclusion/exclusion of assets in CIRP/liquidation even where the ultimate validity of a merger order might be challenged elsewhere. Ratio vs. Obiter: Ratio - Adjudicating Authority possesses jurisdiction to decide whether an alleged asset forms part of the CIRP/liquidation estate; it need not be relegated to civil courts simply because the underlying amalgamation order exists. Obiter - limits on re-opening high court-sanctioned schemes where party conduct evidences implied consent. Conclusion: The Tribunal properly exercised jurisdiction to consider inclusion of leasehold rights in the liquidation estate and rightly declined to re-adjudicate the merit of the amalgamation given the factual matrix (implied consent and rectification). Issue 3 - Requirement of Notice/Determination under Section 111(g) TPA before Challenging Lease Transfer Legal framework: Section 111(g) TPA provides procedures for determination/termination of lease; parties invoked its relevance to contest transfer/vesting. Precedent treatment: The Adjudicating Authority's initial reliance on absence of notice under Section 111(g) was considered but the Appellate Tribunal reviewed this alongside other facts and precedents recognising leasehold rights as assets notwithstanding procedural non-termination. Interpretation and reasoning: The Court observed that the lease was never revoked or determined pre-CIRP; lessor never exercised contractual termination remedies or pre-emption. Merely asserting failure to serve notice under Section 111(g) did not negate the corporate debtor's leasehold asset, particularly where the lessor's conduct (seeking rectification, correspondence acknowledging lessee) evidenced acquiescence. Ratio vs. Obiter: Ratio - absence of prior Section 111(g) notice does not automatically negate the corporate debtor's leasehold rights as assets where the lease remains undetermined and lessor has not exercised termination rights; procedural prerequisites cannot be used to displace substantive asset inclusion in liquidation. Obiter - factual consideration of whether termination steps were taken. Conclusion: The lack of a prior determination under Section 111(g) did not preclude inclusion of leasehold rights in the liquidation estate in the present factual matrix. Issue 4 - Applicability of Section 36(4)(a)(iv) IBC Bar to Leased Land/Leasehold Rights and Sale by Liquidator Legal framework: Section 36(4)(a)(iv) lists excluded assets; interplay with definition of 'asset'/'property' and precedents treating leasehold/development rights as assets. Precedent treatment: The Tribunal relied on decisions holding leasehold/development rights to be property/assets (Victory Iron Works, New Okhla, other Tribunal precedents) and distinguished cases where ownership transfer (not mere leasehold) was in issue. Interpretation and reasoning: The Court distinguished ownership of land from leasehold rights: only leasehold rights (intangible assets) were transferred to corporate debtor by amalgamation; ownership remained with lessor. Because the lease was not determined and the corporate debtor owned the leasehold rights, the statutory bar under Section 36(4)(a)(iv) did not apply to exclude those leasehold rights from liquidation estate. The liquidator's advertisement explicitly described the land as leased, reflecting that only leasehold rights were being offered. Ratio vs. Obiter: Ratio - Section 36(4)(a)(iv) does not bar inclusion/sale of leasehold rights owned by the corporate debtor where the lessor retains title to land; leasehold rights as assets can be liquidated. Obiter - observations on content and wording of the impugned advertisement and valuation mechanics under pre-emption clause. Conclusion: The bar in Section 36(4)(a)(iv) does not preclude inclusion of the leasehold rights in the liquidation estate or their sale by the liquidator in the given circumstances. Issue 5 - Late Assertion of Secured Creditor Status and Failure to File Claim within Prescribed Period Legal framework: Liquidation process regulations require filing of claims within prescribed period; parties must plead contentions before the Adjudicating Authority in timely fashion. Precedent treatment: Authorities cited establish that pleas not taken below cannot ordinarily be raised for first time on appeal and that entitlement as creditor arises upon filing a claim. Interpretation and reasoning: The Court noted that secured creditor status was raised belatedly (first during final arguments), not pleaded before the Adjudicating Authority, and no claim was filed within the liquidation commencement timeline. Considering issues of limitation and factual complexity, the Tribunal declined to adjudicate the secured creditor contention on appeal and left the party free to raise it before the liquidator or Tribunal for adjudication on merits. Ratio vs. Obiter: Ratio - belated contentions of secured creditor status not raised in earlier proceedings and without timely claim cannot be entertained on appeal; such issues should be raised before the liquidator/Adjudicating Authority and considered on merits there. Obiter - procedural guidance on limitation and scope of future adjudication. Conclusion: The late plea of being a secured creditor was not adjudicated; the party may pursue the claim afresh before appropriate authority and the Tribunal refrained from deciding that issue. OVERALL CONCLUSION The Adjudicating Authority did not commit illegality in dismissing the application challenging inclusion of the leasehold rights in the liquidation estate. Leasehold rights, though ownership of the land rests with a third party, constitute assets of the corporate debtor when vested in it; the rectified amalgamation and the lessor's conduct supported implied consent; procedural prerequisites (Section 111(g) TPA) and the bar under Section 36(4)(a)(iv) of the IBC did not preclude inclusion or sale of the leasehold rights in the factual matrix; a belated secured-creditor plea raised on appeal was not adjudicated. The appeal is dismissed on merits.