2025 (12) TMI 243 - SC - IBC

Termination of redevelopment agreements upheld; Section 14, 60(5)(c) IBC inapplicable, limited licence no asset, writ directions sustained

A.A. Estates Private Limited Through Its Resolution Professional Harshad Shamkant Deshpande And Another Versus Kher Nagar Sukhsadan Co-Operative Housing Society Ltd & Ors.

SC upheld the termination by Respondent Society of the Development and Supplementary Agreements with the corporate debtor, holding that time was of the ... Validity of termination of the Development Agreement and Supplementary Agreements prior to the initiation of the second CIRP - the agreements constitute “assets” or “property” of the corporate debtor so as to attract the protection of moratorium under Section 14 of the IBC or not - statutory authorities to process and grant approvals in favour of Respondent No.8 for redevelopment of the subject project - violation of principles of natural justice. Whether the termination of the Development Agreement dated 16.10.2005 and Supplementary Agreements dated 23.12.2005 and 09.04.2014 by Respondent No. 1 Society prior to the initiation of the second CIRP was valid and effective in law? - HELD THAT:- In contract law, time is of the essence in a redevelopment agreement, whose object is timely rehabilitation of displaced members. Prolonged delay defeats the foundation of the contract and constitutes a material breach entitling the owner to terminate. The right to terminate for default was expressly reserved in the Development Agreement and the Supplementary Agreements - The termination was thus effected after due notice and prolonged default, and cannot be termed arbitrary or mala fide. The Society, being the owner of the property and guardian of the members’ welfare, cannot be compelled to indefinitely await performance from a defaulting developer. The IBC is not intended to freeze urban welfare projects or protect commercial indolence at the cost of citizens awaiting rehabilitation. The reasoning was reiterated in Tata Consultancy Services Ltd v. SK Wheels Pvt. Ltd. Resolution Professional, Vishal Ghisulal Jain [2021 (11) TMI 798 - SUPREME COURT], where this Court held that NCLT’s residuary jurisdiction cannot be invoked if the termination of a contract arises from deficiencies or defaults independent of insolvency. Intervention is justified only where the termination would make certain the corporate death of the debtor. Applying these principles, the termination in the present case was not occasioned by the insolvency of the corporate debtor but by its persistent non- performance. Letters issued by the Society, including one dated 31.05.2019, record that continuation of the agreement was conditional upon compliance by the developer, failing which the contract would stand cancelled. These defaults occurred well before initiation of the CIRP. Thus, the termination was based on legitimate grounds unrelated to insolvency. In the terms of the Development Agreement, the developer was granted only a limited licence to enter and use the land for redevelopment. No estate, proprietary right, or transferable interest was created; ownership and legal possession always remained with the Society. Consequently, the so-called “development rights” of the corporate debtor constitute, at best, a contractual permission and not an “interest in property” within the meaning of Section 14(1)(d) of the IBC - this Court holds that the termination of the Development Agreement dated 16.10.2005 and the Supplementary Agreements dated 23.12.2005 and 09.04.2014 by Respondent No. 1 Society was valid, lawful, and effective in law. No subsisting contractual or proprietary right survived in favour of the corporate debtor on the date of initiation of the second CIRP. Consequently, the NCLT lacked jurisdiction under Section 60(5)(c) of the IBC to interfere with such termination. Whether the Development Agreement and the Supplementary Agreements constitute “assets” or “property” of the corporate debtor so as to attract the protection of moratorium under Section 14 of the IBC? - HELD THAT:- The object of Section 14 is to maintain the corporate debtor’s estate as a going concern and to preserve its assets so as to facilitate resolution. The term “property” under Section 3(27) of the IBC is defined in the widest terms to include money, goods, actionable claims, land and every description of movable or immovable, tangible or intangible property, and extends to deeds and instruments evidencing title or interest therein. However, for the purposes of Section 14, only such property or assets which form part of the corporate debtor’s estate as on the insolvency commencement date are protected. Mere expectant, contingent or uncrystallized contractual rights do not constitute “assets” within the meaning of the Code. In Sushil Kumar Agarwal v. Meenakshi Sadhu and others [2018 (10) TMI 1822 - SUPREME COURT], this Court observed that “development agreements” are not of a uniform kind. While some merely create contractual rights to construct without any proprietary interest, others may, depending upon their terms, confer valuable proprietary or possessory rights in land or the constructed area. The Court emphasized that the determination depends on the nature and extent of rights created under the specific agreement, and whether such rights are capable of being specifically enforced or transferred. It is well settled that the moratorium under Section 14 does not revive terminated contracts or protect rights that have ceased to exist prior to insolvency. The protection is intended to preserve the existing value of the corporate debtor’s estate, not to resurrect lapsed or extinguished interests. Extending moratorium to such non-existent rights would defeat commercial certainty and the sanctity of lawful termination under general law. The Development Agreement dated 16.10.2005 and the Supplementary Agreements dated 23.12.2005 and 09.04.2014 do not constitute “assets” or “property” of the corporate debtor within the meaning of Section 14 of the IBC, as the same stood terminated prior to initiation of the second CIRP. No proprietary, possessory, or enforceable right subsisted in favour of the corporate debtor on the insolvency commencement date. The moratorium declared under Section 14 would therefore not restrain Respondent No. 1 Society or its members from proceeding with redevelopment in accordance with law. Whether the High Court was justified in allowing the writ petition filed by Respondent No. 1 Society and directing the statutory authorities to process and grant approvals in favour of Respondent No.8 for redevelopment of the subject project? - HELD THAT:- It is well settled that while Section 14 of the IBC bars the institution or continuation of suits and proceedings during the moratorium, the constitutional jurisdiction of this Court and the High Courts under Articles 32 and 226 cannot be curtailed by statute. In Embassy Property Developments Pvt. Ltd. v. State of Karnataka and others [2019 (12) TMI 188 - SUPREME COURT], this Court held that the NCLT, being a creature of a special statute to discharge specific functions, cannot be elevated to the status of a superior court exercising powers of judicial review over administrative or statutory action. Matters in the public law domain do not “arise out of or relate to” insolvency proceedings within the meaning of Section 60(5) of the IBC. The Court further observed that decisions taken by governmental or statutory authorities in the realm of public law may be corrected only through the High Court’s power of judicial review. This Court holds that the High Court was justified in entertaining the writ petition and issuing directions to the statutory authorities to process and consider the redevelopment proposal of Respondent No. 8 in accordance with law. These directions do not encroach upon the jurisdiction of the NCLT nor offend the moratorium under Section 14 of the IBC. Whether the proceedings before the High Court stood vitiated by violation of the principles of natural justice, as alleged by the appellants? - HELD THAT:- The principles of natural justice are intended to ensure fairness, not to operate as technical obstacles. They cannot be invoked as empty ritual where no real injustice has occurred. The grievance of the appellants is, therefore, more formal than substantive. Having been duly represented and having failed to demonstrate any actual prejudice, the appellants cannot now be permitted to impugn the judgment on grounds of procedural technicality - the conduct of the appellants does not inspire equity. The record discloses persistent defaults in payment of transit rent, repeated delays, and failure to commence redevelopment despite multiple extensions. The Society, acting in the collective interest of its members, lawfully terminated the agreement and appointed a new developer who has since made substantial progress. The invocation of Section 14 of the IBC to obstruct rehabilitation of residents was a misconceived attempt to shield inaction under the guise of moratorium protection. These repeated defaults and prolonged inaction reveal a consistent lack of bona fides on the part of the appellants. The High Court’s intervention in the present case was therefore not only legally sustainable but also necessary to safeguard the rights of the residents and to ensure that the appellants did not misuse the pendency of insolvency proceedings to indefinitely stall redevelopment - the proceedings before the High Court were conducted in substantial compliance with the principles of natural justice. The appellants were duly represented, were not denied any reasonable opportunity of hearing, and have failed to establish any demonstrable prejudice. The plea of violation of natural justice is therefore devoid of substance and stands rejected. In the present case, Appellant No. 1 – corporate debtor failed to take any meaningful steps towards fulfilling its obligations under the Development Agreement and Supplementary Agreements. Consequently, the slum dwellers and members of Respondent No. 1 Society – among the most vulnerable sections of society – continue to be deprived of their right to proper housing and rehabilitation. Such conduct cannot be permitted to take refuge under the moratorium provisions of Section 14 of the IBC. A clear distinction must, therefore, be maintained between corporate debtors who have acted bona fide and those who have merely secured development rights in form but never acted in substance. Appeal dismissed. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether termination of the development agreement and supplementary agreements by the housing society, prior to commencement of the second CIRP, was valid and effective in law. (2) Whether rights under the development agreement and supplementary agreements constituted 'assets' or 'property' of the corporate debtor so as to attract moratorium protection under Section 14 of the Insolvency and Bankruptcy Code, 2016. (3) Whether the High Court rightly exercised writ jurisdiction under Article 226 to direct statutory authorities to process and grant redevelopment approvals in favour of the new developer, notwithstanding the pending CIRP. (4) Whether the High Court proceedings stood vitiated by violation of principles of natural justice for alleged denial of adequate opportunity to the corporate debtor and its resolution professional. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Validity and effectiveness of termination of the development arrangement prior to CIRP Interpretation and reasoning (a) The development agreement (2005) and supplementary agreement (2014) imposed strict timelines (18+6 months initially; later 40 months from commencement certificate) and obligations to pay transit rent, hardship compensation, and other amounts to members. (b) Despite execution of these instruments and subsequent approvals, the developer failed to commence or complete redevelopment within contractual timelines. Large majority of members received no or intermittent rent; no substantial redevelopment work was undertaken over a prolonged period. (c) The society repeatedly issued default notices and reminders, culminating in termination communications/resolutions dated 09.06.2019, 02.12.2019 and 06.11.2021, expressly citing non-performance, failure to pay rent, and failure to commence redevelopment. (d) Time was of the essence in the redevelopment contract given its object - timely rehabilitation and safety of residents. Prolonged, inexcusable delay constituted material breach and attracted the expressly reserved contractual right of termination. (e) Applying the principles in Gujarat Urja Vikas Nigam Ltd v. Amit Gupta and Tata Consultancy Services Ltd v. Vishal Ghisulal Jain, the Court held that: (i) NCLT's jurisdiction to interfere with termination is confined to cases where termination is solely on account of insolvency and is central to the corporate debtor's survival; (ii) valid contractual terminations on grounds unrelated to insolvency fall outside Section 60(5)(c) IBC. (f) The defaults and termination here were wholly unrelated to insolvency; they preceded both CIRPs. The redevelopment contract was not the sole or life-sustaining contract of the corporate debtor and was not shown as a core asset in the resolution process. (g) The corporate debtor never obtained physical possession of the property; occupation and control always remained with the society and its members. The arrangement at best amounted to a licence to enter and redevelop, not transfer of any estate or interest, as clarified by Section 52 of the Easements Act, 1882 and precedents such as Associated Hotels of India Ltd v. R.N. Kapoor and Qudrat Ullah v. Municipal Board. (h) The first CIRP having been set aside on settlement, no revival of the development agreement occurred thereafter; subsequent termination communications thus remained valid and operative. Conclusion (i) The termination of the development agreement and supplementary agreements by the society, effected after due notice and on account of prolonged non-performance and chronic default, was valid, lawful and effective in law and not vitiated by the IBC. (ii) No subsisting contractual or proprietary right survived in favour of the corporate debtor on the date of commencement of the second CIRP, and the NCLT lacked jurisdiction under Section 60(5)(c) to interfere with such termination. Issue (2): Whether contractual development rights were 'assets' or 'property' protected by Section 14 IBC Legal framework discussed (a) Section 14 IBC: moratorium on institution/continuation of proceedings, transfer/alienation of assets, enforcement of security interests, and recovery of property occupied by the corporate debtor. (b) Section 3(27) IBC: expansive definition of 'property' covering all movable/immovable, tangible/intangible interests. (c) Sushil Kumar Agarwal v. Meenakshi Sadhu: nature of 'development agreements' varies; some create only contractual rights, others may confer proprietary/possessory rights; determination is fact-specific. (d) Rajendra K. Bhutta: Section 14(1)(d) applies where the corporate debtor is in actual occupation of property under a subsisting arrangement; moratorium bars recovery of such occupied property. (e) Tata Consultancy Services Ltd v. Vishal Ghisulal Jain: lawfully terminated contracts prior to CIRP are not 'assets' of the corporate debtor and cannot be revived by moratorium. Interpretation and reasoning (f) The Court held that Section 14 protects only existing, subsisting, enforceable rights forming part of the corporate debtor's estate on the insolvency commencement date; mere expectant or contingent contractual rights, or claims for damages, do not qualify as protected 'assets' or 'property'. (g) On the facts, the agreements had been terminated prior to 06.12.2022 (second CIRP) through repeated termination communications; no proceeding challenging termination was pending at commencement of CIRP. (h) Post-termination, the corporate debtor retained at best a claim for damages - an unsecured monetary claim - not any proprietary or possessory right in the land or building. (i) Under the contractual scheme, proprietary benefits (free-sale area) would arise only upon full and proper performance. As the developer never completed its obligations, no contingent benefit or enforceable interest ever crystallized. (j) Possession, occupation and control of the property at all times remained with the society and its members; the developer never obtained physical or juridical possession, did not demolish or construct, and did not consistently pay rent/compensation. Hence Section 14(1)(d) was inapplicable. (k) The Court distinguished Victory Iron Works: that case involved a bundle of subsisting proprietary and financial rights resembling ownership; here the agreements were purely executory and conditional, and had been terminated before CIRP. (l) The moratorium under Section 14 is to preserve existing estate value, not to revive or re-create extinguished contractual rights or undo lawful termination. Conclusion (m) The development agreement and supplementary agreements did not constitute 'assets' or 'property' of the corporate debtor on the insolvency commencement date, as they had been validly terminated earlier and conferred no subsisting proprietary or possessory rights. (n) The moratorium under Section 14 IBC did not restrain the society from proceeding with redevelopment through a new developer, nor did it protect the corporate debtor's extinguished contractual permissions. Issue (3): Propriety of the High Court's writ directions to statutory authorities during pendency of CIRP Legal framework discussed (a) Articles 226 and 32 of the Constitution: plenary constitutional jurisdiction not curtailed by ordinary legislation. (b) Section 60(5) IBC: NCLT's limited residuary jurisdiction over questions 'arising out of' or 'in relation to' insolvency resolution. (c) Embassy Property Developments Pvt. Ltd. v. State of Karnataka: NCLT/NCLAT cannot exercise judicial review over public law/administrative actions; such matters lie exclusively within High Court's writ jurisdiction. (d) Ghanashyam Mishra & Sons Pvt. Ltd. v. Edelweiss ARC: IBC does not oust constitutional jurisdiction of High Courts where public law remedies are invoked, subject to non-interference with the core insolvency process. Interpretation and reasoning (e) The High Court found that the development arrangement with the corporate debtor had stood validly terminated before the second CIRP and that no subsisting right of the corporate debtor survived in the project; therefore Section 14 IBC was inapplicable. (f) The writ petition sought a mandamus to statutory and planning authorities to process redevelopment proposals in favour of the new developer; no coercive relief was sought against the corporate debtor or resolution professional. (g) The High Court's directions were confined to requiring authorities to process and consider applications in accordance with law, thereby ensuring performance of public duties. It did not adjudicate or enforce private contractual rights, nor did it trench upon NCLT's insolvency jurisdiction. (h) In view of Embassy Property, decisions of governmental/statutory bodies involving public law elements must be tested in writ jurisdiction; NCLT cannot grant or refuse statutory approvals or review administrative inaction of such authorities. (i) Substantial redevelopment work had already commenced under the new developer - demolition of the old structure, payment of rent, approvals obtained - and the residents' rehabilitation was at stake. The High Court's intervention was necessary to avoid administrative paralysis caused by over-broad reliance on moratorium claims. Conclusion (j) The High Court was justified in entertaining the writ petition and in directing the statutory authorities to process and, if appropriate, grant redevelopment approvals to the new developer, subject to compliance with law. (k) These directions were procedural, did not encroach upon the NCLT's domain or affect the CIRP framework, and did not offend Section 14 IBC. Issue (4): Alleged violation of principles of natural justice in the High Court proceedings Legal framework discussed (a) Principles of natural justice: nemo judex in causa sua and audi alteram partem as flexible safeguards against real, not merely technical, injustice. (b) Union of India v. W.N. Chadha; Canara Bank v. Debasis Das: application of natural justice depends on context; focus is on actual prejudice and denial of fair opportunity rather than strict procedural formality. Interpretation and reasoning (c) The writ petition was pending for a considerable period; the corporate debtor and the resolution professional were served in advance, were represented by counsel, and participated in the hearings. (d) No request for adjournment, further time, or leave to file additional affidavits was made; the High Court recorded the appearance and submissions of counsel for the resolution professional. (e) The reliefs sought were directed only against statutory authorities; no direct coercive relief was prayed for or granted against the appellants. (f) The issues before the High Court turned primarily on undisputed documents (agreements, notices, dates of termination, CIRP orders) and statutory interpretation of Section 14 IBC; no complex factual enquiry requiring elaborate evidence arose. (g) Before the Supreme Court, the appellants could not demonstrate what material they were prevented from placing before the High Court or what specific prejudice they suffered by the timing of the hearing and pronouncement of judgment. (h) The Court emphasized that natural justice cannot be invoked as a mere procedural weapon where the party had representation and a fair hearing, and where no real injustice is shown. (i) The Court further noted repeated defaults of the developer in other redevelopment projects and a pattern of attempting to invoke IBC moratorium to stall rehabilitation, reinforcing the absence of equitable grounds to complain of procedural unfairness. Conclusion (j) The High Court proceedings were conducted in substantial compliance with principles of natural justice; the appellants were heard through counsel and afforded reasonable opportunity. (k) No actual prejudice or failure of justice was established; the plea of violation of natural justice was rejected.