Thin Line Between Contractual Dispute And IBC

Introduction

Under Section 14 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), once a company enters Corporate Insolvency Resolution Process ("CIRP"), a moratorium is declared to protect its assets and maintain it as a going concern. However, in many redevelopment cases, defaulting developers misuse this protection. The moratorium is meant to protect the company's existing assets not to revive terminated contracts or hinder the rights of societies and landowners.

This article provides an overview of a judgement passed by the Supreme Court of India in the matter of A. A. Estates Private Limited vs. Kher Nagar Sukhsadan Co-Operative Housing Society Ltd. & Ors. wherein the Divisional Bench of the Hon'ble Apex Court comprising of Justice Pardiwala and Justice J. R. Mahadevan, while dealing with the dispute between a Society and a Developer pertaining to the termination of a Development Agreement, held that the Developer cannot be permitted protection under moratorium provisions of S. 14 IBC in case of failure to take meaningful steps towards fulfilling obligations under development agreement.

Brief facts of the matter:

1. Maharashtra Housing & Area Development Authority ("MHADA") leased the subject property to Kher Nagar Sukhsadan CoOperative Housing Society Ltd. ("Society").
2. By and under a Development Agreement dated 16.10.22005 ("DA") and Supplementary Development Agreement dated 09.04.2014 ("Supplementary DA") the Society appointed A. A. Estates Pvt. Ltd. ("Developer Company") as developer for the purposes of redevelopment of the Society.
3. The Developer Company was required to pay transit rent and complete construction within the agreed timeline but committed defaults in both respects.
4. Owing to these defaults, the Society terminated the DA and Supplementary DA by a resolution dated 09.06.2019 and notice dated 02.12.2019, prior to the commencement of CIRP and outside the operation of any moratorium under Section 14 of the IBC.
5. The Developer Company entered CIRP twice, the first was set aside after settlement, while the second CIRP commenced on 06.12.2022.
6. After termination, the Society appointed a new developer on 07.11.2021 and thereafter executed a fresh Development Agreement dated 10.12.2023 with the new Developer, pursuant to which redevelopment work commenced.
7. The Resolution Professional objected to the new appointment citing moratorium, and being aggrieved by the aforesaid the Society filed a Writ Petition before the High Court of Bombay seeking necessary redevelopment permissions.
8. The Resolution Professional of the Developer Company objected to the Petition by contending that the said Writ Petition was not maintainable by virtue of the moratorium period imposed under the section 14 of the IBC, 2016 and the DA has the effect of extinguishing valuable development rights forming part of the estate of the Developer Company. The High Court of Bombay, by its judgement dated 11.09.2024, rejected the contention of the developer company and granted the reliefs sought by Society. Thereafter, the developer company filed a Special Leave Petition against the order of the High Court of Bombay before the Supreme Court of India.

Issues in Conflict

1. Whether the Development Agreement and the Supplementary Agreements constitute "assets" or "property" of the corporate debtor to attract the protection of moratorium under Section 14 of the IBC.
2. Whether the termination of the DA.
3. Supplementary Agreement prior to the initiation of the second CIRP was valid and effective in law.
4. Whether the Writ Petition filed by Society before the Bombay High Court constitutes violation of the moratorium period.

Observation of the Hon'ble Apex Court

A. Co-relation between the rights under the Development Agreement and the "assets" u/s 14 of IBC - The Dilemma of considering the Development Rights as the assets of the Developer Company

In these kinds of disputes, the developer usually relies on the judgement of the Hon'ble Supreme Court in the case of Victory Iron Works Ltd. v. Jitendra Lohia wherein it was held that development rights are "assets" within the meaning of Sections 18(f) and 25(2)(a) of the IBC. The Resolution Professional is duty-bound to take custody and control of such assets, and any extinguishment without due process undermines the object of the Code and the ability of the Resolution Professional and the Committee of Creditors to maximize asset value.

Hence, the impugned judgment violates Section 14(1)(b) of the IBC. Developers also rely on the definition of term "Property" under Section 3(27) of the IBC wherein interest in the property are included under the ambit of property for the purpose of IBC.

In this instant case also, the developer company argued, by relying on the Victory Iron works case, that the rights arising from the Development Agreement executed between Developer Company and the Society constitute an "asset" or "property" of the developer company within the meaning of Section 14 of the IBC, thereby attracting the protection of moratorium upon commencement of the CIRP.

However, the law and the judiciary are in favour of the Society and answers in negation when it comes to development rights being the assets of the Developer Company. The Hon'ble High Court of Bombay in the case of Tagore Nagar Shree Ganesh Krupa CHS Ltd. v. The State of Maharashtra & Ors, another case where the A.A. Estates Developer Company was in conflict, had categorically held that a developer can never be the owner of the property under redevelopment merely because of the development agreement executed with the Society. It was further observed that the developer only has the contingent and conditional right over the redevelopment property by virtue of development agreement and if the developer fails in its obligation, then no rights are available to him. Therefore, the argument of the developer that the property is one of its assets is not a sound argument.

With regards to the applicability of the Victory Iron Works (supra) case, the Hon'ble Apex Court observed that the reliance on this case is misconceived as it is one of those rare cases wherein the developer company had a demonstrable proprietary and financial interest in the project, making it inapplicable in majority of cases.

B. The Developer in the redevelopment is not the owner but at best can be the Licensee of the redevelopment property

Section 52 of the Indian Easements Act, 1882 defines a "license" as a right to do something upon immovable property of another without an easement or interest therein. In Associated Hotels of India Limited v. R.N. Kapoor, the Hon'ble Supreme Court had clarified that a license merely permits use of premises for a particular purpose while possession and control remain with the owner. Similar views were taken by the Hon'ble Apex Court in the case of Qudrat Ullah v. Municipal Board, Bareilly.

In the light of these precedents, the apex court observed that the developer was granted only a limited license to enter and use the land for redevelopment. Therefore, the so-called "development rights" of the developer company constitute, at best, a contractual permission and not an "interest in property" within the meaning of Section 14(1)(d) of the IBC.

C. Validity and effectiveness of the Termination of Development Agreement by the Society

The termination of the DA and Supplementary Agreements was challenged on two grounds: (i) that the Society could not unilaterally terminate them, and (ii) that prior approval of NCLT under Section 60(5)(c) of the IBC was required.

With respect to the first contention, it was held that the Society, as landowner, validly terminated the agreements after prolonged defaults and before commencement of CIRP. Only assets existing on the insolvency commencement date are protected under Section 14 and terminated contractual rights do not constitute assets. Reliance was also made on the judgement of Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, wherein the Supreme Court clarified that a contract lawfully terminated prior to CIRP cannot be revived by the Resolution Professional nor treated as property of the corporate debtor.

With regards to the second contention, it was also observed that since termination was due to independent contractual breaches and not on account of insolvency, no permission from NCLT was required. Accordingly, the termination was upheld as valid, and NCLT was held to have no jurisdiction to interfere. The Supreme Court, time and again, held that NCLT's residuary jurisdiction cannot be invoked if the termination of a contract arises from deficiencies or defaults independent of insolvency.

High Court's Jurisdiction under Art. 226 of Constitution v. Moratorium period u/s 14 of IBC

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 the High Courts under Articles 32 and 226 cannot be curtailed by statute.

In Embassy Property Developments Pvt. Ltd. v. State of Karnataka, the Supreme Court held that NCLT cannot exercise judicial review over administrative or statutory actions, as such matters fall in the public law domain and must be examined by the High Court. Accordingly, a writ petition seeking directions against statutory authorities or questioning the applicability of the moratorium does not violate Section 14 of the IBC.

Findings of the Hon'ble Supreme Court

1. The DA and Supplementary Agreements were validly terminated after due notice and prolonged defaults. The Society, as landowner, was entitled to appoint a new developer.
2. The terminated agreements do not constitute "assets" under Section 14 of the IBC and no subsisting right survived in favour of the corporate debtor prior to the second CIRP.
3. The High Court has jurisdiction under Article 226 to examine the applicability of the moratorium and grant appropriate relief.

Author's view

The Supreme Court judgment clearly delineates the scope of the moratorium under the IBC, holding that disputes arising from valid termination of redevelopment agreements prior to the initiation of insolvency proceedings fall outside its ambit. Since time is of the essence in redevelopment contracts, prolonged delay by a developer constitutes a material breach, entitling the society or owner to terminate the agreement. The moratorium under Section 14 protects only existing and enforceable rights, and not forfeited or inchoate development rights of a defaulting developer who has neither taken possession nor commenced redevelopment. The insolvency proceedings cannot be misused to stall redevelopment or defeat the legitimate rights of housing societies.

Footnotes

1. A A Estates Private Limited vs. Kher Nagar Sukhsadan Co-Operative Housing Society Ltd. & Ors., 2025 SCC Online SC 2579

2. Kher Nagar Sukhsadan Co-operative Housing Society Ltd. v. State of Maharashtra & Ors WP. No. 3893 of 2024

3. Victory Iron Works Ltd. v. Jitendra Lohia (2023) 7 SCC 227 SC 2579

4. Tagore Nagar Shree Ganesh Krupa CHS Ltd. v. The State of Maharashtra & Ors W.P. No. 1349 of 2024

5. Associated Hotels of India Limited v. R.N. Kapoor, AIR 1959 SC 1262

6. Qudrat Ullah v. Municipal Board, Bareilly, (1974) 1 SCC 202

7. Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, 2020 SCC Online NCLAT 484

8. Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209

9. Embassy Property Developments Pvt. Ltd. v. State of Karnataka, (2020) 13 SCC 308.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.