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Judgment
Per: Janab Mohammed Ajmal, Member (Judicial)
ORDER
This is an Application by the Resolution Professional of the Corporate Debtor seeking prohibitory orders against the Respondent No. 1 in respect of its order dated 17.07.2019.
The facts leading to the Application may briefly be stated as follows.
Respondent No. 3 (R3) is a Cooperative Society registered under Maharashtra Cooperative Societies Act, 1960. A property bearing CTS No. 10/1– C (Part), 10/1–D (Part), 17 & 18 (Part) of Village Dindoshi, Taluka: Borivali, Bhim Nagar, Rajiv Nagar, Opposite Pravasi Industrial Estate, Goregaon Mulund Link Road, Goregaon (East), Mumbai – 400 063 aggregating to 11300.05 sq mtr (approx.) has been in occupation of various dwellers who had hutments/shanties thereon. These dwellers were the members of R3.
ii) This property has been declared as ‘slum area’ under Notification No. SAA/MALAD/13 dated 15.10.1977 under the Maharashtra Slum Areas (Improvement, Clearance and Redevelopment) Act, 1971 (hereinafter referred to as the MSA Act).
iii) R3 in its General Body Meeting on 27.09.2010 resolved to appoint the Corporate Debtor as the developer to undertake redevelopment work on the aforesaid property under the Slum Rehabilitation Scheme (SRS). Pursuant thereto R3 entered into a Development Agreement with the Corporate Debtor on 27.10.2010 under the Development Control Regulations for Greater Bombay, 1991 (DC Regulations) and also executed a Power of Attorney (PoA) on the same day in favour of the Corporate Debtor. These documents however could not be registered. Accordingly, the General Body of R3 on 16.09.2013 resolved to execute the fresh Development Agreement and PoA in line with the earlier Development Agreement. Accordingly, the Development Agreement and PoA were executed on 28.09.2013 and duly registered on 30.09.2013.
iv) The Corporate Debtor in the meantime, in view of the Development Agreement dated 27.10.2010 entered into an agreement with the hutment dwellers / slum dwellers and started paying them rent till the permanent accommodation could be provided. The Respondent No. 1 (R1) on 16.11.2010, recognised the Corporate Debtor as developer and appointed it as such under the SRS.
On 17.12.2011, the Executive Engineer (EE) of R1 issued intimation of approval for construction work of Composite building No. 1 & 2 on the site. The buildings were to contain units for rehabilitation as well as for free sale. By 01.08.2012, R1 issued Commencement Certificate for construction work of the composite buildings up to plinth level.
vi) The revised plan submitted by the Corporate Debtor was also approved on 06.08.2016. The Corporate Debtor accordingly commenced construction activity on the land and had completed construction of the compound wall, storm water drainage, four floors of Wing B and part of the plinth of Wing A of the Composite Building No. 1.
vii) Initially however there was certain delay in construction on account of non-cooperation from the slum dwellers who refused to vacate their dwellings. The slump in the real estate sector in the mid of FY 2016-17 also contributed to the tardy progress.
viii) The Corporate Debtor went into financial difficulties and defaulted in making monthly rent payments to the slum dwellers. Similarly, it also defaulted in its loan repayment. Some of the slum dwellers also complained to the Joint Registrar (JR) of Cooperative Societies, (Eastern and Western Suburbs) concerning non-payment of rent and stoppage of construction work. The JR accordingly on 28.12.2018 informed the EE to issue stop work order for saleable units till the payment of rent to the slum dwellers was made.
ix) One of the financial creditors namely, ICICI Prudential Real Estate AIF I, moved this Authority on 21.12.2018 under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) seeking Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor. It claimed pari passu charge over the property relating to the Slum Rehabilitation Project. R1 on 26.02.2019 issued show cause notice to the Corporate Debtor as to why the action under Section 13(2) of the MSA Act shall not be taken basing on the complaint made by some of the slum dwellers.
The hearing was conducted on 10.04.2019 in view of the letter and the R1 directed the Corporate Debtor to pay the arrears of rent on or before 25.04.2019. The Corporate Debtor on 26.04.2019 explained the circumstances under which it has not been able to comply with the payment of rent and the situation was beyond its control. It also informed R1 that an order for admission of the Company Petition was imminent and there was a possibility that the Resolution Plan for the Corporate Debtor which when approved would take the development work on site ahead. Meanwhile on 08.05.2019, the Company Petition was admitted and the Corporate Debtor went into CIRP.
xi) Consequently, the moratorium under Section 14 came into effect and the Applicant was appointed as Interim Resolution Professional (IRP). Subsequently his appointment as RP was also approved by this Tribunal.
xii) The Applicant by letter dated 10.05.2019 informed the R1 as to the commencement of CIRP and declaration of moratorium. He requested R1 not to take any coercive action in furtherance to the notice dated 19.03.2019. He also sought an audience before R1 concerning the matter. The letter was neither responded to nor was he given a chance of being heard.
xiii) The Respondent then on 17.07.2019 passed an order inter alia terminating the appointment of the Corporate Debtor as developer.
xiv) It is submitted in the Application that such an order is violative of Section 14 of the Code and deserves to be set aside. In case the order is allowed to continue, the CIRP of the Corporate Debtor would be jeopardized and the object & purpose of the Code would be frustrated.
The Applicant accordingly came up with the present Application with the following reliefs:
a. This Hon’ble Tribunal be pleased to:
i)declare the impugned order dated 17 July 2019 of Chief Executive Officer, Slum Rehabilitation Authority as illegal inoperative and void;
ii) direct the Respondents to not take any coercive action against the Corporate Debtor till the completion of the Corporate Insolvency Resolution Process of the Corporate Debtor.
b. That pending the hearing and final disposal of the present Application, stay the operation of the impugned order dated 17 July 2019 of the Chief Executive Officer, Slum Rehabilitation Authority and direct Respondent No. 1 as well as Respondent No. 3 to not carry out any steps in pursuance of the impugned order;
c. For ad interim reliefs in terms of prayer (b) above;
d. For such further & other reliefs as the nature & circumstances of the case may require; and
e. For costs of the Application.
During the hearing the Respondent No. 2 (R2) did not appear. No relief has been claimed against it. Accordingly, the Applicant did not press this Application against R2. This Tribunal by order dated 15.04.2021 dismissed the Application against R2 as not pressed.
R1 & R3 contested the Application by filing separate replies thereto. It is submitted by R1 that it is the planning authority for implementation of the SRSs under the MSA Act. The purpose of the Authority is to provide permanent alternative free accommodation to eligible slum dwellers, to upgrade their standard of living by providing them a cleaner and healthier living environment. It has the jurisdiction and power to ensure proper implementation of the rehabilitation schemes and see that the schemes are implemented in time for the benefit of the slum dwellers as well as the developers. The Corporate Debtor had defaulted in making payment of rent to the eligible slum dwellers and inordinately delayed the construction of the buildings. The Authority accordingly was competent under Section 13(2) of the MSA Act to terminate the appointment of the Corporate Debtor as the developer. The order dated 17.07.2019 was passed on hearing both the sides and is appealable under Section 35 of the said Act. The Applicant accordingly could not seek protection from this Authority without exhausting the remedies available under the Act and challenge the legality and validity of the order. This Authority is not competent to decide the legality and validity of the order. The order cannot be held to be illegal, inoperative and void by this Authority. The Application accordingly is liable to be dismissed.
R3 in its reply submitted that this Application is not maintainable and the relief sought thereunder cannot be granted. The averments of the Application have been refuted and denied. It is submitted that the Application proceeds on an incorrect understanding of the MSA Act. R1 has the right over the property declared as a ‘slum area’ to ensure the redevelopment and rehabilitation of the residents therein. Therefore, to say that the property is an asset of the Corporate Debtor or that by the impugned order a valuable right on the property has been taken away is incorrect. R1 has the Authority to appoint a developer and the prerogative to terminate such appointment. R1 has responsibility to ensure that the slum development scheme is implemented in an efficient and lawful manner. Therefore, the action of R1 in terminating the appointment of the Corporate Debtor as a developer is within the parameters provided under Section 13(2) of the MSA Act. The same cannot be questioned.
Since the Corporate Debtor has not acquired any right over the immovable property as a developer, the property cannot be classified as its asset. Thus it cannot insist on any exclusive right of redevelopment. The status of the Corporate Debtor being that of a contractor, the Principal i.e. R1 was within its powers to replace the contractor. The order dated 17.07.2019 and the Authority of R1 to pass such an order cannot be faulted. It accordingly would not come within the purview of Section 14 of the Code. There could not possibly be any conflict between the provisions of the Code and MSA Act. It is further stated that even if it is held that the conflict exists between the MSA Act and the Code, the former would prevail, it being a special legislation relating to redevelopment of the slum areas. The latter being a general legislation would have to give way to the provisions of the former legislation. Besides Section 42 of the MSA Act is a bar for this Authority to pass any order against an action taken under the Act. The Applicant had filed a Writ Petition before the Hon’ble Bombay High Court but subsequently did not prosecute the same. Therefore this Authority may not entertain the present Application and the same deserves to be dismissed.
The rival contentions raised by both the sides give rise to the following issues.
Whether the order dated 17.07.2019 issued during the CIRP is operative and valid under the law; and
ii) Whether the appointment of the Corporate Debtor as the developer of the property could be terminated during the pendency of the CIRP.
There is no quarrel with regard to the following.
a. The R3, in continuation to the earlier Agreement and PoA dated 27.10.2010, executed a Development Agreement and PoA with the Corporate Debtor on 28.09.2013 and the same was registered on 30.09.2013. R1 on 16.11.2010 appointed the Corporate Debtor as a developer in respect of SRS on the property. R1 granted necessary permission and letter of intent for construction of Composite Buildings nos. 1 & 2 on 17.12.2011 and issued commencement certificate on 01.08.2012.
b. R1 also issued a revised letter of intent on 04.08.2016 for grant of 3,840 F.S.I (Floor Space Index). The Corporate Debtor entered into an agreement with the slum dwellers for construction. There is also no dispute that the Corporate Debtor defaulted in payment of the rent to beneficiaries of the scheme and completion of the development scheme in time. R1 issued show cause notice dated 26.02.2019 basing on the complaints made by some of the beneficiaries seeking reasons as to why action under Section 13(2) of the MSA Act would not be taken.
c. During the hearing on 10.04.2019 on the notice, the Corporate Debtor was directed to pay the rents on or before 25.04.2019. The Corporate Debtor obviously could not pay the rent by that date and on 26.04.2019 submitted its reasons explaining its inability to raise funds. The Corporate Debtor went into CIRP on 08.05.2019. As on that date the Corporate Debtor was the developer in respect of the SRS and was in possession of the property when the moratorium under Section 14 came into effect.
We have heard the learned counsel appearing for the parties at length and have carefully gone through the pleadings and the relevant documents. The critical point revolves around the relevance of section 14 of the Code to the facts of the present case. Section 14 of the Code therefore may profitably be quoted.
“14. Moratorium. –
(1)Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: -
(a)the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b)transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c)any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d)the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
[Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;]
(2)The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
[(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.]
[(3) The provisions of sub-section (1) shall not apply to —
[(a) such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;]
(b)a surety in a contract of guarantee to a corporate debtor.]
(4)The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”
A plain reading of the salutary provision would indicate that on the Insolvency Commencement Date (ICD/08.05.2019), the institution of the suits or continuation of pending suits or proceedings against the Corporate Debtor before any authority or any court of law shall be prohibited. In this case there is no dispute that the property in respect of which the development agreement was executed is not an asset of the Corporate Debtor. The Corporate Debtor only was permitted to develop it in terms of the development agreement. The fact that the Corporate Debtor was the developer in respect of the property and had undertaken certain constructions thereon in pursuance to the development agreement. This would unequivocally indicate that the property was under its occupation as on the ICD. For the purpose of this case, it would thus be sufficient to hold that on the date of Insolvency Commencement, the property was occupied by the Corporate Debtor and the Corporate Debtor was in possession thereof.
Upon commencement of CIRP the moratorium came into effect immediately. Section 14(1)(d) of the Code prohibited recovery of any property by an owner or lessor where such property is occupied by or in possession of the Corporate Debtor. Hence no action whatsoever which could lead to recovery of the property could be taken.
The Hon’ble Supreme Court in a recent judgment of Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited and Others: (2018) 16 SCC 94, held that once moratorium under Section 14 of the Code comes into effect, Section 14(1)(a) expressly stops institution or continuation of pending proceedings against corporate debtors. The Supreme Court opines as under.
“the mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against corporate debtors.”
Section 238 of the Code also assumes significance while considering the contentions raised by the parties. It reads as follows:-
“238. Provisions of this Code to override other laws. - The
provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
The Hon’ble Supreme Court in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority & Another: (2020) 13 SCC 208 (=2020 SCC Online SC 292) has held that:
“However, when it comes to any clash between the MHADA Act and the Insolvency Code, on the plain terms of Section 238 of the Insolvency Code, the Code must prevail. This is for the very good reason that when a moratorium is spoken of by Section 14 of the Code, the idea is that, to alleviate corporate sickness, a statutory status quo is pronounced under Section 14 the moment a petition is admitted under Section 7 of the Code, so that the insolvency resolution process may proceed unhindered by any of the obstacles that would otherwise be caused and that are dealt with by Section 14.”
The Hon’ble Apex Court therein with regard to Section 14 of the Code held as under:
“….
14.A bare reading of Section 14(1)(d) of the Code would make it clear that it does not deal with any of the assets or legal right or beneficial interest in such assets of the corporate debtor. For this reason, any reference to Sections 18 and 36, as was made by the NCLT, becomes wholly unnecessary in deciding the scope of Section 14(1)(d), which stands on a separate footing. Under Section 14(1)(d) what is referred to is the "recovery of any property". The 'property' in this case consists of land, ad-measuring 47 acres, together with structures thereon that had to be demolished. 'Recovery' would necessarily go with what was parted by the corporate debtor, and for this one has to go to the next expression contained in the said sub-section.
……
27.The matter had come to this Court after the Adjudicating Authority had approved of a certain resolution plan, unlike in the facts of the present case, and what was clear, on the facts of that case, was that a show cause notice of the Municipal Corporation, which preceded admission of the insolvency resolution process, made it clear that assets of MCGM could not possibly be subsumed within a resolution plan without its approval/permission. It was in this context that this Court, in para 47 of the said judgment, stated that Section 238 of the Code cannot be read as overriding the MCGM's right-indeed its public duty-to control and regulate how its properties are to be dealt with. "Properties" was referred to in this judgment as referring to assets of the corporate debtor. We have seen how, in the facts of this case, we are not concerned with the assets of the corporate debtor, least of all the assets of MHADA. The limited question before us is as to whether Section 14(1)(d) of the Code will apply to statutorily freeze 'occupation' that may have been handed over under a Joint Development Agreement.
28.Likewise, the recent judgment Sushil Kumar Agarwal (supra) deals with specific performance and whether a Development Agreement may be specifically performed. The ratio of that judgment appears to be that where Development Agreements create an interest in property, they may be specifically performed, but not otherwise. As we have pointed out herein above, it is clear that Section 14(1)(d) of the Insolvency & Bankruptcy Code, when it speaks about recovery of property "occupied", does not refer to rights or interests created in property but only actual physical occupation of the property. For this reason also, this judgment is wholly distinguishable.”
The Hon’ble Court in Hotel Gaudavan (supra) and Rajendra K. Bhutta (supra) have made it clear that no action in respect of any proceedings by any authority against the Corporate Debtor could be continued nor the Corporate Debtor could be divested of any property it its occupation. The termination of the Corporate Debtor as the developer of the property was made during continuation of the CIRP. There is no dispute that R1 was aware of the commencement of insolvency as early as 10.05.2019. Despite such information R1 went on to pass the order terminating the Corporate Debtor as the developer.
That facts and circumstances of the matter at hand taken in light of the statutory provisions under sections 238 & 14 of the Code would indicate that the Code would override all other legislations, be it Central, State, special or general.
The Hon’ble Supreme Court in Rajendra K. Bhutta (supra) have in clear terms delineated the extent of this Code and limits of the other Authorities in dealing with a Corporate Debtor under CIRP. The termination of the Corporate Debtor as the developer would essentially result in the property being taken out of its possession. Both of which are prohibited under Section 14(1) of the Code. Therefore, the order dated 17.07.2019 being violative of the mandatory provision cannot be held to be valid and operative in law.
In that view of the matter both the issues indicated supra have to be answered in the negative. This view also finds support from the opinion expressed by this Bench in Shantanu T. Ray v. Maharashtra Industrial Development Corporation Limited and Anr. (MA No. 3691 of 2019 in C.P. (IB) No. 2298/MB/2018 decided on 12.04.2021). In the result, the contentions raised by R1 & R3 cannot be accepted and the Application deserves to be allowed. Hence ordered.
ORDER
The Application be and the same is allowed on contest as against R1 & R3 and dismissed as not pressed against R2. Order dated 17.07.2019 of R1 is held to be inoperative and invalid under law. R1 & R3 shall not take any action whatsoever against the Corporate Debtor pursuant to the said order. There would however be no order as to costs.