Ritu Tandon vs M/s Rain Automotive India Pvt. Ltd.

Per: Justice Rakesh Kumar Jain:

03.07.2023: This appeal is directed against the order dated 03.06.2022, passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench – II) by which an application filed by the Respondent under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 r/w Rule 11 of the National Company Law Tribunal Rules, 2016 (in short ‘Code’) for refund of the security deposit of Rs. 11,25,000/- by the Appellant to the account of the Corporate Debtor has been allowed.

In brief, the Appellant is the owner of a property bearing No. F-11, Block – 1, Mohan Co-operative Industrial Area, New Delhi which was given on lease to the Corporate Debtor (Rain Automotive India Pvt. Ltd.) on 16.09.2016 at the rate of Rs. 3,75,000/- per month with increase of 5% every year after the receipt of security deposit of Rs. 11,25,000/- and execution of a lease deed dated 18.10.2016.

The Appellant (landlord) filed an application under Section 9 of the Code bearing I.B No. 1095(ND) of 2019 before the Adjudicating Authority against the Corporate Debtor in respect of arrears of rent of Rs. 23,04,284/- besides the unpaid electricity bills of Rs. 47,363/-. The said application was admitted on 14.06.2019 and Akarsh Kashyap was appointed as the Interim Resolution Professional (IRP). Moratorium was also imposed and the Appellant was directed to deposit a sum of Rs. 2 Lakhs to meet the immediate expenses of IRP.

After appointment of the IRP, the Appellant submitted proof of claim in Form-B on 20.06.2019 in which a categorical averment was made “details of any mutual credits, mutual debts, or other mutual dealings between the Corporate Debtor and the Operational Creditor which may be set off against the claim – NIL”

There is no dispute to the fact that on 12.08.2019, the IRP sent an email to the Appellant by which he informed her that peaceful and vacant possession of the property has been handed over on 07.08.2019 and demanded the security deposit of Rs. 11,25,000/- deposited by the Corporate Debtor. The said email is reproduced as under:-

It is pertinent to mention that despite the categorical demand by the IRP of the security deposit which was estate of the Corporate Debtor, the Appellant did not return the same and also did not claim any set off in Form-B.

Be that as it may, the Committee of Creditors (CoC) in its 3^rd Meeting convened on 19.10.2019 passed a resolution for liquidation of the Corporate Debtor in terms of Section 33(2) of the Code and in pursuance thereof, the RP filed an application CA No. 1623 of 2019 before the Adjudicating Authority seeking liquidation of the Corporate Debtor in which the Adjudicating Authority passed the order of liquidation on 02.01.2020 and appointed Ms. Preeti Jaiswal as the Liquidator who was later on replaced by Ms. Maya Gupta by the order of the Adjudicating Authority on account of her failure to give consent to act as the Liquidator of the Corporate Debtor within the prescribed time.

The Liquidator, in compliance of the Regulation 12 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (in short ‘Regulations’) made a public announcement on 01.02.2020 in Form – B of Schedule II in Financial Express (English) (New Delhi Edition), Jansatta (Hindi) and fixed the last date for submission of proof of claim as 26.02.2020. The Respondent received a claim submitted by the Appellant to the tune of Rs. 40,98,372/- as stipulated in Form B of Schedule II. In this Form, the Appellant again averred that “details of any mutual credit, mutual debts, or other mutual dealings between the Corporate Debtor and the Creditor which may be set off against the claim – NIL” but at the same time in para 4 of clause 4 of the said Form made an averment that “in terms of clause 3(c) of the lease deed the Operational Creditor had forfeited the security amount of Rs. 11,25,000/- and had adjusted the same against the unpaid lease rent”. This led to the filing of an application under Section 60(5) of the Code by the Respondent for refund of the security with interest to form liquidation estate of the Corporate Debtor which has been allowed by the impugned order.

There is no doubt that as per Section 14(1)(c) of the Code 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) is prohibited. Meaning thereby, the Appellant could not have retained the security interest created by the Corporate Debtor at the time when it was demanded by the RP vide its email dated 12.08.2019 much prior to the date when the order of liquidation was passed on 02.01.2020.

However, Counsel for the Appellant has argued that once the order of liquidation has been passed, the order of moratorium shall not have any effect in view of Section 14(4) proviso, therefore, the Tribunal has erred in placing reliance upon Section 14 for the purposes of passing the order of refund. He has also argued that the amount of security is part of rent which has been adjusted out of the arrears of rent to be paid by the Respondent (CD) in view of Regulation 29 of the Regulations. During the course of hearing, Counsel for the Appellant has categorially submitted that there is no direct precedent on this issue of interpretation of Regulation 29 of the Regulations but the case set up by the Appellant is that she has a right to claim set off of the arrears of rent against the security deposit lying with her and if after adjustment also some more amount is payable even then she can prefer a claim with the Liquidator.

On the other hand, Counsel for the Respondent has submitted that the Appellant has not come to the Court with clean hands and has been playing hide and seek with the RP when she was categorially asked to refund the amount of Rs. 11,25,000/- on 12.08.2019, much prior to the date of order of liquidation, to return the amount of security deposit after taking peaceful and vacant possession of the premises in question. In this regard, the Respondent has also referred to the provision of lease deed pertaining to the security deposit which is reproduced as under:-

It is also argued that the Appellant deliberately retained the amount of Security and knew very well that it cannot be set off because of the clear prohibition provided in Section 14(1)(c) of the Code because of which column no. 8 of Form B dated 20.06.2019 filed by the Appellant before the RP was kept Nil but after the passing of the order of liquidation, the Appellant has raised the issue of adjustment of amount of security deposit in the Form submitted by her as a proof of claim which is a fraudulent act on her part.

We have heard Counsel for the parties and perused the record with their able assistance.

From the resume of the facts narrated hereinabove, it is apparent that the Appellant and the Corporate Debtor were both bound by the terms and conditions of the lease deed dated 18.10.2016 in which clause 4 was incorporated in regard to the security deposit. It was agreed upon by both the parties that handing over of peaceful and vacant possession of the demised premises and the amount of security deposit has to be returned. As per the email dated 12.08.2019 sent by the RP to the Appellant the peaceful and vacant possession of the demised premises has been handed over to the Appellant on 07^th August, 2019 at 16:30 PM and in the same email the RP requested the Appellant to refund the amount of security deposit as it was the part of the estate of the Corporate Debtor and could not have been retained by the Appellant in view of prohibition contained in Section 14(1)(c) of the Code but the Appellant did not abide by it nor claim a set off in Form B which was submitted by her to the RP on 20.06.2019. Therefore, it was only an afterthought on the part of the Appellant who had perhaps waited for the initiation of the liquidation proceedings and at that time the claim of set off, in terms of the provisions of Regulation 29 of the Regulations, as alleged was raised. But the question would arise as to whether the Appellant should be given this kind of premium of making an adjustment of the amount of security deposit during the liquidation proceedings, taking advantage of the provisions of Section 14(4) proviso, especially when the said amount was asked to be returned much earlier by the RP vide its email dated 12.08.2019 as the liquidation order was passed much later on 02.01.2020. Had it been a case where the RP had not even asked for the amount of security to be returned as it could not have been retained by the Appellant in view of Section 14(1)(c) of the Code or a case where RP had not gone to the Adjudicating Authority in a case where the Appellant had claimed a set off despite the provisions of Section 14(1)(c) then the matter would have been altogether different and perhaps the Appellant might have been right in its approach because there is no dispute that the rigours of Section 14 would come to an end as soon as the liquidation order is passed but the Appellant cannot be allowed to take advantage of its own wrong as she went in hiding after the email dated 12.08.2019 was sent which was almost four months prior to the passing of the order of liquidation and did not comply with the provision of Section 14(1)(c) of the Code herself. The act and conduct of the Appellant cannot be appreciated and rather deserves to be deprecated because she herself did not follow the law which has been laid down in the Code, therefore, keeping in view the aforesaid facts and circumstances much less the act and conduct of the Appellant which we do not approve at all, this appeal is hereby dismissed and the Appellant is hereby saddled with costs of Rs. 10,000/- which shall be deposited by the Appellant in the Prime Minister Relief Fund within a period of 30 days from the date of receipt of certified copy of this order.