A property’s owners have an undisputed right over the property under ownership. Such undisputed right, including the right to use the property more often than not, is leased out to by the Owners against payment of lease rentals. The jurisprudence behind the treatment of the Landlord and the outstanding lease rentals by a Company undergoing the Corporate Insolvency Resolution Process (CIRP) has come a long way since the Insolvency and Bankruptcy Code, 2016 (IBC) has come into force. However, with every passing day, new and distinct problems as regards the treatment of the Landlord and the outstanding rental payment are being faced by the Landlord at different stages of an ongoing Corporate Insolvency Resolution Process (CIRP). The woes of the Landlord are far from over.

To initiate proceedings under IBC as an operational creditor, the owners/landlords remain in a fix on whether lease rentals due is an operational debt, or not is well established. There continues to be an ambiguity in the treatment of outstanding lease rentals dues as to whether such claims fall within the ambit of “Operational Debts”. The issue is now pending before the Hon’ble Supreme Court in Promila Taneja v. Surendri Design (P) Ltd., Civil Appeal No. 4237 of 2020.

However, apart from the above, various issues are faced by the Landlords in an ongoing insolvency resolution process. The owners/ landlords vested proprietary rights are being taken away without following any process of law under an ongoing CIRP contrary to the provisions of the IBC. Enumerated below are the broad challenges faced by landlords/owners:

Dilemma Faced by the Owner/Landlord/Lessors at Various Stages

A. PRE-CIRP

The Owner/landlord/lessor has all the reliefs provided for in the law of the land, i.e., Delhi Rent Control Act, 1958 or any other State Legislation and Transfer of Property Act, 1882, as amended to date. The said statutes adequately protect the property owners and provide recourse to the landlords/owner to seek eviction and recover outstanding lease rentals. However, the aspect of initiation of CIRP under IBC by such owner’s/landlords suffers from some ambiguity as on date.

B. POST-CIRP

 

The landlord/lessor, when first comes to know about the commencement of CIRP Proceedings vis a vis the Corporate Debtor/lessee, applies to IRP for claiming the outstanding lease rental payments. Thereafter, upon not getting any positive response from the IRP, such an owner/ landlord moves in an Interim Application under section 60(5) of the Code before the Adjudicating Authority seeking directions as against the Resolution Professional of the Corporate Debtor for vacating the premises along with handing over of vacant possession to the landlord/lessor and; payments related to the outstanding lease rentals. It is relevant to take note of Section 14 of IBC, which interferes with the right of an owner/landlord to take back property under possession and/or occupation of a company undergoing CIRP. Section 14 (1) (d) of IBC, which restricts the right of such owners/landlords, reads as follows,

“(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;

(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.”

The Hon’ble Supreme Court has deliberated the issue of ownership, possession, and occupation in the matter of Rajendra K Bhutta v. Maharashtra Housing And Area Development Authority And Another, (2020) SCC OnLine SC 292, which held  as follows;

“15. The conspectus of the aforesaid judgments would show that the expression “occupied by” would mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression “possession”, which would connote possession being either constructive or actual and which, in turn, would include legally being in possession, though factually not being in physical possession.”

In view of the same, there have been instances where the landlord/lessor has been left with an unfavourable order of dismissal of the interim application seeking handover of vacant peaceful possession of the premises and payment towards the outstanding rental dues. However, to balance the needs of such owners/Landlord an explanation was appended to Section 14 (1) (d) of IBC inserted by the IBC (Amendment) Act, 2020, w.e.f. 28.12.2019, which reads as follows:

“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 license, permit, registration, quota, concession, clearances 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, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;”.

The explanation mentioned above aimed to counterbalance an anomaly that developed due to the enforcement of Section 14(1) (d) of IBC. In its pre-amendment form, the proprietary right of an owner/landlord/third party was taken away for no fault without exercising due process of law. The explanation was added that without payment of current dues arising for the use or continuation of a license, permit, registration, quota, concession, clearances, or a similar grant or right during the moratorium period shall not be suspended or terminated on the grounds of insolvency. The vacuum so filled by the insertion of the explanation above further gave hope to the owner/landlord that its current dues arising for the use or continuation of license shall be paid. Moreover, Section 14 of the Insolvency Bankruptcy Code, 2016, read with Regulations 31 (b) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, envisaged payment of lease rentals/amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1) (d) as Insolvency Resolution Process Costs (CIRP Costs), which reads as under;

“31. Insolvency Resolution Process Costs

“Insolvency resolution process costs” under section 5(13(e) shall mean-

 (b) Amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);…….”

The landlord/lessor, for the most part, had a remedy that its claim against using its premises during CIRP shall qualify as CIRP Cost and shall be paid in priority by the Successful Resolution Applicant. Therefore, the Resolution Plan was thought to be of great significance for the landlords/owners whose lease rentals payable during CIRP were required to be paid in priority and entirety under the plan.

C. Post Approval of Resolution Plan

However, the approval of the resolution plan has posed challenges for the landlords/owners. It is relevant to note that as the owners of the lease-hold property, the Landlord has no direct participation and say in the CIRP. The landlords/owners in the background are kept in the dark and proceed based on the Resolution Professional’s assurances. The Resolution Professional is the sole master of determining CIRP costs, and his decision-making is, as such, not amenable to challenge by landlords/owners. The position of landlords/owners has further suffered a setback in light of the decision passed by the Hon’ble NCLAT regarding Mack Star Marketing Private Limited V. Ashish Chawchharia, Company Appeal (AT) (Insolvency) No. 389 of 2021 & I.A. No. 850 of 2022. The said Hon’ble NCLAT, in the said judgment, while recognizing the right of owners to get the amount of lease rentals for the usage of premises during CIRP, rejected the claim of the Appellant on account of the same not being a part of the Resolution Plan. The Hon’ble NCLAT has proceeded on the basis that a successful Resolution Applicant cannot be subsequently burdened with additional claims.

Conclusion

In the future, it is evident that the plight of landlords/owners is far from being appropriately dealt with in cases of companies under IBC. The provisions of IBC are indeed driven to ensure rehabilitation and revival of companies in financial distress. For such resolutions, power is solely vested with a particular class of creditors, i.e., “Financial Creditor”. An independent professional, i.e., Resolution Professional, is helping the process. In the said background, the provisions of IBC must be read and interpreted harmoniously to meet the requirement of “balancing the interests of all stakeholders”. Landlords/owners, stakeholders in insolvency resolution, accordingly be heard, and their lease rentals pre and during CIRP be paid according to the law. Such an interpretation is in line with the fundamental law of our land in as much as no proprietary right of a party/person cannot be taken away without following the process of law.

AUTHORS:

Ms. Varsha Banerjee
Partner, Dhir & Dhir Associates

Ms. Smriti Dua
Senior Associate, Dhir & Dhir Associates

More from Dhir & Dhir Associates