The Supreme Court has, in the judgment of Rajendra K. Bhuta vs. MHADA [AIR 2020 SC 3274] caused to clear the anomaly regarding a major question of law that will have far reaching effects on present and prospective real estate companies undergoing bankruptcies before the National Company Law Tribunal.
The Issue before the Court was whether a land in which the Corporate Debtor has Development Rights in its favour pursuant to a Development Agreement with MHADA can be treated to be an asset of Corporate Debtor for application of provisions of Section 14(1)(d) (Moratorium provision) of the Insolvency and Bankruptcy Code (“IBC”).
Section 14 (1) (d) of the Code provides as follows:
The above judgment has, inter alia interpreted the expression ‘occupied by’ to 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 actual or symbolic. In this regard, the court has held that a Corporate Debtor holding a land under a Joint Development Agreement is deemed to be in actual occupation thereof, and therefore such land will be included within the assets of the Corporate Debtor in insolvency. Accordingly, the MHADA was restrained from taking actual possession of the land pursuant to a termination of the Development Agreement.
The judgment further clarified that, 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.
The Court went on to hold :
It is a common practice for Real Estate Companies to enter into Joint Development Agreements with other developers for construction of real estate projects. Often, where these projects are funded by a financial institution, the development rights arising out of these Development Agreements are mortgaged to financial institution. Now, in the event of commencement of insolvency in respect of these borrower companies (“Corporate Debtors”), a moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) is declared, which essentially stalls the commencement of any proceedings or actions against the Corporate Debtor. The judgment in Rajendra Bhuta (supra) provides that these development rights of the Corporate Debtor under joint development agreements will be deemed to be land that the corporate debtor is in actual ‘possession’ of and will form part of the assets in insolvency and will be immune to any action by parties outside insolvency.
It is remains to be seen how the aforesaid judgment would apply to acquisition of properties or stalled real estate projects by the Slum Rehabilitation Authority (“SRA”) under section 13(2) of the Maharashtra Slum Areas (Improvement and Clearance) Act, 1971 (“Slum Act”) or an Amnesty Scheme under the said Act. It may be pertinent to note here, that as per the ratio laid down in Rajendra Bhuta the SRA (also being a statutory authority similar to MHADA) might be restrained from taking possession of such assets of the Corporate Debtor that comprise of the development rights under a joint development agreement as they may be held to form part of the Corporate Debtors assets in insolvency. This could go against the argument, that SRA is a beneficial legislation and an LOI issued by the SRA is generally for the benefit of the slum dwellers, unlike a development agreement with MHADA. It would be interesting to have an authority settle the law on the possible conflict between the IBC and the Slum Act in this regard.
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