2023 (9) TMI 1685 - HC - IBC

Petitioner s right as a suspended director of a corporate debtor is protected by section 14 of the Insolvency and Bankruptcy Code 2016 - moratorium provisions prohibiting recovery of property occupied or possessed by the corporate debtor - HELD THAT - The receiver appointed in a particular suit is nothing more than the hand of the Court so to speak to hold the property of the litigants whenever it must be kept in the grasp of the Court in order to preserve the subject matter of the suit pendente lite and the possession of the receiver is simply the possession of the Court. To such an extent is this the case that any attempt to disturb that possession without the leave of the Court is a contempt of Court. The receiver s possession is on his behalf and for the benefit of all the parties to the suit in which he is appointed. The property in his hands is in custodia legis for the person who can make a title to it. He is not appointed for the benefit of strangers other than parties to the suit. He has no estate or interest himself and his power to manage is created by the Court s order appointing him and binding on persons before the Court. On meaningful reading of Section 14(1)(d) it is clear that recovery of property by owner/lessor where such property is occupied by corporate debtor is not permissible when a moratorium under IBC is declared. Section 14(1)(d) does not deal with any of the assets or legal right or beneficial interest in such assets of the corporate debtor but what is referred to therein is the recovery of any property . Moreover the bar under clause (d) is attracted only when the owner or lessee is seeking recovery of property. In the facts of the case the receiver is seeking property from an agent of the receiver on default of payment of royalty amount. Such proceedings cannot termed as proceedings for the recovery of property by the owner or lessee. The object of the Insolvency and Bankruptcy Code 2016 is to resolve insolvency and bankruptcy cases involving an insolvency professional s appointment to manage the debtor s affairs and the resolution of the case transparently and efficiently. The purpose of such an act is to recover the dues of the corporate debtor and calculate the value of the assets so that if ultimately it is found that the company is to be revived the appropriate recommendation shall be made to the appropriate Court for the revival of such company. However possession of the receiver s agent cannot be termed as an asset of a company. Applying section 14 of the IBC to the receiver s agent would amount to reading something into statute that the legislature never intended. In so far as the locus of suspended directed to agitate rights of the corporate debtor is concerned such issue does not rise for consideration in the facts of the case as it is already held that the position of an agent of the receiver cannot be termed as possession or occupation contemplated by Clause 2 of Sub-Section (1) of Section 14 of the IBC. Conclusion - Possession of the receiver s agent cannot be termed as possession within the meaning of Clause (d) of Section 14(1) of the IBC. In view of the undisputed fact of failure to pay Rs. 2, 89, 30, 000/- towards the royalty amount by the corporate debtor the exercise of discretion by the Court cannot be faulted. There is no merit in the writ petition - Petition dismissed.

The core legal questions considered by the Court in this matter are:

(1) Whether the petitioner, as a suspended director of the corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP), is entitled to protection under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), specifically the moratorium provisions prohibiting recovery of property occupied or possessed by the corporate debtor;

(2) Whether the possession held by the agent of the Court Receiver can be equated with possession or occupation by the corporate debtor within the meaning of Section 14(1)(d) of the IBC;

(3) Whether the Court Receiver's order directing deposit of arrears of royalty and forcible possession of the subject property can be challenged by the petitioner under the moratorium provisions;

(4) The nature and legal status of possession by a Court-appointed receiver and his agent, and the effect of such possession on rights of parties during insolvency proceedings;

(5) The locus standi of a suspended director to contest orders relating to possession and recovery of property during CIRP.

Issue-wise Detailed Analysis:

1. Entitlement of Suspended Director to Protection under Section 14 of the IBC

The petitioner contended that as a suspended director of the corporate debtor, she is entitled to the protection of Section 14 of the IBC, which imposes a moratorium on recovery of property occupied or possessed by the corporate debtor. The petitioner relied on the plain language of Section 14(1)(d), which prohibits recovery of property by an owner or lessor where such property is occupied or possessed by the corporate debtor. She argued that the only exceptions to this moratorium are carved out under subsections (2) and (3), which do not apply here. The petitioner also relied on several precedents affirming the protection of rights during CIRP and the moratorium under the IBC.

The Court examined the scope of Section 14 of the IBC, which declares a moratorium on various actions including recovery of property by an owner or lessor where such property is occupied or possessed by the corporate debtor. However, the Court noted that the bar under Section 14(1)(d) applies only when the owner or lessor seeks recovery of property from the corporate debtor. In the present case, the receiver sought possession from the agent of the receiver on account of default in payment of royalty, which is distinct from recovery by an owner or lessor. Thus, the Court held that the moratorium under Section 14(1)(d) is not attracted in this context.

2. Nature of Possession by Court Receiver and His Agent

The Court undertook a detailed examination of the legal position of a Court-appointed receiver and his agent. It emphasized that the receiver is the hand of the Court, holding property in custodia legis to preserve the subject matter of the suit. The possession of the receiver is the possession of the Court, and any interference with such possession without leave of the Court amounts to contempt. The receiver holds no estate or interest in the property but acts as custodian for the benefit of the parties to the suit.

The Court relied on authoritative precedents, including a Three-Judge Bench decision which underscored that property in custodia legis through a receiver is exempt from judicial process except with leave of the Court, to avoid conflict of jurisdiction and protect the rule of law.

Further, the Court referred to the Supreme Court's classification of possession in the context of immovable property, distinguishing possession arising from proprietary interest, contractual/licensor rights, gratuitous/permissive possession, and trespass. The Court highlighted that a caretaker or agent, including a receiver's agent, holds possession only on behalf of the principal and acquires no personal right or interest in the property regardless of the duration of possession. Such possession is not protected as "possession" within the meaning of Section 14(1)(d) of the IBC.

Accordingly, the Court concluded that the agent of the receiver cannot claim possession or occupation in the statutory sense that would attract the moratorium under the IBC. The receiver's agent's possession is derivative and custodial, not proprietary or independent.

3. Applicability of Moratorium under Section 14 of the IBC to the Receiver's Agent

Given the nature of possession held by the receiver and his agent, the Court held that the moratorium provisions of Section 14 do not apply to the receiver's agent. The Court reasoned that applying Section 14 to protect the agent's possession would be contrary to the legislative intent and the object of the IBC, which is to facilitate efficient and transparent resolution of insolvency by preserving assets and recovering dues.

The Court observed that possession by the receiver's agent cannot be treated as an asset or property interest of the corporate debtor. Therefore, the moratorium on recovery of property occupied or possessed by the corporate debtor does not extend to prevent the receiver from enforcing payment of dues or taking possession from his agent in default of royalty payments.

4. Locus of Suspended Director to Challenge Possession Orders

The Court briefly addressed the petitioner's locus to challenge the order of possession. It held that the suspended director's position does not entitle her to claim possession or to invoke the moratorium protections as if she were the corporate debtor. Since the possession concerned is that of the receiver's agent and not the corporate debtor, the suspended director cannot claim to be in possession within the meaning of Section 14(1)(d).

Thus, the Court found no merit in the contention that the petitioner could maintain the writ petition on the basis of her status as suspended director.

5. Court Receiver's Report and Enforcement of Arrears of Royalty

The Court noted the undisputed fact that royalty arrears amounting to approximately Rs. 2.89 crores were due from the corporate debtor. The Trial Court had allowed the Court Receiver's report directing deposit of the arrears and authorizing forcible possession of the subject flat with police assistance. The Court found no error in the exercise of discretion by the Trial Court in granting these reliefs.

The Court rejected the petitioner's challenge to the order, holding that the receiver's possession and enforcement of royalty dues are valid and not barred by the moratorium under the IBC.

Conclusions:

The Court dismissed the writ petition, holding that:

(a) The moratorium under Section 14(1)(d) of the IBC does not protect the possession of the receiver's agent;

(b) The possession by the receiver and his agent is in custodia legis and does not confer any proprietary or possessory rights on the agent;

(c) The petitioner, as a suspended director, has no locus to claim protection under Section 14 or to challenge the receiver's possession;

(d) The Court Receiver's order directing deposit of royalty arrears and forcible possession is lawful and enforceable;

(e) There is no merit in the petitioner's challenge, and the writ petition is dismissed without costs.

Significant Holdings:

"The receiver appointed in a particular suit is nothing more than the hand of the Court, so to speak, to hold the property of the litigants whenever it must be kept in the grasp of the Court in order to preserve the subject matter of the suit pendente lite and the possession of the receiver is simply the possession of the Court."

"No one acquires title to the property if he or she was allowed to stay in the premises gratuitously. Even by long possession of years or decades such person would not acquire any right or interest in the said property."

"The caretaker or agent holds property of the principal only on behalf of the principal. He acquires no right or interest whatsoever for himself in such property irrespective of his long stay or possession."

"On meaningful reading of Section 14(1)(d), it is clear that recovery of property by owner/lessor where such property is 'occupied by' corporate debtor is not permissible when a moratorium under IBC is declared. However, the bar under clause (d) is attracted only when the owner or lessee is seeking recovery of property. In the facts of the case, the receiver is seeking property from an agent of the receiver on default of payment of royalty amount. Such proceedings cannot be termed as proceedings for the recovery of property by the owner or lessee."

"Possession of the receiver's agent cannot be termed as possession within the meaning of Clause (d) of Section 14(1) of the IBC. Applying section 14 of the IBC to the receiver's agent would amount to reading something into statute that the legislature never intended."

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