2025 (6) TMI 606 - AT - IBC

Liability to pay license fees to the Corporate Debtor despite alleged mutual agreements to adjust renovation expenses against such fees - jurisdiction of the Adjudicating Authority to adjudicate inter-se disputes between the parties - initiation of moratorium period and Respondent No. 1 could not have initiated any proceedings against the Appellant or terminated the LLA. There was no money payable i.e. License fee by the Appellant to the Corporate Debtor since it was agreed between the Appellant and the Corporate Debtor that the cost incurred by the Appellant would be settled against License fee - HELD THAT - The license was to commence from 12.07.2022 (license commencement date) for the period upto five years. The LLA provided for a grace period i.e. fit out period to the Appellant of 60 days from the date of commencement within which the Appellant was supposed to commence the business and pay the license fee as per the LLA - The Appellant s pleading is that since he incurred more than Rs.1 Crore to obtain such license therefore he was not supposed to pay to the Corporate Debtor as per their mutual understanding. It is found that this pleading is not legally tenable in view of clause 5 of LLA. The Appellant was duty bound to pay the license fee after the fit out period of 60 days was over. There was no authorisation from the Corporate Debtor to the suspended director of the Corporate Debtor to issue such letters to the Appellant regarding issuance of such correspondence as per record made available and also that the letter do not bear the seal/stamp of the Corporate Debtor - The Adjudicating Authority has categorically recorded that the correspondence relied upon by the Appellant with the suspended board of directors is contrary to the terms and conditions of LLA. Appellant is that it is not within jurisdiction of the Adjudicating Authority to adjudicate inter-se disputes between the parties and for any remedy the Respondent No. 1 was required to approach appropriate suitable judicial forum like the small cause court - HELD THAT - The Respondent No. 1 is duty bound to act in accordance with code and according to which the liquidator is supposed to take over the assets of the Corporate Debtor in terms of section 25(2)(a) (b) of the Code. We have already noted that the Respondent No. 1 gave due notice to the Appellant for termination of LLA after obtaining approval of the CoC since the Appellant failed to make payment as per notice by the Respondent No.1 - It is also noted that Respondent No 1 initiated the IA No. 5065 of 2023 before the Adjudicating Authority who passes the Impugned Order asking the Appellant to vacate the said property and to pay the necessary dues to the Respondent No.1. There are no merit in the argument of the Appellant that the Adjudicating Authority erred in passing the Impugned Order or it is only small cause court is competent to adjudicate such matters. The Impugned Order has been correctly passed by the Adjudicating Authority. As per Section 14 of the Code the moratorium period started and the Respondent No. 1 could not have initiated any proceedings against the Appellant or terminated the LLA - HELD THAT - It is an obligation as well as the right of the Resolution Professional to protect the interest of the Corporate Debtor and take necessary action including realising recoverable dues from third party like the Appellant on behalf of the Corporate Debtor as well as take legal action in accordance with law to take possession of property in given circumstances. In the present case the Appellant has not paid the license fee on certain assumptions - there are no merit in the contentions of the Appellant that during moratorium period the Respondent No. 1 could not have terminated the LLA. This Appellate Tribunal in the matter of Deepak Sakharam Kulkarni Anr. vs. Manoj Kumar Agarwal Resolution Professional of DS Kulkarni 2024 (9) TMI 1254 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL PRINCIPAL BENCH NEW DELHI has recognized the power of the Resolution Professional to terminate agreements and observe that while it is impermissible to deprive third parties of their rights solely on the basis of the initiation of insolvency proceedings there is no prohibition on terminating agreements in accordance with the contractual terms during the CIRP or even thereafter. Thus during moratorium the respondent could terminate the LLA and also was entitled to take legal action against the Appellant. Conclusion - i) The Appellant is liable to pay license fees as per the LLA and the alleged mutual agreement to adjust renovation expenses is not binding or enforceable against the Corporate Debtor. ii) The Adjudicating Authority has jurisdiction to entertain and decide the Interim Application for possession and recovery of dues under the Code and the Appellant s contention that only civil courts had jurisdiction was rejected. iii) The moratorium under Section 14 do not bar the Resolution Professional from terminating the LLA or initiating proceedings against the Appellant as such actionsaere within the Resolution Professional s statutory authority acting on behalf of the Corporate Debtor. There are no error in the Impugned Order. The Appeal devoid of any merit stand rejected.

Summary

The core legal questions considered in this judgment include:

(i) Whether the Appellant was liable to pay license fees to the Corporate Debtor despite alleged mutual agreements to adjust renovation expenses against such fees;

(ii) Whether the National Company Law Tribunal (Adjudicating Authority) had jurisdiction to adjudicate disputes arising from the Leave and License Agreement (LLA) between the parties, or whether such disputes should have been resolved by a civil court such as the Small Causes Court;

(iii) Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) barred the Resolution Professional (Respondent No.1) from terminating the LLA or initiating proceedings against the Appellant during the Corporate Insolvency Resolution Process (CIRP); and

(iv) Related issues concerning the validity of correspondence between the Appellant and the Corporate Debtor's suspended directors, and the priority of secured creditors' rights over the leased premises.

Issue-wise Detailed Analysis:

Issue (I): Liability to Pay License Fees Despite Claimed Expense Adjustments

The Appellant contended that it was not liable to pay license fees as it had incurred substantial renovation and licensing costs exceeding Rs. 1 crore, which were allegedly agreed to be adjusted against the license fees payable to the Corporate Debtor. The Appellant relied on correspondence exchanged with the Corporate Debtor, asserting that the license tenure would commence only after obtaining the Occupation Certificate (OC) and excise license, and that the Appellant's expenses would be reimbursed or adjusted accordingly.

The legal framework considered included the terms of the Leave and License Agreement dated 14.07.2022, particularly Clause 5 which stipulated a 60-day fit-out period commencing from the license commencement date (12.07.2022), during which the Appellant was to commence business and pay license fees thereafter. The clause allowed extension of the fit-out period only in the event of COVID-19 pandemic-related lockdowns or restrictions.

The Court observed that the Appellant's contention of non-payment due to delayed permissions was not supported by the LLA's express terms, which did not provide for extension of the fit-out period on grounds other than pandemic restrictions. The correspondence relied upon by the Appellant was found to have been issued by suspended directors without proper authorization and lacked the Corporate Debtor's seal, rendering them ineffective against the Corporate Debtor. The Adjudicating Authority's reasoning, emphasizing the binding nature of the LLA terms over unauthorized correspondence, was upheld.

Consequently, the Court concluded that the Appellant was bound to pay license fees after the lapse of the 60-day fit-out period and that the alleged mutual agreement to adjust renovation expenses was not legally tenable.

Issue (II): Jurisdiction of the Adjudicating Authority to Adjudicate Disputes Under the LLA

The Appellant argued that the Adjudicating Authority lacked jurisdiction over contractual disputes arising from the LLA and that the Respondent should have approached the Small Causes Court or other appropriate civil forums for recovery of dues or eviction.

The Court referred to precedents including the judgment of this Appellate Tribunal in Encore Asset Reconstruction Company Pvt. Ltd. vs. Ms. Charu Sandeep Desai, which was upheld by the Supreme Court, establishing that when property is owned by the Corporate Debtor but in possession of a third party, the Resolution Professional has the right to take possession under Section 18 of the Code. The Adjudicating Authority and this Appellate Tribunal have residuary jurisdiction to decide matters impacting the insolvency process, including possession and contract termination issues affecting the Corporate Debtor's assets.

The Court noted the importance of timely resolution under the Code's strict timelines and observed that the Resolution Professional's action to initiate proceedings before the Adjudicating Authority was appropriate and consistent with the Code's objectives. The argument that the Small Causes Court was the only competent forum was rejected.

Issue (III): Effect of Moratorium under Section 14 of the Code on Termination of LLA and Proceedings Against the Appellant

The Appellant contended that the moratorium period barred the Respondent No.1 from terminating the LLA or initiating recovery proceedings during the CIRP.

The Court analyzed the scope and object of Section 14, which protects the Corporate Debtor from legal actions and termination of contracts by third parties during the moratorium to preserve the Corporate Debtor as a going concern. However, the Court clarified that this protection does not extend to the Corporate Debtor or its authorized Resolution Professional, who acts on behalf of the Corporate Debtor and is empowered under Sections 17, 23, and 25 of the Code to manage assets, execute contracts, and take necessary actions including termination of agreements in the Corporate Debtor's best interest.

The Court found that the Resolution Professional, with Committee of Creditors' approval, validly invoked the termination clause of the LLA due to the Appellant's breach (non-payment of license fees). The moratorium did not preclude such action initiated by the Resolution Professional. The Court distinguished the present case from precedents restricting termination by third parties during moratorium, emphasizing that the Resolution Professional's actions were within statutory authority.

The Court also noted that the Appellant failed to challenge the termination before the Adjudicating Authority and did not vacate the premises or pay dues even after termination notice, justifying the Adjudicating Authority's order for possession recovery and payment.

Additional Considerations:

The Court acknowledged the priority of Respondent No. 2 (an Asset Reconstruction Company) as a secured creditor holding a mortgage created in 2015 over the property, preceding the LLA executed in 2022. The mortgagee's rights were recognized as overriding under Section 48 of the Transfer of Property Act, 1882, reinforcing the secured creditor's position in insolvency proceedings.

The Court also addressed the validity of the Appellant's correspondence with the Corporate Debtor's suspended directors, finding such communications unauthorized and not binding on the Corporate Debtor.

Significant Holdings:

"The said clause expressly warrants for extension of the Fit Out Period only in the eventuality/ on account of pandemic. Further, the correspondences relied upon by the Respondent with a member of the suspended Board of Directors of the Corporate Debtor, are contrary to the terms and conditions set out in the afore-stated L&LA dated 14.07.2022 and the said correspondences would thus have no detrimental bearing upon the same."

"The objective of section 14 of the code is intended to protect Corporate Debtor from legal hassels during resolution period and it was never intended to give the protection of moratorium to third party like the Appellant herein."

"The Resolution Professional is obligated to protect the interest of the Corporate Debtor and take necessary action including realizing recoverable dues from third party like the Appellant on behalf of the Corporate Debtor as well as take legal action in accordance with law to take possession of property in given circumstances."

"The Adjudicating Authority and this Appellate Tribunal possess the necessary jurisdiction to adjudicate all matters impacting the insolvency process, particularly those relating to core value maximization and the facilitation of resolution."

The Court's final determinations were:

• The Appellant was liable to pay license fees as per the LLA, and the alleged mutual agreement to adjust renovation expenses was not binding or enforceable against the Corporate Debtor.
• The Adjudicating Authority had jurisdiction to entertain and decide the Interim Application for possession and recovery of dues under the Code, and the Appellant's contention that only civil courts had jurisdiction was rejected.
• The moratorium under Section 14 did not bar the Resolution Professional from terminating the LLA or initiating proceedings against the Appellant, as such actions were within the Resolution Professional's statutory authority acting on behalf of the Corporate Debtor.
• The impugned order directing the Appellant to vacate the premises and pay outstanding license fees was upheld, and the appeal was dismissed as devoid of merit.