Section- 14 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred as the Code) provides for the imposition of moratorium once the application of insolvency is admitted and CIRP has been initiated by the order of Adjudicating Authority. During this moratorium period certain acts, enumerated u/s 14(1) of the Code, have been made to be prohibited. In the recent past Adjudicating authorities have encountered cases relating to cancellation of lease deeds by the lessor during the moratorium period, the issue in this regard has not been resolved yet completely.
In this blog the author has strived to discuss the cases relating to unilateral termination of contracts and cancellation of lease deeds during the moratorium period with a critical outlook so as to find out the shortcomings in intertwined legal issues which are created due to flawed reasoning adopted in these cases. The author would then proceed to propose certain policy suggestions so as to fill the loopholes.
In, not so immediate, but recent past the NCLAT has considered the issue of unilateral termination of contract during the moratorium period, in Gujarat Urja Vikas Nigam Ltd. v Amit Gupta and Tata Consultancy Services Limited v. Vishal Ghisulal Jain and then in GRIDCO Limited v Surya Kanta Sathapathy. In all these cases despite having factual dissimilarity the adjudicating authority has held that the termination of contract during the moratorium period is in violation of Section- 14(1) of the Act by stating that termination of contracts during moratorium period hampers going concern of corporate debtors’ business.
Furthermore in all these cases the contract was terminated on non-insolvency grounds which suggest the inference that NCLAT is heading toward setting such precedents whereby, even if the grounds of terminating the contract is non-performance of contractual obligations, the tribunals will try to keep contract alive so as to ensure that corporate debtor is running as a going concern.
During the resolution process, Section- 14(1) of the Code also imposes prohibition on the recovery of property by the owner or lessor where such property is occupied by the corporate debtor. Regarding the issue of cancellation of lease during moratorium period, the cases in tribunal are very limited in numbers. Initially, in the case of Chhattisgarh State Industrial Development Corporation v. Sanjay Gupta & Anr., the NCLAT, while deciding the case involving the issue of cancellation of Industrial Lease deed, has left it open for consideration in future.
Further the Supreme Court of India in the case of Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority and Anr., while determining the correct interpretation of Section- 14(1)(d) of the Code has observed that a bare reading of Section- 14(1)(d) of the Code makes it clear that it does not deal with right or interest created in the property but only the physical actual occupation and possession of the property. Section- 14(1)(d) stands on a separate footing and refers only to ‘Recovery of any Property’.
An academic understanding of the above-mentioned decision would likely to follow the inference that as per the reasoning adopted in this case, apart from possession or occupation of property, all the leasehold right of the lessee may be terminated during the moratorium period. But in the light of prior three judgments, the distinction drawn, between recovery of property and other rights and interests in property, in Rajendra K. Bhutta case proved to be abundant and futile. Since a lease deed is also a kind of contract and if tribunals are reluctant to allow termination of contracts even on non-insolvency grounds then such distinction is of no means as once CIRP starts then one simply can’t terminate the contract. Resultantly not only the recovery of property becomes ultra vires of the code but also the terminating other rights and interests, which are contrary to the lease deed.
Presently, any unilateral termination of a lease deed during the moratorium period faces two shortcomings. Firstly, the inherent prohibition u/s 14, if it satisfies tribunal that termination of deed hampers the going concern of corporate debtor’s business. Secondly, the restriction under Section- 14(1)(d) regarding the recovery of property. So the recovery of all properties occupied and possessed by debtor, during moratorium period, is prohibited while the remaining rights and interests in the property is to be filtered on the basis of inherent restriction of Section- 14(1), i.e. hampering of going concern of business, which will leave a very small room for the lessor or owner of the property to terminate remaining rights and interests in the property.
In the backdrop of all this, legislature inserted an explanation (having overriding effect), by the way of ordinance in 2019, to this section which states that any license, permit, registration, quota, concession, clearance and any other similar grant or right given by Government or its instrumentalities shall not be suspended or terminated on the grounds of insolvency, subjected to default in payment during moratorium period. But application of this explanation is limited to certain cases.
On analysis of all these judgments it seems that while interpreting the scope of Section- 14 of the Code, the tribunal has taken too technical approach. The legislative intent of this provision, as stated under Report of Insolvency committee, is to keep corporate debtors’ assets together during the resolution process and to ensure that the company continues as a going concern while creditors take a view on resolution of default. Keeping such corporate debtors running as a going concern during the resolution process boosts the value of all stakeholders.
It is contended that the Moratorium u/s 14 of the Code is not intended to dispense with obligations to comply with non-pecuniary requirements, further the purpose is to keep assets together and not to bar every other action especially when countervailing public policy concerns are involved. Pacta Sunt Servanda is a fundamental principle of contract law and a rule of public policy. The obligations of the parties must not be hampered by flawed consideration of courts. The purpose of imposing moratorium is to reduce the complexity of the resolution process for practical purposes and not to grant un-discretionary powers to default contractual arrangement.
The committee further noted that termination of grants for the non-compliance with the requirements which are not related to the insolvency of the corporate debtor would not be hit by the provision. Termination and suspension of such grants on the ground of non-insolvency shall not be barred by the moratorium.
The author contends that the tribunal while deciding this issue must take wider perspective into consideration. Disallowing termination of contracts on non-insolvency grounds is ultra vires of the scheme of the Code. Reference shall be made to the explanation to this Section, in this explanation the legislative intent is clearly codified where it says that grants, license, permit and right of any similar nature shall not be suspended or terminated on the account of ‘insolvency’ means if the these rights are terminated on non-insolvency grounds, this explanation and provisions of this section would not hit.
The reasoning as adopted in Ravinder K. Bhutta case may or may not be correct but prior 3 cases set a bad precedent which need to be considered by Apex Court so that the dilemma of courts on the issue of cancellation of lease deeds can also be solved.
Author: *Mr. Abhyudaya Yadav, 3rd year Student at Dharmashastra National Law University, Jabalpur.