A recent Supreme Court judgement, titled Rajendra Bhutta v. MHADA, brings to focus just how much deference is expected to be shown to the mandated moratorium period under the Insolvency and Bankruptcy Code. As per the Code, when an application for initiating the corporate insolvency resolution process is admitted, the Adjudicating Authority is to declare a moratorium prohibiting various acts aimed to recover dues from the corporate debtor. These acts are enumerated in Section 14 of the IBC.
Strangely enough, in the still-to-be-notified part of the IBC that deals with insolvency resolution for individuals and partnership firms, there are two moratoriums: an interim moratorium that begins as soon as the application for insolvency resolution is filed and the other that begins after the application is admitted. When I checked out the report of the Bankruptcy Law Reforms Committee (which led to the enactment of the Code) on this point, it explained this “interim moratorium” for individuals as being “To avoid the possibility of action against the debtor between the filing and acceptance of the application.” Why hasn’t the same logic been applied to corporate entities? I suppose we will never know.
Rajendra Bhutta pertained to a particularly sticky situation. Guru Ashish Construction Private Limited, the company tasked by MHADA, a Maharashtra state government entity, with setting up a redevelopment project involving 672 tenements spread over 47 acres, had an insolvency application admitted against it. After the application was admitted (and therefore the moratorium came into force), MHADA terminated its agreement with Guru Ashish and demanded that the land in its possession be handed back. The resolution professional went to the NCLT seeking a direction to restrain MHADA from taking over possession of the land, since the moratorium had already come into force. The case ultimately reached the Supreme Court.
Before the Supreme Court, the resolution professional argued that the case was covered by Section 14(1)(d) of the IBC, which states that the moratorium prohibits “the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.” (emphasis added) The resolution professional submitted that the sub-section had to be read distributively as per the Latin maxim reddendo singula singulis (which means “referring each to each”). So in Section 14(1)(d), “owner” had to be read with “occupied by” and “lessor” had to be read with “possession”. Since the land was owned by MHADA and occupied by the corporate debtor, its recovery was prohibited under Section 14(1)(d).
The Supreme Court (per Nariman, J) accepted the reddendo singula singulis argument and therefore agreed with the interpretation of the resolution professional that an owner was prohibited from recovering property occupied by the corporate debtor. In doing so, it also explained the difference between the legal terms “occupied by” and “in possession of” (something we are all taught in law college and somehow forget along the way). “Occupied by”, the Supreme Court observed, means actual physical possession, whether or not it is legal in nature. “In possession of”, on the other hand, includes both constructive and actual possession and would therefore take within its meaning a case where a person is legally in possession even though he is not actually in physical possession of a property. This means that “in possession of” is a wider term than “occupied by”.
Therefore, as per the Supreme Court’s interpretation, an owner of a property is restricted by Section 14 from recovering it from a corporate debtor that is in actual possession of the property. This is why MHADA’s application failed, as Guru Ashish was in actual possession of the property. However, as per the Court’s reading of the provision, if Guru Ashish had not been in actual possession of the property then the owner, i.e. MHADA (so long as it was not a lessor) could recover it despite the moratorium. On the other hand, a lessor of a property cannot recover possession of the property from the corporate debtor, even if it is not in actual possession of the property, given the wide meaning of the expression “in possession of”.
According to me, an interpretation that places the right of an owner-lessor below the rights of (say) an owner-licensor without there being any tangible reason for making such a differentiation is absurd, especially when another interpretation was possible. The Supreme Court need not have applied reddendo singula singulis and could have said that the expressions “occupied by” and “in possession of” applied to both owners and lessors. Nothing in the language of the sub-section prevented such a reading. The result in the case would have been the same.
