Section 238 of the IBC becomes relevant when the assets are of the debtor and not of a third party.

Municipal Corporation of greater Mumbai (MCGM) vs. Abhilash Lal & Ors.

Case name – Municipal Corporation of greater Mumbai (MCGM) vs. Abhilash Lal & Ors.

Case number – Civil Appeal No. 6350 of 2019

Forum – Supreme Court of India

Bench – Justice S. Ravindra Bhat, Justice Arun Mishra, Justice Vineet Saran

Decided on – November 15, 2019

Relevant Act/Sections – Insolvency and Bankruptcy Code, 2016 – Section 238; Mumbai Municipal Corporation Act, 1888 – Section 92; Section 92A

Author of the case brief – Kanisqa Agarwal

Brief Facts:

December 20, 2005: A contract was signed between MCGM and SevenHills in which the latter agreed to develop a 1500 bed hospital on a 19-acre plot in Marol, Andheri (East). SevenHills was given 60 months to build the hospital. The land was leased to SevenHills for 30 years.

April 24, 2013: The contracts come to an end and the project is yet to be completed. SevenHills owed INR 76 crores in lease rent defaults to MCGM.

January 23, 2018: MCGM serves a show cause notice (SCN) to SevenHills over its alleged breaches of contract. SevenHills had borrowed from banks and financial institutions and created security by way of mortgage of the concerned plot of land. Axis Bank files a company petition in its position as a financial creditor of SevenHills for the purposes of Corporate Insolvency Resolution.

April 12, 2018: An Insolvency Resolution Professional (IRP), Mr. Abhilash Lal is appointed for the financial reconstruction plans of SevenHills. UAE-based Dr Shetty’s New Medical Centre (SNMC) submitted a resolution plan which is approved by the Committee of Creditors (CoC).

July 26, 2019: NCLT, Hyderabad approves the resolution plan

At stake for MCGM was the land on which was almost worth INR 1600 crores which it claims was usurped in the name of providing healthcare services.

MCGM filed an application before NCLT Hyderabad claiming that it ought to be declared as a Financial Creditor (on the grounds that the concerned lease was a capital or finance lease and the unpaid lease rentals were a financial debt) and a Member of the Committee of Creditors.

MCGM further opposed the resolution plan claiming that the same had to comply with Mumbai Municipal Corporation Act (MMC Act) and it needed the approval of the Improvement Committee of the MCGM.

NCLT dismissed the contentions of the MCGM. Subsequently, MCGM appealed the order before the NCLAT.

MCGM argued before the NCLAT that the non-compliance with the conditions stipulated in the contract (with SevenHills Healthcare), meant that there was no lease deed and consequently no interest available in the land, in favour of the Corporate Debtor.

August 8, 2019: NCLAT upheld the NCLT order stating that revised resolution plan had been accepted and all terms specified in its written submissions, were to be incorporated and subsequently ordered MCGM to not take action which would annul the resolution plan.

Nature of the contract between MCGM & SevenHills:

  • The lease deed was to be executed after the completion of the project. 
  • The project period was for 60 months starting from the date excluding the monsoon period. 
  • SevenHills could mortgage the property for securing advances from financial institutions for the construction of the project and thereafter towards its working.
  • Such mortgage/charge or interest was subject to approval by MCGM.
  • In the event the contract was to be terminated, MCGM would not in any manner be liable towards the mortgaged amount and all its rights and ownership would continue to vest in it free from encumbrances.

Issue:

Whether the provisions of the IBC override all other laws and hence, that the resolution plan approved by the NCLT acquires primacy over all other legal provisions (including the MMC Act in this case)?

Arguments on behalf of the appellants:

  • No lease deed was executed in favour of SevenHills, the Corporate Debtor. Ergo, MCGM was the undeniable owner of the land.
  • The proposal seeking direction with regard to the lease deed, had to be necessarily dealt with in accordance with law i.e. it needed the approval of the Improvement committee of the MCGM.
  • Neither the adjudicating authority nor the NCLAT could issue any direction seeking to bind MCGM with respect to the manner it had to deal with properties that belonged to it. 
  • MCGM issued a show cause notice proposing to terminate the contract even before the insolvency proceedings were initiated. Since the terms of the contract were infringed, in fact, there was no subsisting lease which could have been dealt with by the revised proposal

Arguments on behalf of the respondents:

Resolution Professional:

  • MCGM had categorically consented to the resolution plan in writing before the NCLT and NCLAT. NCLAT, after hearing the submissions of MCGM that it had no objections to the resolution plan, affirmed it. MCGM, through the submission of its counsel, is thus bound by estoppel.
  • The resolution plan is absolutely unconditional in nature and in no manner contingent on the resolution of the dispute with MCGM.
  • Having been approved by the CoC and the NCLT on merits, the plan attained finality and binds MCGM as a stakeholder in the Corporate Debtor.

SNMC:

  • SNMC does not acquire any interest in the said land and only acquires managerial control over the Corporate Debtor by way of holding equity shares in the Corporate Debtor. MCGM cannot place any embargo on such shareholding changes by resorting to proceeding under the Code.

Ratio:

  • Supreme Court set-aside the NCLAT order and upheld MCGMs’ right and public duty to control and regulate how its properties are dealt with. S.238 of the IBC cannot be read as overriding the MCGM’s right.
  • Section 238 of the IBC becomes relevant when the assets are of a debtor and not of a third party.
  • In the absence of nod under MMC Act, the adjudicating authority could not have overridden MCGM’s objections and enabled creation of a fresh interest in favour of SNMC. 
  • SC agreed with the Bombay HCs’ observation (W.P. No. 1728 of 2011) that the land (for which the interest was created by way of a NOC from MCGM) which was mortgaged along with the superstructure did not prejudice the right of MCGM and it is for the concerned Bank to consider the same while giving financial assistance.
  • MCGM cannot be held against the submissions of its counsel in this regard as there can be no estoppel against the express provisions of law.

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