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2025 (4) TMI 1411 - AT - IBCOnerous contract under Regulation 10 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016 (Liquidation Regulations) - Leave and License Agreement - divergence of the opinion between the parties holding the transaction as onerous under Regulation 10 of the Liquidation Regulations 2016 - Regulation 10 of the Liquidation Regulations 2016 is beyond the provisions of the IBC and ultra vires to IBC or not. Divergence of opinion between the two judgements delivered by the Hon ble Technical Member and Judicial Member - HELD THAT - udicial Member after considering the submissions of the parties and noticing all relevant facts have come to the conclusion that Leave and License Agreement 07.06.2019 is unprofitable and burdensome and affects the provision of Regulation 10 of the Liquidation Regulation 2016. The facts as noticed above clearly indicates that Leave and License Agreement was entered for rent of Rs.5, 000 p.m. On a letter sent by liquidator asking the appellant to vacate appellant himself came with the proposal that he is ready to enter into Leave and License Agreement for amount of Rs.2.25 lakhs p.m - The submission which has been pressed by the appellant is that although Technical Member has declared the transaction to be covered by Regulation 10 of the Liquidation Regulations 2016 however the Ld. Judicial Member has not found the transaction as onerous. Regulation 10(1)(b) includes unprofitable contracts thus Judicial Member has also come to the conclusion that transaction is covered by one of the illustrations given under onerous property in Regulation 10. In paragraph 10 Ld. Judicial Member has obviously referred to Regulation 10(1)(d) which mentioned unprofitable contracts which can be basis for disclaimer of onerous property - the submission of the appellant that there is divergence of opinion between Technical Member and Judicial Member. Ld. Judicial Member has given detailed reason including the conduct of the corporate debtor and come to the conclusion that the transaction 07.06.2019 was not bona fide and good faith transaction not accepted. Thus both the Ld. Members have expressed the opinion that transaction of Leave and License Agreement dated 07.06.2019 was an onerous transaction covered under Regulation 10 hence there is no error in partly allowing the I.A.2012/2022 by the adjudicating authority. Regulation 10 is beyond the provisions of the IBC and is ultra vires to the IBC or not - HELD THAT - Regulation 10 of the Liquidation Regulation 2016 is thus regulation specified and is fully covered by Section 35(1)(o). Liquidation Regulation has been framed in exercise of powers conferred under various sections of the IBC including Section 34 and Section 35 thus regulations have been clearly framed under Section 35 and as per Section 35(1)(o) liquidator can perform such other function as maybe specified by the board. The power vested in the liquidator by Regulation 10 i.e. disclaimer of the onerous property is thus fully covered by provisions of the IBC and cannot be held to be beyond IBC or ultra vires to the IBC as contented by counsel for the appellant. Regulation 10 has been framed in accordance with the provisions of the IBC and the Regulation 10 empowering the liquidator to disclaim a contract is well within the statutory powers and the Regulation 10 is fully inconsonance with and is in accordance with the provisions of the IBC and has been enacted to give effect to the provisions of the IBC - thus there are no substance in the submission of the appellant that Regulation 10 is beyond the provisions of IBC. Conclusion - i) Both the Ld. Members have expressed the opinion that transaction of Leave and License Agreement dated 07.06.2019 was an onerous transaction covered under Regulation 10 hence there is no error in partly allowing the application by the adjudicating authority. ii) There are no substance in the submission of the appellant that Regulation 10 is beyond the provisions of IBC. There are no error in the order passed by the adjudicating authority - appeal dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in these appeals are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the Leave and License Agreement is an onerous contract under Regulation 10 of the Liquidation Regulations and can be disclaimed by the liquidator Relevant legal framework and precedents: Regulation 10 of the Liquidation Regulations, 2016, empowers the liquidator to disclaim onerous property or contracts that impose a heavy burden on the corporate debtor during liquidation. The concept of an onerous contract is also explained in Accounting Standard (AS) 29, which defines an onerous contract as one where the unavoidable costs of fulfilling the contract exceed the economic benefits expected to be received. The Supreme Court judgment interpreting Section 535 of the Companies Act, 1956, which is pari materia to Regulation 10, was cited to emphasize that disclaimer powers are to protect creditors from onerous covenants and must be exercised with due circumspection. Court's interpretation and reasoning: The adjudicating authority, through both the Technical Member and Judicial Member, examined whether the Leave and License Agreement was onerous. Both members concluded that the agreement was unprofitable and burdensome. The agreement was entered at a nominal rent of Rs. 5,000 per month for 12 years, which was significantly below market rates. The appellant later proposed a rent of Rs. 2.25 lakhs per month, confirming the inadequacy of the original rent. The security deposits and advance payments made by the appellant were already utilized by the erstwhile management, providing no benefit to creditors during liquidation. The Judicial Member clarified that although the agreement may not strictly fall under the definition of onerous contract as per AS 29, it qualifies as an unprofitable contract under Regulation 10(1)(b) of the Liquidation Regulations, which allows disclaimer of such contracts. Key evidence and findings: The facts established included the date of the agreement (post initiation of CIRP), the nominal rent, the size and nature of the premises, the advance payments made by the appellant, and the appellant's own admission of willingness to pay higher rent later. The liquidator's letter asking the appellant to vacate and enter into a fresh agreement was ignored initially. The adjudicating authority found the transaction was not bona fide and was entered without good faith, adversely affecting the liquidation process and value maximization. Application of law to facts: The Tribunal held that the Leave and License Agreement imposed a heavy burden on the corporate debtor and its creditors, qualifying as onerous property under Regulation 10. The liquidator was justified in disclaiming the agreement to protect the interests of creditors and facilitate liquidation. Treatment of competing arguments: The appellant argued that the agreement was not onerous but merely unprofitable, and that there was a divergence of opinion between the Technical and Judicial Members on this point. The appellant also contended that the reference to Illustration 10 of AS 29 by the Judicial Member was misplaced as it is not part of Regulation 10. The Tribunal rejected these arguments, clarifying that both members agreed on the agreement being onerous or unprofitable under Regulation 10, and that the Judicial Member's reference to AS 29 was for illustrative purposes only and not part of the Regulation. Conclusion: The Tribunal upheld the adjudicating authority's decision allowing the liquidator to disclaim the Leave and License Agreement under Regulation 10 as onerous property. Issue 2: Whether the transaction is an undervalued transaction under Section 45 of the IBC and can be avoided Relevant legal framework: Section 45 of the IBC defines undervalued transactions and empowers the liquidator to avoid such transactions. However, the adjudicating authority held that the Leave and License Agreement was not covered by Section 45 and rejected the liquidator's prayers under this provision. Court's interpretation and reasoning: The adjudicating authority found no applicability of Section 45 to the transaction, and the Tribunal did not interfere with this finding. The liquidator's claim for recovery under Section 48(1) based on undervalued transaction was also rejected. Conclusion: The transaction was not held to be an undervalued transaction under Section 45 of the IBC. Issue 3: Whether Regulation 10 of the Liquidation Regulations is ultra vires or inconsistent with the IBC Relevant legal framework: Section 34(2) of the IBC vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator upon appointment. Section 35(1)(d) and (o) empower the liquidator to protect assets and perform functions specified by the Board. Section 3(32) defines "specified" as those specified by regulations made by the Board under the Code. Regulation 10 is framed under these powers. Section 240(2)(y) authorizes the Board to make regulations regarding functions of the liquidator under Section 35. Court's interpretation and reasoning: The Tribunal held that Regulation 10, empowering the liquidator to disclaim onerous contracts, is a valid exercise of the powers conferred by the IBC. The regulation is consistent with the objectives of the Code, including value maximization and efficient liquidation. The Tribunal distinguished the appellant's argument that only transactions enumerated in Sections 43 to 51 can be avoided, clarifying that disclaimer of onerous contracts is a separate power vested in the liquidator through regulations. The Tribunal also referred to the Supreme Court's interpretation of Section 535 of the Companies Act, 1956, which is analogous to Regulation 10, to support the validity of such disclaimer powers. Conclusion: Regulation 10 of the Liquidation Regulations is intra vires the IBC and is not ultra vires or inconsistent with the Code. Issue 4: Whether the adjudicating authority erred in rejecting the appellant's challenge to the auction notice The appellant challenged the public notice issued by the liquidator for auction of the premises. The adjudicating authority dismissed this challenge, allowing the auction to proceed. The auction was successfully conducted for Rs. 4.21 crore. The Tribunal found no error in this decision. Issue 5: Whether the adjudicating authority erred in directing the liquidator to reconsider the appellant's claim The appellant had submitted a claim of Rs. 1.15 crore before the liquidator, which was initially rejected for non-compliance with prescribed format. The adjudicating authority directed the liquidator to reconsider the claim after due verification and allowed the appellant to submit the claim in the prescribed format within 30 days. The Tribunal upheld this direction as just and proper. 3. SIGNIFICANT HOLDINGS "The intention of disclaiming a contract or property as onerous is to protect the creditors of the Corporate Debtor and releasing the Corporate Debtor from a heavy burden imposed by such a contract or property." "The Leave and License Agreement dated 07.06.2019 is 'unprofitable' and 'burdensome' and attracts the provisions under Regulation 10 of the Liquidation Regulations, 2016." "The power vested in the liquidator by Regulation 10 i.e., disclaimer of the onerous property is thus fully covered by provisions of the IBC and cannot be held to be beyond IBC or ultra vires to the IBC." "Section 34(2) vests all powers of the board of directors and key managerial personnel of the corporate debtor in the liquidator; Section 35(1)(o) empowers the liquidator to perform such other functions as may be specified by the Board; Regulation 10 of the Liquidation Regulations is framed under these provisions." "The Liquidator is justified in disclaiming the Leave and License Agreement dated 07.06.2019 as onerous contract under Regulation 10 of the Liquidation Regulations, 2016." "There is no divergence of opinion between the Technical Member and Judicial Member; both have concluded that the transaction is onerous/unprofitable and can be disclaimed." "The adjudicating authority rightly rejected the challenge to the auction notice and allowed the auction to proceed." "The liquidator was rightly directed to reconsider the appellant's claim after due verification and submission in prescribed format."
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