2025 (3) TMI 1193 - HC - IBC

Termination of petitioner s appointment as developer of a slum rehabilitation project - petitioner s failure to pay transit rent arrears and to complete the project within the stipulated time - overriding effect of Section 31 of the IBC over Section 13 (2) of the Slum Act. Does the approval of the petitioner s resolution plan by the NCLT under Section 31 of the IBC override or nullify the petitioner s obligations and liabilities arising under the Slum Act and the Slum Rehabilitation Scheme? In particular is the SRA barred or restricted by the IBC from taking action under Section 13 (2) of the Slum Act due to the resolution plan s binding effect? - HELD THAT - Undoubtedly Section 238 of the IBC gives it overriding effect over inconsistent provisions of other laws. But in the present scenario the Slum Act s mandate of ensuring timely rehabilitation of slum dwellers is not inconsistent with the objectives of the IBC. Rather it furthers the very aim of keeping the corporate debtor as a going concern by facilitating the completion of the project that forms the basis of the company s revival. It must be noted that the IBC is not merely a tool for liquidation or asset-stripping but a mechanism for holistic revival of viable companies. In a slum redevelopment project the success and viability of the corporate debtor hinges on cooperation from slum dwellers and compliance with SRA guidelines. If the developer fails to honour its obligations such as payment of transit rent or timely completion of rehabilitation buildings the project collapses not only financially but also socially. In such a situation the SRA stepping in to rescue the project is a necessary regulatory response and a sovereign function exercised in public interest. The principle of public interest penetrates insolvency law. Certain non-monetary consequences which arise under welfare legislations like the Slum Act cannot be lightly brushed aside merely because insolvency proceedings under the IBC have commenced or concluded. The removal of a developer under Section 13 (2) of the Slum Act is one such consequence. Another example arising in the present case is the proposed acquisition of the project land by the SRA. As per the Slum Act once a developer is removed due to non-performance the SRA has the power to acquire the land belonging to the outgoing developer so that the same land can be handed over to the incoming developer for completing the rehabilitation scheme - the corporate debtor is not being dispossessed without remedy; rather it is being divested of an asset which it was unable to utilise for the public good and that too in accordance with legal process. In the present case the SRA s action of removing the petitioner as developer is a regulatory decision made in furtherance of the statutory scheme under the Slum Act. This decision is not rendered invalid merely because the developer has undergone insolvency or that a resolution plan has been approved. The two statutes operate in distinct spheres the IBC deals with debt resolution and revival of the corporate debtor while the Slum Act is aimed at protecting the interests of slum dwellers and ensuring timely completion of rehabilitation projects - The IBC is not a refuge for those who have failed in their public responsibilities. The approval of a resolution plan does not and cannot bind independent statutory authorities like the SRA from discharging their duties under law. The welfare of slum dwellers the progress of redevelopment schemes and the broader public interest cannot be made subservient to the financial restructuring of one defaulting entity. In conclusion therefore it must be held that the removal of the petitioner as developer and the consequent acquisition of the land by the SRA are lawful justified and not inconsistent with the IBC. The resolution plan approved by the NCLT under the IBC does not override the petitioner s obligations under the Slum Act except to the limited extent that financial claims arising before the insolvency commencement date and duly dealt with in the plan cannot be enforced separately. Is the obligation to pay transit rent to slum dwellers a statutory obligation imposed by the Slum Act/regulations (and thus part of the public law framework) or merely a contractual term of the development agreement between the petitioner and the slum society? - HELD THAT - The nature and character of the obligation to pay transit rent has been debated before this Court. The petitioner suggests that this obligation is rooted in private agreements and therefore like any other contractual obligation may be modified waived or extinguished through insolvency proceedings. On the other hand the respondents have taken a firm stand that this is not a matter of private negotiation but a statutory duty arising from the scheme sanctioned under the Slum Act. When a slum rehabilitation scheme is sanctioned under the Slum Act it is not a mere private arrangement between a builder and slum dwellers. It is a public welfare scheme governed by statutory provisions detailed guidelines of the Slum Rehabilitation Authority (SRA) and formal conditions set out in the Letter of Intent (LoI) and other regulatory documents such as Annexure II and Regulation 33(10) of the Development Control Regulations (DCR) applicable in Maharashtra. A critical condition of such schemes is that the developer must provide either alternate transit accommodation or monthly transit rent to every eligible slum dweller from the date of vacating their hutments until permanent rehabilitation units are handed over. This is not an optional or negotiable term that can be bargained away. If the obligation to pay transit rent were viewed as a purely private or contractual liability it would open the door for each slum dweller to individually file a claim in the corporate insolvency process as an operational creditor. However this is both impractical and unfair considering the socio-economic background of the slum dwellers. The insolvency framework was not designed to handle such public welfare claims in this fragmented manner. More importantly transit rent is not a one-time debt. It is a continuing performance obligation which accrues monthly until the permanent housing is delivered. It is true that the petitioner entered into formal agreements with individual slum dwellers or the co-operative housing society to implement the project. These are usually in the form of tri- partite agreements involving the developer the slum dweller and the SRA or society - The developer cannot ignore or belittle this obligation merely because it appears in a contract. It is a duty owed not just to an individual but to a class of beneficiaries protected by a welfare law. Accordingly even if unpaid transit rent qualifies as an operational debt under the IBC for accounting purposes this classification does not dilute the developer s continuing obligation to ensure that transit rent is regularly paid going forward. Breach of this obligation is not merely a civil wrong it is a breach of the statutory framework attracting regulatory consequences including removal from the project. The obligation to pay transit rent is essentially a statutory obligation even though it is implemented through formal agreements. Was the SRA justified in law in invoking Section 13 (2) and issuing the impugned order terminating the petitioner s appointment as developer? - HELD THAT - In the present case it is evident that the SRA considered all relevant factors. Notably the authority took into account the petitioner s defence including the approval of the resolution plan under IBC the alleged improvement in financial capacity and the fresh LoIs issued in 2024. However the SRA ultimately found that on-ground progress remained unsatisfactory and more importantly that transit rent dues remained unpaid thereby causing hardship to slum dwellers. 103. In such a situation the authority was justified in taking a pragmatic decision to protect the welfare of slum dwellers which is the central objective of the Slum Act. The decision to allow the society to appoint a new developer is not punitive but rather remedial to break the stagnation and ensure that the scheme is taken to its logical conclusion. This Court finds no perversity irrationality or illegality in the impugned order. It cannot be said that the action of the SRA was arbitrary or in breach of procedural fairness. On the contrary the process followed appears fair thorough and in alignment with the statutory scheme s objective of timely and effective rehabilitation of slum dwellers. The action initiated by the SRA under Section 13 (2) of the Slum Act is lawful reasonable and justified having regard to the petitioner s long-standing failure to pay transit rent the resulting hardship to slum dwellers. Was the decision-making process of Respondent No. 6 (CEO SRA) in issuing the impugned order fair and in accordance with law? - HELD THAT - The petitioner is not merely an implementing agency or contractor but also the owner of the land on which the slum rehabilitation scheme is being implemented. This dual role brings with it a greater degree of responsibility and accountability. The burden of compliance is higher especially when the land has been granted for a public welfare scheme under beneficial terms. In such a situation the SRA was duty-bound to afford the petitioner a conclusive and time-bound opportunity to clear the dues particularly after revival under the IBC before proceeding to cancel development rights. The record indicates that the AGRC did not extend such a final opportunity to the petitioner before concurring with the CEO s decision to terminate the petitioner s rights. In the respectful view of this Court this constitutes a procedural lapse not one that invalidates the SRA s substantive powers or its overall assessment but a deficiency in natural justice that warrants correction. This Court finds no infirmity in the SRA s decision to invoke Section 13 (2) of the Slum Act. The decision is well-reasoned supported by facts and aligned with the objectives of the Act. However the limited procedural deficiency namely the failure to grant a final opportunity to the revived petitioner to clear its dues and demonstrate intent is one that must be remedied to uphold fairness. Conclusion - i) The resolution plan approved by the NCLT under the IBC does not override the petitioner s obligations under the Slum Act except to the limited extent that financial claims arising before the insolvency commencement date and duly dealt with in the plan cannot be enforced separately. ii) The obligation to pay transit rent is essentially a statutory obligation even though it is implemented through formal agreements. iii) The action initiated by the SRA under Section 13 (2) of the Slum Act is lawful reasonable and justified having regard to the petitioner s long-standing failure to pay transit rent the resulting hardship to slum dwellers. iv) This Court finds no infirmity in the SRA s decision to invoke Section 13 (2) of the Slum Act. The decision is well-reasoned supported by facts and aligned with the objectives of the Act. However the limited procedural deficiency namely the failure to grant a final opportunity to the revived petitioner to clear its dues and demonstrate intent is one that must be remedied to uphold fairness. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

(i) Whether the approval of the petitioner's resolution plan by the NCLT under Section 31 of the IBC overrides or nullifies the petitioner's obligations and liabilities under the Slum Act and the Slum Rehabilitation Scheme, particularly concerning the SRA's action under Section 13 (2) of the Slum Act.

(ii) Whether the obligation to pay transit rent to slum dwellers is a statutory obligation under the Slum Act/regulations or merely a contractual term of the development agreement between the petitioner and the slum society.

(iii) Whether the SRA was justified in law in invoking Section 13 (2) and issuing the impugned order terminating the petitioner's appointment as developer.

(iv) Whether the decision-making process of Respondent No. 6 (CEO, SRA) in issuing the impugned order was fair and in accordance with law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Does the approval of the petitioner's resolution plan by the NCLT under Section 31 of the IBC override or nullify the petitioner's obligations and liabilities arising under the Slum Act and the Slum Rehabilitation Scheme?

The Court analyzed the interplay between the IBC and the Slum Act, recognizing that the IBC is primarily an economic legislation aimed at insolvency resolution, while the Slum Act is a social welfare legislation focused on slum rehabilitation. The Court held that the approval of a resolution plan under the IBC does not extinguish statutory obligations under the Slum Act. The SRA's action under Section 13 (2) is a regulatory measure aimed at ensuring the completion of the rehabilitation project, not a recovery of past dues. The Court emphasized that the IBC's non-obstante clause in Section 238 only applies where there is an actual inconsistency, which was not the case here.

Issue (ii): Is the obligation to pay transit rent to slum dwellers a statutory obligation or merely a contractual term?

The Court concluded that the obligation to pay transit rent is a statutory obligation embedded in the Slum Act and the development scheme approved by the SRA. Although formalized through agreements, the obligation is not a mere contractual term but a statutory duty aimed at ensuring temporary accommodation for slum dwellers during the redevelopment process. The Court noted that this obligation is a core component of the slum rehabilitation scheme and cannot be waived or modified through insolvency proceedings.

Issue (iii): Was the SRA justified in invoking Section 13 (2) and issuing the impugned order?

The Court found that the SRA's action under Section 13 (2) was justified due to the petitioner's prolonged failure to pay transit rent and the resultant hardship to slum dwellers. The Court noted that the non-payment of transit rent was a significant breach of the statutory framework, and the SRA's decision to replace the petitioner as developer was a necessary regulatory measure to ensure the continuation of the project and protect the welfare of slum dwellers. The Court emphasized that the decision was not punitive but remedial, aimed at addressing the stagnation of the project.

Issue (iv): Was Respondent No. 6's decision (impugned order) justified in law - Procedural fairness and other considerations?

The Court held that the SRA followed due process and complied with the principles of natural justice before issuing the impugned order. The petitioner was given notice and an opportunity to be heard, and the decision was based on material evidence and relevant considerations. The Court found no evidence of mala fides or extraneous considerations influencing the SRA's decision. However, the Court noted a procedural lapse in not granting the petitioner a final opportunity to demonstrate readiness and capability to discharge its duties post-resolution plan approval. The Court directed the SRA to provide the petitioner with a final opportunity to address the grievances of the slum dwellers before finalizing the appointment of a new developer.

3. SIGNIFICANT HOLDINGS

The Court held that the approval of a resolution plan under the IBC does not override statutory obligations under the Slum Act, except for extinguishing financial claims dealt with in the plan. The obligation to pay transit rent is a statutory duty, and the SRA's action under Section 13 (2) was justified due to the petitioner's failure to fulfill this obligation. The Court emphasized that the SRA's decision was a regulatory measure aimed at protecting the welfare of slum dwellers and ensuring the completion of the rehabilitation project. The Court directed the SRA to provide the petitioner with a final opportunity to address the grievances of the slum dwellers before proceeding with the appointment of a new developer.