Moratorium U/S 14 IBC Doesn’t Revive Contracts Or Protect Rights That Have Ceased To Exist Prior To Insolvency: Supreme Court

The Supreme Court reiterated that moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) does not revive terminated contracts or protect rights that have ceased to exist prior to insolvency.

The Court was hearing a Civil Appeal preferred by an estate company, challenging the Judgment of the Bombay High Court in a Writ Petition.

The two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed, “It is well settled that the moratorium under Section 14 does not revive terminated contracts or protect rights that have ceased to exist prior to insolvency. The protection is intended to preserve the existing value of the corporate debtor’s estate, not to resurrect lapsed or extinguished interests. Extending moratorium to such non-existent rights would defeat commercial certainty and the sanctity of lawful termination under general law.”

The Bench said that while Section 14 of the IBC bars the institution or continuation of suits and proceedings during the moratorium, the constitutional jurisdiction of the Supreme Court and the High Courts under Articles 32 and 226 cannot be curtailed by statute.

Senior Advocate Dhruv Mehta represented the Appellants, while AOR Anshuman Srivastava represented the Respondents.

Facts of the Case

The Appellant company was the Corporate Debtor which was undergoing Corporate Insolvency Resolution Process (CIRP) under the provisions of the IBC. The Respondents - society and the Maharashtra Housing & Area Development Authority (MHADA) had entered into a lease deed thereby leasing a plot of land along with a building. The Respondent society executed a registered Development Agreement with the Appellant company for redevelopment of the subject project. However, redevelopment was stalled as the remaining 41 members failed to vacate the premises and the society continued to raise repeated allegations against the Appellant.

Disputes deepened and then the CIRP was initiated against the Appellant but was set aside. In the meanwhile, the society disregarding its own lapses and statutory moratorium, purported to terminate the agreement. It also sought approvals from MHADA for appointing a new developer and this was done despite the express objections raised by the Appellant i.e., Resolution Professional (RP). Thereafter, the society filed a Writ Petition which was disposed of by the High Court and being aggrieved, the Appellants approached the Apex Court.

Court’s Observations

The Supreme Court in view of the above facts, noted, “… the termination in the present case was not occasioned by the insolvency of the corporate debtor but by its persistent non performance. Letters issued by the Society, including one dated 31.05.2019, record that continuation of the agreement was conditional upon compliance by the developer, failing which the contract would stand cancelled. These defaults occurred well before initiation of the CIRP. Thus, the termination was based on legitimate grounds unrelated to insolvency.”

The Court remarked that the so-called “development rights” of the Corporate Debtor constitute, at best, a contractual permission and not an “interest in property” within the meaning of Section 14(1)(d) of the IBC

“… this Court holds that the termination of the Development Agreement dated 16.10.2005 and the Supplementary Agreements dated 23.12.2005 and 09.04.2014 by Respondent No. 1 Society was valid, lawful, and effective in law. No subsisting contractual or proprietary right survived in favour of the corporate debtor on the date of initiation of the second CIRP. Consequently, the NCLT lacked jurisdiction under Section 60(5)(c) of the IBC to interfere with such termination”, it added.

The Court explained that for the purposes of Section 14, only such property or assets which form part of the Corporate Debtor’s estate as on the insolvency commencement date are protected and mere expectant, contingent or uncrystallized contractual rights do not constitute ‘assets’ within the meaning of the IBC.

“Upon such termination, the corporate debtor was left, at best, with a claim for damages, which is a mere unsecured monetary claim and not a proprietary right capable of protection under Section 14. … . Only upon full and proper performance would the developer earn a “free-sale” entitlement, which alone could be treated as an asset. As the developer failed to perform its obligations, no contingent or beneficial right ever crystallized in its favour”, it said.

The Court observed that no actual, constructive, or juridical possession was ever transferred to the Appellant and the developer never commenced demolition, construction, or payment of rent and compensation as required under the agreement.

“In absence of possession or any incident of ownership, Section 14(1)(d) has no application. … we hold that the Development Agreement dated 16.10.2005 and the Supplementary Agreements dated 23.12.2005 and 09.04.2014 do not constitute “assets” or “property” of the corporate debtor within the meaning of Section 14 of the IBC, as the same stood terminated prior to initiation of the second CIRP”, it held.

The Court emphasised that the jurisdiction under Article 226 is wide enough to ensure that statutory authorities perform their public duties and do not withhold approvals without legal justification.

“The High Court did not usurp the jurisdiction of the NCLT or interfere with any matter directly arising from the insolvency process. Its directions were confined to ensuring that the Society’s rights as owner of the land were not indefinitely suspended due to the pendency of CIRP proceedings against a developer who no longer had any subsisting contractual or proprietary interest in the project”, it added.

The Court reiterated that the IBC does not oust the constitutional jurisdiction of the High Courts, particularly where intervention is sought against administrative or statutory inaction in the public law domain, provided such intervention does not obstruct or undermine the insolvency process.

“In light of the above, this Court holds that the High Court was justified in entertaining the writ petition and issuing directions to the statutory authorities to process and consider the redevelopment proposal of Respondent No. 8 in accordance with law. These directions do not encroach upon the jurisdiction of the NCLT nor offend the moratorium under Section 14 of the IBC”, it also held.

Conclusion

Furthermore, the Court observed that the principles of natural justice act as fundamental safeguards ensuring fairness, equity, and reasonableness in decision making and the twin pillars – nemo judex in causa sua (no one shall be a Judge in their own cause) and audi alteram partem (the right to be heard) – are essential components of the rule of law.

“The principles of natural justice are intended to ensure fairness, not to operate as technical obstacles. They cannot be invoked as empty ritual where no real injustice has occurred. The grievance of the appellants is, therefore, more formal than substantive. Having been duly represented and having failed to demonstrate any actual prejudice, the appellants cannot now be permitted to impugn the judgment on grounds of procedural technicality”, it remarked.

The Court, therefore, concluded as follows –

• The termination of the Development Agreement and Supplementary Agreements was valid, lawful, and effective in law, having been carried out after due notice and in consequence of prolonged and inexcusable default by the developer. The Society, as the owner of the land, was entitled to revoke the contract and appoint a new developer to protect the interest of its members.

• The Development Agreement and the Supplementary Agreements do not constitute ‘assets’ or ‘property’ of the Corporate Debtor within the meaning of Section 14 of the IBC. The said agreements stood validly terminated prior to the initiation of the second CIRP, and hence, no subsisting or enforceable right survived in favour of the Corporate Debtor.

• The High Court was justified in entertaining the Writ Petition of the Respondent society and directing the statutory authorities to process and grant approvals. Such directions were procedural in nature, did not encroach upon the jurisdiction of the NCLT, and did not contravene the moratorium under Section 14 of the IBC.

• The proceedings before the High Court were conducted in substantial compliance with the principles of natural justice. The Appellants were afforded a fair opportunity of hearing, and no real prejudice or failure of justice has been demonstrated.

Accordingly, the Apex Court dismissed the Appeal and upheld the impugned Judgment.

Cause Title- A A Estates Private Limited and Another v. Kher Nagar Sukhsadan Co-Operative Housing Society Ltd. & Ors. (Neutral Citation: 2025 INSC 1366)

Appearance:

Appellants: Senior Advocate Dhruv Mehta, AOR Vipin Kumar Jai, and Advocate Kartikeya Sharma.

Respondents: AORs Anshuman Srivastava, Aaditya Aniruddha Pande, Chirag M. Shroff, Suchitra Atul Chitale, Shashwat Singh, Advocates Siddharth Dharmadhikari, Shrirang B. Varma, Bharat Bagla, Sourav Singh, Aditya Krishna, Adarsh Dubey, Chitransha Singh Sikarwar, Dhananjay Kataria, R. Ilam Paridi, R. Vishnu Kumar, Saurav Beniwal, Aman Kumar, and Sidhant Verma.

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