Redevelopment Projects under Moratorium – Refuge for Developers?
Owais Khan
LL.B- Government Law College, Mumbai
A Moratorium constitutes a very important element within the framework of Corporate Insolvency Resolution Proceedings (CIRP) under the Insolvency & Bankruptcy Code (Code). A moratorium, is simple terms is a restriction on certain activities that cannot be undertaken by the Corporate Debtor or any third party (CD) in relation to the assets of the CD or property within its possession.
The Moratorium activates immediately after the admission of the CD for CIRP by the orders of the Adjudicating Authority (AA). As per Sec. 14 of the Code, on the Insolvency Commencement Date, the AA shall by order declare a moratorium for prohibiting the following activities as laid down below:
- The Institution of suits or continuation of pending suits or proceedings against the CD including execution of any judgement, decree, or order;
- Transferring, Alienating, Encumbering or Disposing of by CD any of its assets or any legal right or beneficial interest therein;
- Any action to Foreclose, recover or enforce any security interest created by the CD in respect of its property including any action under the SARFAESI Act, 2002.
- The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the CD.
However, any License, Permit, Quota, Registration, Concession, Clearance or similar right or grant given by the Central Government, State Government, sectoral regulator or any authority constituted under any law for the time being in force shall not be suspended on the ground of insolvency.
Thus, at times a situation arises, wherein a Developer enters into an Agreement for redevelopment of the society with the Society and Housing Development Authority of the State. Subsequently, the Developer commits a default and is admitted for CIRP. In most circumstances, the Developers argues that owing to the moratorium imposed upon him, the said project being an asset of the Developer cannot be subjected to any further action. This may lead to gross injustice to the residents of the Society. Thus, the courts have rightly stepped up to protect the interests of the Residents and excluded the said projects from the operation of Moratorium, further broadening the limitations under Sec. 14 of the Code.
In Rajendra K. Bhutta vs. Maharashtra Housing & Development Authority of India & Anr. (2020) ibclaw.in 27 SC it has been held that the term “occupied” under Sec. 14(1)(d), does not include any interest or right created in favor of the CD by virtue of an agreement, but only physical possession of the property. Thus, in the given case, when the CD was admitted to CIRP, the court rightfully allowed the Housing Authority to take over the possession of the Project, negating the argument of the CD that the said property is its asset, and thus was not subjected to moratorium.
The Hon’ble Bombay High Court has been at the forefront in protecting the interests of the residents of the society by virtue of some of its landmark adjudications on the said subject. In Rajan Garg, Resolution Professional of Truly Creative Developers Pvt. Ltd. vs. CEO, Slum Rehabilitation Authority, (2024) ibclaw.in 265 HC a developer purchased a plot of land which was already inhabited by Slum Dwellers at the time of Purchase. It further issued a Letter of intent for a Slum Rehabilitation Scheme. However, with the passage of time, the developer failed to pay the transit rent to the slum dwellers and ultimately committed a default, pursuant to which it was admitted for CIRP. A general meeting was called by the Asst. Registrar, Cooperative Societies of Slum Rehabilitation Authority whereby it was decided to appoint another party as developer. Since, the property was owned by the CD, the members of the society took steps to initiate the acquisition of the said plot and for the declaration of the Slum plot as a Slum Rehabilitation Area, wherein the newly appointed developer could execute the project. However, the CD argued that the said acquisition was not possible owing to moratorium imposed upon its assets, which also include the plot. The Court held that the protection of the Assets of the CD cannot prevail over the considerations of a welfare statute and the concerns of the individual citizens for whom the welfare statutes are enacted, finally ruling in favor of the Slum Dwellers.
The Court also interpreted some of the Ratio decidendi of P. Mohanraj vs. M/s. Shah Brothers Ispat Pvt. Ltd. (2021) ibclaw.in 24 SC in the above judgement. The court agreed that anything that is transactional or related to transactions shall be subjected to moratorium. It is inconceivable that the operation of any statute could be stayed by Sec. 14 of the Code. Thus, this interpretation deserves attention as redevelopment projects are an operation of a statute, enacted by the state legislature, in majority of states. Hence, on a broader term, it can be construed to hold that redevelopment projects are outside the ambit of moratorium.
Similarly, in Tagore Nagar Shree Ganesh Krupa Co-operative Housing Society Ltd vs The State of Maharashtra & Ors. a developer entered into a development agreement with a society. However, it subsequently committed a default and was admitted for CIRP. The Society subsequently entered into another development agreement, which was objected by the CD, arguing that the project is an asset of the CD and cannot be subjected to any variation owing to the moratorium. The court adjudicated that corporate resuscitation will not be permitted at the cost of individual city residents’ rights to have a redeveloped home and to receive transit rent. It directed the Housing authority to allow the new developer to proceed with the project. The rights vested in favour of the CD by virtue of the development Agreement does not allow the CD to classify the said project as its asset.
In another case, Nagesh Madhava Surana vs. State of Maharashtra & Ors. The Development Agreement explicitly provided that the possession of the plot shall vest with the Developer, who was subsequently admitted to CIRP. The CD argued that owing to CIRP and the declaration of moratorium, no other than the Resolution professional of the CD could be in possession of the plot. The court negated the argument of the CD and allowed the society to appoint a new developer. The court held that the protection under Sec. 14 seeks to prevent the dissipation of assets which might result in an unplanned or inadvertent dilution of available assets to the Committee of Creditors. Moratorium as a provision seeks for preservation of the assets in status quo till a decision is taken by the committee.
Thus, the protection of the interests of the owners of the flats have been upheld over those of the Developers who become CD. At a time when metropolitan city suffer from excess scarcity of land and land is emerging as the new oil, the redevelopment projects are a new buzz in the real estate industry, and these judgements can surely be a helping hand to the societies.
