Agreement validly terminated prior to CIRP not give any enforceable right to corporate debtor

Agreement validly terminated prior to initiation of CIRP did not constitute “assets” or “property” of the corporate debtor u/s 14 of the IBC

In a recent judgment, Hon’ble Supreme Court has held that Development Agreement and Supplementary Agreements validly terminated prior to the initiation of the second CIRP did not constitute “assets” or “property” of the corporate debtor within the meaning of Section 14 of the IBC and hence, no subsisting or enforceable right survived in favour of the corporate debtor.

ABCAUS Case Law Citation:
4893 (2025) (11) abcaus.in SC

In the instant case, the appellant was the Corporate Debtor, which was undergoing Corporate Insolvency Resolution Process under the provisions of the Insolvency and Bankruptcy Code, 2016.

The Respondent was a Co-operative Housing Society. Originally, the Respondent Society and one party (respondent no. 2) had entered into a Lease Deed leasing a plot of land along with the building thereon in favour of the Society for a period of 99 years. Later, the Society executed a registered Development Agreement with Appellant for redevelopment of the subject project.

The appellant failed to complete the redevelopment within the stipulated time of 18 months. Therefore, a Supplementary Development Agreement was executed, under which Appellant was required to complete redevelopment within 40 months from the receipt of the commencement certificate and revising the rent and hardship compensation payable to the Society members.

However, redevelopment was stalled as the remaining members failed to vacate the premises, and the Society raised allegations against Appellant who had also incurred expenses to carry out necessary repairs to the existing building, but the Society attributed the delays to the developer.

Subsequently, Corporate Insolvency Resolution Process (CIRP) was initiated against Appellant which was, however, set aside pursuant to a settlement between the parties. Meanwhile, the Society issued communication(s) / notice(s) terminating the Development Agreement with Appellant and executed a resh Development Agreement and Power of Attorney and appointed a new developer. The Society also sought approvals from State Development Authority in favour of new developer.

Subsequently, CIRP was admitted against Appellant at the instance of Bank and a Resolution Professional was appointed.

Thereafter, the society executed a fresh Development Agreement with new Developer. However, owing to the pendency of the second CIRP and the moratorium operating under Section 14 of the IBC, the State authority revoked the permission already granted, due to which, new Developer was unable to proceed with the redevelopment work.

Therefore, the Society filed a Writ Petition before the Hon’ble High Court to direct the authorities concerned to grant approvals / permissions to new developer. The High Court disposed of the writ petition in favour of the society.

In the present case, the appellant before the Hon’ble Supreme Court challenged the order of the High Court.

The Hon’ble Supreme Court observed that the correspondence exchanged between the parties demonstrated that the Society repeatedly called upon the developer to fulfil its obligations. Notices of default and reminders were issued over several years, culminating in three termination notices. These communications specifically cited persistent non-performance, failure to pay transit rent, and failure to commence redevelopment. Out of 60 members, 41 received no rent while 19 received it only intermittently. Such chronic default justified the Society’s decision to terminate, which was duly communicated and never revoked.

The Hon’ble Supreme Court opined that in contract law, time is of the essence in a redevelopment agreement, whose object is timely rehabilitation of displaced members. Prolonged delay defeats the foundation of the contract and constitutes a material breach entitling he owner to terminate. The right to terminate for default was expressly reserved in the Development Agreement and the Supplementary Agreements.

The Hon’ble Supreme Court observed that in the instant case, the termination was thus effected after due notice and prolonged default, and cannot be termed arbitrary or mala fide. The Society, being the owner of the property and guardian of the members’ welfare, cannot be compelled to indefinitely await performance from a defaulting developer. The IBC is not intended to freeze urban welfare projects or protect commercial indolence at the cost of citizens awaiting rehabilitation.

The Hon’ble Supreme Court noted that it had examined the NCLT’s jurisdiction under Section 60(5)(c) of the IBC and held that the power to restrain or set aside termination is confined to cases where –(i) the termination is solely on account of insolvency (for example, by an ipso facto clause); and (ii) such termination would inevitably result in the corporate death of the debtor by depriving it of its sole or central contract essential to the success of the CIRP. The Court cautioned that the NCLT must refrain from interfering with valid contractual terminations, based on breaches unrelated to insolvency.

The above reasoning was reiterated in another case where Apex Court held that NCLT’s residuary jurisdiction cannot be invoked if the termination of a contract arises from deficiencies or defaults independent of insolvency. Intervention is justified only where the termination would make certain the corporate death of the debtor.

The Hon’ble Supreme Court opined that in the instant case, termination of the contract neither arose from insolvency nor imperiled the corporate debtor’s survival. It was a lawful termination for non-performance, falling outside the jurisdiction of the NCLT under Section 60(5)(c).

The Hon’ble Supreme Court further observed that the terms of the Development Agreement, the developer was granted only a limited licence to enter and use the land for redevelopment. No estate, proprietary right, or transferable interest was created; ownership and legal possession always remained with the Society. Consequently, 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.

Accordingly, the Hon’ble Supreme Court held that the termination of the Development Agreement and the Supplementary Agreements by 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.

The Hon’ble Supreme Court further held that 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. 

The Hon’ble Supreme Court further observed that 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.

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