IBC Cannot Be Used to Validate Illegal Constructions Or Defeat Town Planning Laws: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has held that while a corporate debtor's subsisting contractual and development rights under a hire-purchase agreement may constitute assets under the Insolvency and Bankruptcy Code (IBC), the insolvency process cannot be used to legitimise unauthorised construction or defeat statutory town planning laws.

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha observed:

“We emphasise that insolvency jurisprudence cannot become an instrument for validating illegal constructions or defeating statutory town planning laws, unless the same could be legally compounded by the appropriate authority. If the project suffers from violations incapable of regularisation / Compounding under the governing statute, no Resolution Plan can compel the UPAVP to compound such violations.”

The case arose from a commercial plot allotted by the Uttar Pradesh Awas Evam Vikas Parishad (UPAVP) in 2006. K.S.N. Buildwell Pvt. Ltd. became a joint allottee in 2010 under a hire-purchase agreement.

The agreement required payment of quarterly instalments with interest, permitted construction subject to approved plans and provided that ownership would pass only after all dues were cleared and a conveyance deed executed.

According to UPAVP, the company defaulted on its instalment payments and raised construction beyond the approved building plan. Demolition notices followed in 2017. The authority sealed the property in August 2019 and, two years later, issued a recovery certificate for more than ₹81 crore

Insolvency proceedings against the company commenced in October 2022. By then, four buildings had been substantially constructed and 144 flats and 44 commercial shops had already been allotted.

The National Company Law Tribunal (NCLT) directed de-sealing of the property and later sent the resolution plan back to the Committee of Creditors (CoC), holding that third-party land had been included in the plan. UPAVP challenged the de-sealing order, while the Resolution Professional (RP) and the homebuyers challenged the remand.

UPAVP argued that three consecutive payment defaults automatically cancelled the tenancy under the hire-purchase agreement and that the land never belonged to the corporate debtor. The Resolution Professional and the homebuyers countered that although title remained with UPAVP, the company continued to hold contractual and development rights over the property.

They also pointed out that the resolution plan had received 100% approval from the CoC.

The tribunal found that the property had been sealed and confiscated before commencement of the corporate insolvency resolution process and that the action was taken because of unauthorised construction, not payment defaults. It therefore held that the basis of the NCLT's de-sealing order did not survive and set it aside.

At the same time, the tribunal clarified that ownership of the land remained with UPAVP and the resolution plan could not proceed on the assumption that title had passed to the corporate debtor.

“Equally, it is undisputed that the Corporate Debtor had, over many years, constructed a substantial commercial/housing project with the implied permission of the UPAVP and had created rights in favour of 144 residential allottees and 44 commercial purchasers. Such commercial and contractual rights cannot be ignored merely because the title in the land remained vested in UPAVP.”, the tribunal ruled.

The tribunal held that contractual and development rights subsisting on the insolvency commencement date may constitute assets under the IBC. However, the Resolution Professional could not claim rights greater than those held by the corporate debtor or bypass statutory provisions governing illegal constructions.

It also observed that where the governing law permits compounding or regularisation, the existence of the insolvency process does not prevent a resolution applicant from pursuing those statutory remedies.

Accordingly, the tribunal allowed UPAVP's appeal, set aside the NCLT's de-sealing order, dismissed the appeals filed by the Resolution Professional and the homebuyers, and upheld the remand of the resolution plan to the Committee of Creditors.