Lease Termination, Eviction During IBC Moratorium Of Gujarat Hydrocarbons And Power SEZ Invalid: Gujarat HC

The Gujarat High Court has dismissed an appeal by Gujarat Industrial Development Corporation and upheld the quashing of its decision to terminate a lease and evict Gujarat Hydrocarbons and Power SEZ Ltd during insolvency proceedings.

The court held that both the termination of the lease and the eviction action were “non est, illegal and bad in law” as they were taken during the moratorium period.

“Given the object of Section 14(1) of the IBC' 2016, in the facts of the present case, neither the termination of the lease agreement in terms of the clause 15 (Breach of covenant) nor the eviction “proceedings” under the Gujarat Public Premises Act, were permissible during the moratorium period. The orders of termination of lease and eviction of the lessee, therefore, have been rightly quashed by the learned Single Judge.”

A Division Bench of Chief Justice Sunita Agarwal and Justice D.N. Ray said that once insolvency proceedings begin, the property in possession of the corporate debtor cannot be recovered by the lessor, even if there is a breach of the lease.

The dispute arose from a lease deed dated February 21, 2008, under which land was allotted to Gujarat Hydrocarbons and Power SEZ Ltd for development of a Special Economic Zone. Insolvency proceedings were initiated against the company on November 18, 2020, which triggered a moratorium.

Despite this, the corporation terminated the lease on December 13, 2021 citing breach of conditions such as non-payment of dues and non-utilisation of land, and later passed an eviction order on March 10, 2022 under the Public Premises Act.

These actions were challenged by the company, and a single judge had set them aside. The Division Bench agreed with that view.

Explaining why contractual rights cannot be enforced during the moratorium, the court said:

“However, both these actions should freeze during the period of moratorium, inasmuch as, re-entry in terms of the said terms and conditions of the lease deed, would not be permitted or stand prohibited in view of clause (d) of subsection (1) of Section 14, inasmuch as, recovery to any property by the lessor which is in occupation or possession of the Corporate debtor, is impermissible.”

The court also noted that the corporation had participated in the insolvency process as an operational creditor and is bound by the resolution plan. It added that the insolvency law would prevail over the Public Premises Act in case of any inconsistency.

Dismissing the appeal, the court said it found no error in the single judge's ruling and clarified that its observations would not prejudice the parties in pending proceedings.