NCLT Ahmedabad Bars MIDC From Demolishing Structures on K-Lifestyle's Dombivli Plots During CIRP

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has restrained the Maharashtra Industrial Development Corporation (MIDC) from taking coercive action against K-Lifestyle & Industries Ltd during its Corporate Insolvency Resolution Process (CIRP).

It held that demolition and lease termination cannot proceed during the subsistence of the moratorium.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma said:

“The contention of the Respondent that the moratorium cannot be used as a shield to protect illegality has been duly considered and to perpetuate illegality. While the said proposition is correct in principle, the same cannot override the statutory mandate of Section 14. Even assuming the existence of violations or unauthorized constructions, enforcement actions leading to dispossession, demolition, or deprivation of possession must remain in abeyance during the subsistence of CIRP. ”

The application was filed by Resolution Professional Ajit Kumar of K-Lifestyle & Industries Ltd under Section 60(5) of the Insolvency and Bankruptcy Code (IBC), seeking protection of the corporate debtor's assets.

CIRP against the company began on February 5, 2020, after admission of a Section 7 petition, triggering the statutory moratorium under Section 14. The Resolution Professional issued a public announcement inviting claims and sought information from the suspended board of directors but faced non-cooperation.

The dispute concerns industrial plots in MIDC's Dombivli Industrial Area. These plots had been acquired by the corporate debtor through an auction conducted by Bank of India. After the insolvency process began, the Resolution Professional wrote to MIDC on August 13, 2020, February 9, 2021 and February 26, 2021, informing it about the moratorium and asking it not to take any coercive steps.

Despite these communications, MIDC went ahead and issued a demolition notice on June 10, 2021, followed by a termination notice on June 22, 2021. It alleged that there were unauthorised constructions on the plots, along with deviations from approved plans and breaches of lease conditions.

The Resolution Professional argued that these steps violated the moratorium under Sections 14 and 238 of the Insolvency and Bankruptcy Code, which bars recovery or enforcement actions against the corporate debtor's assets during the insolvency process.

MIDC, in response, maintained that the company had been in violation for years. It pointed to alleged breaches dating back to 2009, including excess construction, lack of approvals, failure to obtain completion certificates, change in use of the premises, sub-letting without permission, and non-payment of dues.

It argued that the moratorium cannot be used to perpetuate illegality.

The tribunal noted that the subject property forms a significant asset of the corporate debtor and must be preserved during CIRP. It found that MIDC's actions were initiated after the commencement of CIRP and during the operation of the moratorium.

Relying on the Supreme Court's ruling in Rajendra K. Bhutta v. MHADA and the NCLAT decision in MIDC v. Santanu T. Ray, the tribunal held that statutory authorities are restrained from taking steps that result in dispossession of the corporate debtor during moratorium.

The tribunal further observed that termination of the lease is intrinsically linked to possession of the property, and would inevitably lead to dispossession and demolition, which is barred under Section 14 of the Code.

It further held:

“In the facts of the present case, it is evident that the Respondent, despite having knowledge of the CIRP and moratorium, has proceeded to issue demolition and termination notices. Such action, in the considered view of this Tribunal, is in teeth of Section 14 read with Section 238 of the Code, the latter having an overriding effect over other laws.”

Holding that such actions cannot be sustained in law, the tribunal allowed the application and restrained MIDC from acting upon the demolition notice dated June 10, 2021 and the termination notice dated June 22, 2021, or taking any coercive steps against the corporate debtor's property during the CIRP.