IBC Section 162: Disclaimer of leaseholds

Section 162 of Insolvency and Bankruptcy Code, 2016: Disclaimer of leaseholds

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The bankruptcy trustee shall not be entitled to disclaim any leasehold interest, unless a notice of disclaimer has been served on every interested person and-

(a) no application objecting to the disclaimer by the interested person, has been filed with respect to the leasehold interest, within fourteen days of the date on which notice was served; and

(b) where the application objecting to the disclaimer has been filed by the interested person, the Adjudicating Authority has directed under section 163 that the disclaimer shall take effect.

(2) Where the Adjudicating Authority gives a direction under clause (b) of sub-section (1), it may also make order with respect to fixtures, improvements by tenant and other matters arising out of the lease as it may think fit.

Legal Commentary & Landmark Judgments: Section 162

Section 162 governs the specific conditions and safeguards applicable to the Disclaimer of Leaseholds by the Bankruptcy Trustee.

Leave of Court Requirement: A disclaimer of a leasehold property does not take effect without the leave of the Adjudicating Authority, except in statutory cases where sub-lessees or mortgagees are absent.
Notice to Sub-Lessees and Under-Tenants: The trustee must serve notice on every sub-tenant or mortgagee of the leasehold, who is given fourteen days to apply for a vesting order.
Vesting Order Protection: The Adjudicating Authority may make an order vesting the leasehold in any sub-lessee or mortgagee subject to the same liabilities as the bankrupt was subject to.

Key Landmark Precedents:

Embassy Property Developments v. State of Karnataka (2020) 13 SCC 308: The Supreme Court noted that rights of third-party sub-lessees and statutory lease conditions are governed by specialized procedural safeguards during insolvency.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: Affirmed that the Code balances the rights of distressed estates with the legitimate property rights of innocent third parties.

Courtroom Practice & Strategic Litigation Guidance:

Sub-tenants facing a trustee's lease disclaimer must immediately apply under Section 162(2) for a vesting order to step into the head lease, preserving their physical possession and commercial operations.