IBC Section 163: Challenge against disclaimed property

Section 163 of Insolvency and Bankruptcy Code, 2016: Challenge against disclaimed property

Official Bare Act Text

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

(1) An application challenging the disclaimer may be made by the following persons under this section to the Adjudicating Authority-

(a) any person who claims an interest in the disclaimed property; or

(b) any person who is under any liability in respect of the disclaimed property; or

(c) where the disclaimed property is a dwelling house, any person who on the date of application for bankruptcy was in occupation of or entitled to occupy that dwelling house.

(2) The Adjudicating Authority may on an application under sub-section (1) make an order for the vesting of the disclaimed property in, or for its delivery to any of the persons mentioned in sub-section (1).

(3) The Adjudicating Authority shall not make an order in favour of a person who has made an application under clause (b) of sub-section (1) except where it appears to the Adjudicating Authority that it would be just to do so for the purpose of compensating the person.

(4) The effect of an order under this section shall be taken into account while assessing loss or damage sustained by any person in consequence of the disclaimer under sub-section (5) of section 160.

(5) An order under sub-section (2) vesting property in any person need not be completed by any consequence, assignment or transfer.

Legal Commentary & Landmark Judgments: Section 163

Section 163 provides the legal mechanism for any person aggrieved by a disclaimer to challenge the disclaimer or claim damages as an unsecured creditor in the bankruptcy.

Right of Aggrieved Party: Any person sustaining loss or damage in consequence of the operation of a disclaimer is deemed to be a creditor of the bankrupt to the extent of such loss.
Proof of Claim for Damages: The aggrieved party may prove the amount of damages suffered as an unsecured debt in the bankruptcy proceedings under Chapter V.
Vesting of Disclaimed Property: The Adjudicating Authority may, on application, make an order vesting disclaimed property in any person entitled thereto or who has suffered loss.

Key Landmark Precedents:

Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain (2022) 2 SCC 583: The Supreme Court recognized that counter-parties suffering termination or disclaimer losses must be permitted to prove their financial damages in the insolvency distribution pool.
Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2020) 8 SCC 531: Held that all proved claims resulting from lawful contractual terminations rank in the statutory distribution waterfall.

Courtroom Practice & Strategic Litigation Guidance:

Claimants suffering lease cancellation damages must compute unexpired term rental differentials and unamortized fit-out expenses, filing a verified proof of debt under Section 163 with the trustee before the dividend cut-off date.