Relief for Future Lifestyle as NCLT denies lessor's plea for return of unsold merchandise

In a relief for Future Lifestyle Fashions Limited (Future), a Kishore Biyani group company undergoing corporate insolvency resolution process (CIRP), the National Company Law Tribunal (NCLT) on August 28 rejected a plea by Mohan Clothing Company Private Limited (Mohan Clothing), a lessor seeking the return of over 11,696 unsold items of its merchandise [Mohan Clothing v. Bank of India].A bench of Judicial member Kuldip Kumar Kareer and Technical member Anil Raj Chellan said that while the goods had indeed been supplied by Mohan Clothing to Future Lifestyle, the moratorium in place due to the CIRP prohibits recovery of the property from Future Lifestyle, the corporate debtor.Future Lifestyle Fashions, which owns retail properties such as Central and Brand Factory, owes over ₹5,700 crore to its various creditors with the bulk of the dues owed to financial creditors including 11 banks.On May 4, the Mumbai bench of the NCLT directed the initiation of CIRP against Future Lifestyle, after admitting a petition from Bank of India..Mohan Clothing, a long-time supplier of fashion apparel to the Future group, had provided goods on a "sale or return" basis to Future Lifestyle's retail stores. The items in question included shirts, trousers, jackets, and accessories under the labels 'Blackberrys' and 'Blackberrys Casuale'.They were not returned by Future despite several notices and legal demands..Mohan Clothing argued that the unsold inventory should be returned. The company cited a Memorandum of Understanding (MoU) dated March 2, 2020, outlining the terms of their supply agreement. However, the MoU was contested by Future and other respondents who claimed that it was invalid as it lacked signatures of key representatives of the Future Lifestyle..In their affidavit, Future Lifestyle and its resolution professional countered that the absence of a signed MoU undermined Mohan Clothing's claim. They also argued that the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), which prohibits the recovery of property during the CIRP, prevented the return of the goods. The purpose of moratorium is to keep the corporate debtor’s assets together during the CIRP to facilitate an orderly resolution and to maintain the company as a going concern, it was argued..The NCLT found that though Mohan Clothing had not presented a signed MoU, evidence including email correspondences acknowledging the supply of goods, indicated that the products were indeed supplied to Future.But the NCLT upheld the moratorium which prohibits the recovery of property from the corporate debtor during the insolvency resolution period..In its order, the tribunal highlighted that the term ‘property’ as defined under Section 3(27) of IBC includes goods. The moratorium under Section 14(1)(d) prohibits the recovery of any property in possession of the corporate debtor. The physical possession of the goods by the corporate debtor is sufficient to be protected by the moratorium, it was held. "Thus, we see that the word “property” (and not “assets”) has been defined u/s 3(27) of the Code to include goods and the expression “occupied by” would mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression “possession”, which would connote possession being either constructive or actual and which, in turn, would include legally being in possession, though factually not being in physical possession. Therefore, it is not much relevant for the Bench to get into the question of ownership or title to the goods supplied by the Applicant to the Corporate Debtor, as the actual physical possession of such goods by the Corporate Debtor is sufficient enough to be protected by the moratorium u/s 14(1)(d) of the Code," the order said.The tribunal further noted that returning the goods would adversely impact the corporate debtor’s ability to operate as a going concern. "If the goods are ordered by the Tribunal to be returned to the Applicant (Mohan Clothing), then it will affect the status of the corporate debtor as a going concern which is against the true spirit and intent of the Code," the NCLT said.Therefore, it ruled that the unsold goods could not be reclaimed during the CIRP period. .However, the NCLT instructed the resolution professional to expedite the verification of Mohan Clothing’s claim for the outstanding amount of ₹8,10,03,206, which was pending since May 18, 2023.The tribunal's order also noted that Mohan Clothing is entitled to compensation for the sale price of goods sold by the corporate debtor after the insolvency commencement date as per the agreed terms. After the CIRP period, should the goods remain unreturned, Mohan Clothing may reclaim them in accordance with the law..Future Lifestyle is the third company of the Kishore Biyani-led Future Group to face CIRP due to loan defaults, following its flagship firm Future Retail Ltd and logistics and infra arm Future Enterprises, which are also undergoing liquidation and insolvency proceedings respectively..Advocate Aman Arora with Advocate Aradhnan More appeared for Mohan Clothing. Advocate Nandita Bajpai with Advocate Nausher Kohli appeared for the respondents. .[Read Order]