- 19-Apr-2025
- Healthcare and Medical Malpractice
Lease agreements (whether for commercial or residential property) are a critical part of business operations. During a company’s insolvency or bankruptcy, the treatment of these agreements is governed by the Insolvency and Bankruptcy Code (IBC). The lessors (property owners) and lessees (tenants) both have specific rights and obligations under insolvency proceedings, and how these leases are handled depends on the stage of the insolvency process.
Under the Insolvency and Bankruptcy Code (IBC), a lease agreement is often classified as an operational debt, meaning that the lessor's claim for rent or lease payments is treated as a debt to be settled during the Corporate Insolvency Resolution Process (CIRP).
The lessor, as a party to the lease agreement, is considered an operational creditor, and the claims related to unpaid rent or lease obligations will be part of the creditor's claims.
During CIRP, the Resolution Professional (RP) takes control of the company’s operations and manages its assets, including the leased properties.
The RP has the option to continue or terminate the lease agreements based on the needs of the company’s restructuring. In many cases, the RP will attempt to continue leases that are essential for the business's operations.
Lease obligations that are due before the insolvency process are typically included as part of the company's outstanding operational debts and will be addressed as part of the resolution plan.
Rent payments accrued after the commencement of the insolvency process (i.e., during the CIRP) are treated as new operational debts and should be paid in full to ensure continued use of the leased property during the restructuring period.
The Resolution Professional (RP) can either continue or terminate the lease agreements during the CIRP. If the leased property is essential for the business, the RP may opt to continue paying rent and fulfilling lease obligations.
In some cases, the RP may renegotiate the terms of the lease to reduce liabilities, such as negotiating for a reduction in rent or extending the lease period.
If the leased property is deemed unnecessary, the RP may choose to terminate the lease agreement and avoid future payments.
The treatment of lease agreements is part of the resolution plan prepared by the Resolution Professional (RP). The Committee of Creditors (CoC), which is formed during the CIRP, must approve the resolution plan, which may include provisions for dealing with lease liabilities, either by continuing, terminating, or renegotiating leases.
If the lease is terminated, the lessor is considered a creditor and will have to file claims for unpaid rent as part of the insolvency proceedings.
If the company is liquidated (as opposed to undergoing resolution), the lease agreements are typically terminated, and the company will stop operating in leased premises.
However, the lessor can file a claim for unpaid rent and any other obligations under the lease as part of the company’s liquidation process.
In liquidation, the lessor’s claim for unpaid rent is treated as an unsecured debt, which means they are typically lower in priority compared to secured creditors or employee dues.
Lessors may face difficulties in receiving full payment for rent arrears during the insolvency process. If the lease is continued, the lessor will typically receive only partial or full payment for rent accrued after the start of the insolvency proceedings.
If the lease is terminated, the lessor may file a claim for unpaid rent as part of the liquidation or resolution process, but they will be treated as unsecured creditors, and recovery may be difficult if there are insufficient assets.
Rent payments or lease liabilities that arise post-insolvency (after the commencement of the CIRP) are considered new operational debts and must be paid in full to the lessor.
If the company is successful in restructuring and emerges from insolvency, the lease may continue with revised terms, and regular rent payments will be made.
Suppose a retail company enters insolvency and is undergoing CIRP. It leases several retail spaces for its stores. The Resolution Professional (RP) reviews the leased properties and decides that certain locations are essential for the company's business. The RP continues to pay the rent for these leases as part of the ongoing operational costs during the resolution process.
For other non-essential properties, the RP may choose to terminate the leases and stop paying rent. The lessors of these properties can file their claims for unpaid rent as part of the insolvency proceedings. These claims will be classified as unsecured debts and will only be paid after higher-priority debts (e.g., employee salaries, secured creditors) are settled.
Lessors' Rights in Insolvency: Lessors have the right to file claims for unpaid rent during insolvency proceedings, either during CIRP or in liquidation.
Post-Termination Claims: If the lease is terminated during the insolvency process, the lessor may be entitled to a claim for any rent arrears up to the date of termination, but as unsecured creditors, they may not recover the full amount if the company’s assets are insufficient.
Ongoing Lease Obligations: If the lease continues, the lessor is entitled to receive payment for rent and other lease-related expenses as part of the post-insolvency operational debts.
Lease agreements in insolvency proceedings are handled as part of the company’s operational debts. During Corporate Insolvency Resolution Process (CIRP), the Resolution Professional may choose to continue, renegotiate, or terminate leases based on the company’s needs. Lessors can file claims for unpaid rent, but as unsecured creditors, their claims are lower in priority compared to other creditors. In liquidation, leases are typically terminated, and lessors will have to file claims as part of the liquidation process.
Answer By Law4u Team
Discover clear and detailed answers to common questions about Corporate and Business Law. Learn about procedures and more in straightforward language.
