Insolvency and Bankruptcy Code, 2016 | Section 162

Section 162: Disclaimer of Leaseholds under the Insolvency and Bankruptcy Code, 2016

Section 162 prescribes the safeguards that apply when a bankruptcy trustee proposes to disclaim a leasehold interest. It requires notice to interested persons and provides a 14-day opportunity to object, with adjudication under Section 163 where an objection is made.

Legal reference: Part III, Chapter V of the Insolvency and Bankruptcy Code, 2016 (Act 31 of 2016).

Key point: A bankruptcy trustee cannot simply abandon a leasehold interest without complying with the notice and objection requirements in Section 162.

Text of Section 162: Disclaimer of leaseholds

162. (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.

Meaning of disclaimer of a leasehold interest

A leasehold interest is an interest in property held under a lease, subject to its terms and applicable law. A disclaimer is the statutory mechanism through which a bankruptcy trustee seeks to relinquish an onerous interest of the bankrupt's estate. It is not the same as an ordinary contractual surrender or termination of a lease.

Section 160 defines onerous property for this purpose as an unprofitable contract or other estate property that is unsaleable, not readily saleable, or may give rise to a claim. Section 162 provides additional protection specifically for leasehold interests.

Requirements under Section 162(1)

1. Notice to every interested person

The bankruptcy trustee must serve a notice of disclaimer on every interested person. Depending on the rights affected, interested persons may include the landlord, persons with a legally recognised interest in the lease, or others whose rights are affected. The precise recipients depend on the facts and applicable procedural rules.

2. Fourteen-day period to object

Under Section 162(1)(a), an interested person has fourteen days from service of notice to file an application objecting to the proposed disclaimer. The statutory period runs from the date notice was served, not merely the date on which the trustee prepared the notice.

3. Order where an objection is filed

If an interested person files an objection, Section 162(1)(b) requires a direction of the Adjudicating Authority under Section 163 for the disclaimer to take effect. The trustee should not treat an objected-to disclaimer as automatically effective.

Section 162(2): Fixtures and tenant improvements

When the Adjudicating Authority directs that a disclaimer is to take effect following an objection, it may also make appropriate orders concerning fixtures, improvements made by the tenant, and other matters arising from the lease. These powers allow the Authority to address property-related consequences rather than treating the disclaimer as an isolated act.

Section 160 - Onerous property of bankrupt: sets out the bankruptcy trustee's power to disclaim onerous property, the effect of disclaimer, and protections for third parties.
Section 161 - Notice to disclaim onerous property: addresses a written request by an interested person for a decision and the consequences if no decision is made within seven days.
Section 163 - Challenge against disclaimed property: identifies persons entitled to challenge a disclaimer and empowers the Adjudicating Authority to order vesting or delivery of disclaimed property in appropriate cases.

These provisions should be read together. Section 162 supplies leasehold-specific conditions and does not replace the wider statutory framework governing disclaimer.

Practical example

Suppose an individual undergoing bankruptcy holds a lease of commercial premises with continuing obligations that burden the estate. The bankruptcy trustee considers disclaimer under Section 160. Because the asset is a leasehold interest, the trustee must also comply with Section 162 by serving notice on interested persons. If an interested person objects within fourteen days, the trustee requires the relevant direction under Section 163. The Adjudicating Authority may also address tenant-installed fixtures or improvements.

This is an illustration only; the result in a real case depends on the lease, the nature of the bankruptcy proceeding, applicable commencement notifications, and the Authority's order.

Frequently asked questions

Can a bankruptcy trustee disclaim a lease without notice?

Section 162 expressly requires service of a notice of disclaimer on every interested person before a leasehold interest may be disclaimed under that provision.

How long does an interested person have to object?

Section 162(1)(a) specifies fourteen days from the date the notice was served.

What happens if someone objects?

Where an objection is filed, the disclaimer requires a direction from the Adjudicating Authority under Section 163 before it can take effect under Section 162(1)(b).

Can the Authority decide what happens to improvements made by the tenant?

Yes. Section 162(2) authorises orders concerning fixtures, tenant improvements and other matters arising from the lease when a direction is made under Section 162(1)(b).

Official legal sources and further reading

Note: The statutory wording is reproduced for reference. Check the latest notified provisions, amendments, rules and judicial decisions before relying on the law for a particular proceeding. Part III provisions have been brought into force in stages and their practical applicability depends on the category of debtor and relevant notifications.