The Supreme Court has ruled that time extension charges under a NOIDA lease deed, levied as a percentage of lease premium to penalise the defaulting developer, cannot be treated as CIRP costs when the developer has been replaced by a Successful Resolution Applicant and the homebuyers have pooled resources to complete the project. The Court drew a clear distinction between the default of the Corporate Debtor and the position of the homebuyers and the SRA, holding that penalising the latter for the past sins of the former is impermissible, particularly where the local authority is essentially entrusted with development and welfare functions.
The Apex Court rejected NOIDA’s attempt to extend the time extension framework beyond the original three-year lease cap by relying on its office order dated Oct 18, 2019, holding that even the expanded 10-year penalty regime cannot be foisted as CIRP costs on the SRA and the homebuyers. The Court reaffirmed that the underlying purpose of a NOIDA lease is development of an urban and industrial township, and that this welfare purpose would be defeated if the authority insisted on recovery of default charges from innocent homebuyers and a fresh resolution applicant seeking to complete a stalled project.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran noted that the lease deed indicated the plot was acquired under the Land Acquisition Act, 1894 for development by NOIDA for setting up an urban and industrial township. The underlying purpose of the lease was to provide adequate infrastructure for industries and commercial establishments as also to provide housing, both as a welfare measure and a revenue generation exercise for the local authority. While NOIDA is involved in a commercial venture, it cannot be divorced from the essential welfare purpose that every local authority pursues.
The Court observed that the project was commenced to provide housing, an essential part of development, and many persons had invested their life savings with the intention of obtaining a roof over their heads. The project was to be completed in 2016, but despite another decade having passed, the home buyers were still left in the lurch. The defaulting developer was now out of the picture, and the half-baked project could be completed only if the Resolution Plan was put into operation and completed.
The Court further noted that the default charges, both as imposed in the lease deed and as introduced under the new policy, were a percentage of the lease premium meant to penalise a defaulting developer, motivate timely completion, and act as a deterrent against time lags. The AR had submitted that the time extension charges did not fall within Section 5(13)(c) of the CIRP Regulations since they were neither incurred by the Resolution Professional nor did they concern the continuation of the project. The SRA pointed out that the Resolution Plan capped contingent protection at the overlap period balance alone and recorded that unless specifically adjudicated to form part of CIRP costs by a binding judicial pronouncement, any cost above the Rs.3 crores estimate would first be recovered from the allottees of towers 17/18/19 of Lotus Panache as super area charge.
Briefly, a developer, M/s Granite Gate Properties Private Limited, took two plots on perpetual lease from the New Okhla Industrial Development Authority (NOIDA) at a high premium to construct high-rise apartment complexes, one in Sector 100 called ‘Lotus Boulevard’ and the other in Sector 110 called ‘Lotus Panache’. The developer ran into financial trouble and was declared a Corporate Debtor (CD) under the Insolvency and Bankruptcy Code. The Committee of Creditors (CoC) was constituted entirely of home buyers, who were treated as a Class of Financial Creditors. A Resolution Plan was approved, with M/s SMV Agencies Private Limited emerging as the Successful Resolution Applicant (SRA).
The NCLT disposed of multiple interlocutory applications together with the application by the Resolution Professional (RP) to approve the Resolution Plan. Two appeals arose, one by the Authorised Representative (AR) of the home buyers and another by NOIDA before the NCLAT. The AR’s grievance was that the NCLAT had directed the time extension charges under both lease deeds to be treated as CIRP costs for the maximum period of three years provided in the lease deed. NOIDA, on the other hand, contended that the time extension charges should be included as CIRP costs not just for three years but for the further period introduced by its office order dated Oct 18, 2019.
During the CIRP, the home buyers pooled their own resources as advance payment of the balance sale consideration and carried out construction as a going concern under the CoC-approved ‘Pool and Build’ mechanism. NOIDA, however, sealed three towers of Lotus Panache on Oct 16, 2024, pending a decision on the time extension charges. The time extension charges were claimed by NOIDA for three years, December 2016 to December 2017, December 2017 to December 2018, and December 2018 up to the insolvency commencement date of Jan 10, 2019.
The original lease deed stipulated time extension charges at 4%, 5% and 6% in the first, second and third years of delay respectively, with cancellation of the lease after the three-year period. The new policy under office order dated Oct 18, 2019, read with the earlier office order dated June 18, 2015, extended the time extension framework beyond three years up to the 10th year, at 7%, 8%, 9% and 10% for the first four years respectively and thereafter at 1% of the total premium per year up to the 10th year, with cancellation thereafter.
