New Delhi: The Supreme Court has made it clear that homebuyers and resolution applicants for stalled real estate projects cannot be penalised for delays caused by the original developer, which has since gone into insolvency.
In an order Thursday, a bench of justices JB Pardiwala and K. Vinod Chandran set aside a National Company Law Appellate Tribunal (NCLAT) ruling that allowed time-extension charges to be treated as Corporate Insolvency Resolution Process (CIRP) costs, and be recovered by the Noida authority from the homebuyers who pooled money to complete stalled projects.
The bench emphasised that such charges are penal in nature, and to impose them would amount to punishing stakeholders for the past failures of the corporate debtor.
The case is linked to two housing projects—Lotus Boulevard in Noida Sector100 and Lotus Panache in Sector 110— that were being executed by Granite Gate Properties Pvt. Ltd after NOIDA granted the firm developer rights to construct high‑rise residential complexes.
The projects were to be completed by 2016.
However, Granite Gate ran into financial distress, and failed to complete the projects. The firm was eventually declared insolvent in 2019, becoming a corporate debtor under the Insolvency and Bankruptcy Code.
With insolvency admitted, a Committee of Creditors (CoC) was constituted, consisting of homebuyers recognised as a class of financial creditors. A Resolution Plan was approved to be implemented by M/s SMV Agencies Private Limited as the new Successful Resolution Applicant (SRA ).
During the Corporate Insolvency Resolution Process (CIRP), the homebuyers themselves pooled funds under a “Pool and Build” mechanism to keep construction alive until a resolution plan could be implemented.
The matter came before the National Company Law Tribunal (NCLT) in 2019, the adjudicating authority for insolvency cases. While approving the resolution plan, the NCLT also passed directions regarding NOIDA’s claim for time‑extension charges.
These charges, imposed under the lease deed, are fees levied when a developer fails to complete construction within the stipulated period. Initially capped at three years (4 percent, 5 percent, and 6 percent of the premium for each year of delay), Noida authority’s subsequent policies in 2015 and 2019 extended the regime up to 10 years with escalating percentages.
Noida argued that these charges should be treated as CIRP costs, and paid by the SRA and homebuyers who were now completing the project. Unless the charges are cleared for up to 10 years, the project could not legally continue and therefore, it said.
The NCLT partly accepted this view, directing that time‑extension charges for up to three years be treated as CIRP costs.
Both, the homebuyers and Noida authority, were dissatisfied with this outcome, and filed appeals before the National Company Law Appellate Tribunal (NCLAT). The NCLAT ruled that time-extension charges under the lease deed should be treated as CIRP costs, but only for a maximum of three years as stipulated in the lease deed, and not 10 years as demanded by the Noida authority.
Also read: 800 Gurugram homebuyers paying EMI and rent — ‘developer cheated, sold crematorium as green area’
SC reasoning
The Supreme Court was required to examine whether Noida authority’s levy of time‑extension charges could legitimately be classified as costs incurred during the CIRP.
Looking at the lease deed, the court noted that Noida had acquired land under the Land Acquisition Act, 1894 to promote development of urban and industrial township and promote industrial and commercial enterprises. The lease originally allowed penalties of 4 percent, 5 percent and 6 percent for delays in the first three years, after which Noida could cancel the lease.
“The underlying purpose of the lease itself is to provide adequate infrastructure for the development of industries and commercial establishments as also to provide housing by utilisation of lands, both as a welfare measure and revenue generation to the local authority,“ the SC said.
“The authority surely is involved in a commercial venture, but it cannot be divorced from the essential purpose which every local authority pursues and advances, i.e. welfare measures without a mere profit motive,” it added.
Emphasising on development, the court noted, “The essential purpose of development would fail if NOIDA brings in a stipulation of payment of default charges. The default charges, as imposed in the lease deed as also now introduced as per the new policy, specifies a percentage of the lease premium to penalise a defaulting developer. The intention is also to motivate completion within time lines and to act as a deterrent to avoid time lags. “
Setting aside the NCLAT order, the court held that it is only proper that Noida waives the penal charges since it is neither the default of the homebuyers nor the SRA, which led to the delay.
The SC said the homebuyers and the SRA were sought to be penalised for “past sins” of the corporate debtor, which cannot be allowed, especially in the context of the authority imposing penalty, ie: the local authority being concerned essentially with the development of the area under its control.
Therefore, the SC set aside the orders treating time‑extension charges as CIRP costs.
(Edited by Ajeet Tiwari)
Also read: For over 6,000 HDIL homebuyers, there is no home a decade since they invested. Hope running out too