In a significant ruling protecting homebuyers affected by prolonged insolvency proceedings, the Supreme Court has held that delay penalties imposed by the New Okhla Industrial Development Authority (NOIDA) cannot be recovered from homebuyers or the successful resolution applicant when the delay was caused by the defaulting developer.
A Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran set aside the direction requiring time extension charges relating to the Lotus Boulevard and Lotus Panache housing projects to be treated as Corporate Insolvency Resolution Process (CIRP) costs.
The Court observed that neither the homebuyers nor the successful resolution applicant was responsible for the delay in completing the projects. Requiring them to bear the penalties would effectively punish them for the “past sins” of the corporate debtor, the Bench said.
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The Supreme Court highlighted the plight of homebuyers who invest their hard-earned savings in housing projects after being promised luxurious homes in grand high-rise buildings, only to subsequently discover that those promises were a “pipe dream”.
Granite Gate Properties Private Limited had obtained two plots from NOIDA on perpetual lease after paying a substantial premium. The developer proposed to construct two residential projects—Lotus Boulevard in Sector 100 and Lotus Panache in Sector 110, Noida.
The developer subsequently faced financial difficulties and was declared a corporate debtor under the Insolvency and Bankruptcy Code. The homebuyers constituted the Committee of Creditors as a class of financial creditors.
A resolution plan submitted by SMV Agencies Private Limited was approved, and the company emerged as the successful resolution applicant.
Several applications were filed before the National Company Law Tribunal during the insolvency proceedings, including an application by the resolution professional seeking approval of the resolution plan.
The dispute before the Supreme Court arose from a direction issued by the National Company Law Appellate Tribunal requiring time extension charges under the two lease deeds to be treated as CIRP costs for a maximum period of three years available for completing the projects.
The authorised representative of the homebuyers challenged this direction. NOIDA filed a separate appeal contending that the charges should not be restricted to the three-year period mentioned in the original lease deeds.
According to NOIDA, the charges for further extensions permitted under its subsequent policy, extending up to the tenth year, should also be included in CIRP costs.
The principal question before the Supreme Court was whether the time extension charges demanded by NOIDA could legally be treated as costs incurred during the corporate insolvency resolution process.
The authorised representative informed the Court that the homebuyers had pooled their own resources during the CIRP. They made advance payments towards the balance sale consideration and continued construction under a Committee of Creditors-approved “Pool and Build” mechanism.
Despite these efforts, NOIDA sealed three towers of the Lotus Panache project on October 16, 2024, pending a decision concerning the payment of time extension charges.
The homebuyers argued that the extension charges were neither incurred by the resolution professional nor related to keeping the corporate debtor operational during the insolvency process. Therefore, the charges could not be categorised as CIRP costs.
NOIDA had claimed extension charges for the first year between December 2016 and December 2017, the second year between December 2017 and December 2018, and the third year from December 2018 until the insolvency commencement date of January 10, 2019.
The homebuyers maintained that, even if some portion of the charges were to be considered CIRP costs, only the balance period commencing from January 10, 2019, could potentially be included.
They further submitted that the charges were penal in nature. The underlying default was committed by the erstwhile developer, which had already entered insolvency proceedings. Transferring that liability to the homebuyers would consequently be unjust.
NOIDA argued that the housing projects could not be continued without payment of the time extension charges. The charges were therefore necessary for project completion and should be included in CIRP costs.
It relied on the terms of the lease deeds, which provided that the leases would be governed by the Uttar Pradesh Industrial Area Development Act, 1976, as well as rules, regulations and directions issued under the legislation.
Under the original lease terms, extension charges were fixed at four per cent, five per cent and six per cent of the lease premium for the first, second and third years of delay, respectively. The lease was liable to be cancelled after the expiry of the three-year extension period.
NOIDA also relied on its office order dated October 18, 2019, read with an earlier office order dated June 18, 2015. It contended that the revised policy permitted extensions beyond three years and up to the tenth year, subject to payment of progressively calculated charges.
Accordingly, NOIDA asked the Supreme Court to recognise extension charges for the entire permissible period up to the tenth year as CIRP costs.
The successful resolution applicant supported the submissions made on behalf of the homebuyers.
It also informed the Court that the resolution plan contained only limited contingent protection concerning the overlapping period. The plan recorded that unless a binding judicial ruling specifically classified the disputed amount as CIRP costs, any amount exceeding the estimated ₹3 crore would first be recovered from the allottees of Towers 17, 18 and 19 of Lotus Panache as a super-area charge.
The inclusion of the time extension charges as CIRP costs could, therefore, ultimately impose an additional financial burden upon the homebuyers.
Examining the lease agreements, the Supreme Court noted that the plots had originally been acquired under the Land Acquisition Act, 1894, for development by NOIDA as part of an urban and industrial township.
The purpose of the leases was to promote the overall development of the area, including industrial and commercial enterprises and housing in multi-storeyed buildings.
The Court acknowledged that NOIDA was involved in activities having a commercial component. However, its functions could not be separated from the welfare and development objectives ordinarily pursued by a local authority.
Development generates revenue through taxes, duties and other levies, which is then used to meet infrastructure requirements. NOIDA was consequently expected to take financially prudent decisions while simultaneously advancing the development and welfare of the area under its jurisdiction.
The Supreme Court noted that the housing projects were supposed to be completed in 2016. However, despite nearly another decade having passed, the homebuyers continued to remain without possession of their homes.
The homebuyers had already contributed additional funds to continue construction during the CIRP. The resolution plan had also been approved by the Committee of Creditors, which consisted entirely of the homebuyers.
The Court found that the successful resolution of the insolvency and completion of the unfinished projects were essential to achieving the original development purpose for which the land had been leased.
That objective would be defeated if NOIDA insisted upon payment of the developer’s default charges before allowing the projects to proceed.
The Bench explained that the extension charges under the original lease deeds and NOIDA’s revised policy were calculated as a percentage of the lease premium.
Their purpose was to penalise a developer that failed to complete a project within the stipulated period. The charges were also intended to encourage timely completion and deter unnecessary delays.
In the present case, however, the defaulting developer was no longer in control of the projects. The unfinished construction could be completed only through implementation of the approved resolution plan.
The successful resolution applicant and the homebuyers were not responsible for the original developer’s failure to complete the projects. The Court therefore found no justification for imposing the penal consequences of that failure upon them.
Considering the peculiar circumstances, the Supreme Court held that NOIDA should waive the time extension penalties.
The Court categorically observed that the delay was attributable neither to the homebuyers nor to the successful resolution applicant. They could not be compelled to bear liabilities arising from the corporate debtor’s earlier misconduct and defaults.
The Bench also emphasised that NOIDA, as the local authority imposing the penalty, was principally responsible for ensuring the development of the area under its control. Insistence on penal charges in these circumstances would obstruct rather than advance completion of the housing projects.
Consequently, the Supreme Court set aside the direction treating the time extension charges as CIRP costs and modified the NCLAT’s order to that extent.
NOIDA’s separate request for recognition of extension charges beyond three years and up to the tenth year was also rejected.
The homebuyers’ appeal was allowed, while NOIDA’s appeal was dismissed.
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