The case involved two housing projects in Noida’ Sectors 100 and 110, which have been stalled for the past 10 years.

The Apex Court held that time extension charges levied on an insolvent developer cannot be recovered as cost of Corporate Insolvency Resolution Process (CIRP) from homebuyers.

A Bench of Justices JB Pardiwala and K Vinod Chandran vacated an order of the National Company Law Appellate Tribunal (NCLAT) which had asked a Committee of Creditors (CoC) of homebuyers to pay the time extension charges levied by New Okhla Industrial Development Authority (NOIDA) for delayed completion of two housing projects.

The Court noted that homebuyers and the new developer were being punished for mistakes committed by the original developer.

The Supreme Court was hearing appeals against orders of NCLAT and National Company Law Tribunal (NCLT) in relation to Lotus Boulevard and Lotus Panache housing projects located at Sector 100 and 110 of Noida. These projects were being constructed by Granite Gate Properties Private Limited which went insolvent during the course of construction of the projects.

The projects were supposed to be completed by 2016. The original developer went into insolvency and homebuyers were admitted as financial creditors and a CoC comprising them was formed.

Homebuyers continued construction of the projects through the ‘Pool and Build’ mechanism by contributing their own funds during the course of insolvency. Later, a resolution plan was approved and SMV Agencies Private Limited was brought in as successful resolution applicant.

The impugned demand by NOIDA pertained to time extension charges levied by it under the lease deeds relating to two projects. As per the terms of the original lease deed, charges of 4%, 5% and 6% of the lease premium were payable towards extension of completion for the first, second and third years respectively. NCLAT held that these charges were to be treated as cost of CIRP.

The homebuyers opposed this claim saying that the projects were delayed even before insolvency began and till the time insolvency commenced it was the default of the original developer. They added that they should not be penalised for the default committed by the original developer.

On the other hand, NOIDA was contending that it should be allowed to levy charges even beyond the three years as per its later policy.

The Court said that the intention of levying such penalty was to ensure that a developer does not delay a project. However, in the instant case the original developer was no longer developing the project, it observed.

The Bench went on to say that NOIDA’ functions were not restricted to collecting money on account of lease of land. It has the duty to promote construction activity and develop housing.

According to the Court, if the new developer is burdened with these charges it would not be able to complete the projects.

The Bench said that the plans would only get completed if the resolution plan was implemented. By allowing NOIDA to recover the penalty from homebuyers and the new developer as cost of CIRP, the process of completion of projects would be hampered.

Therefore, the Bench held that NOIDA should give a waiver for the time extension charges levied in this case considering the facts and circumstances.

The Court set aside NCLAT’s direction allowing NOIDA to recover time extension charges as cost of CIRP. It also rejected NOIDA’s contention of claiming charges as per its later policy for beyond three years.

Senior Advocate Dhruv Mehta with Rachit Mittal, Yashraj Singh, Parish Mishra, Kanishk Raj, Srishti Agrawaal, Aayushi Kiran, Shivansh Bansal, Ravinder Singh, Ritvik Bharadwaj, Nishita Kushwaha and other appeared for the home buyers and successful resolution applicant.

Garima Jain, Som Raj Choudhury, Sumant Batra, Sanyam Saxena, Sahil Sethi, Shrutee Aradhana and Samridh Bindal appeared for NOIDA. Aditi Bhushan and Prashant Kumar Nair also appeared.