The Supreme Court on Thursday held that time extension charges imposed on an insolvent developer cannot be recovered as Corporate Insolvency Resolution Process (CIRP) costs from homebuyers [Granite Gate Properties v. NOIDA & Ors.].

A Bench of Justices JB Pardiwala and K Vinod Chandran set aside an order of the National Company Law Appellate Tribunal (NCLAT) which had directed a Committee of Creditors (CoC) comprising homebuyers to pay the time extension charges imposed by the New Okhla Industrial Development Authority (NOIDA) on housing projects stalled since 2016.

The Court said the homebuyers and the new developer were being made to bear the consequences of the original developer’s default.

It lamented the plight of homebuyers who were left waiting for homes they had invested their life savings in.

“Yet another case highlighting the plight of home buyers, who invest their hard-earned life savings for a roof over their heads, on promises of living in style and luxury, in grandiose high-rise buildings promised by the developer, with exotic names, end up with the realization that it was all a pipe dream," the Court noted.

The Court was hearing appeals concerning the Lotus Boulevard and Lotus Panache housing projects in Noida’s Sectors 100 and 110. The projects were being developed by Granite Gate Properties Private Limited, which later went into insolvency.

The projects were originally supposed to be completed in 2016. The developer subsequently went into insolvency and a Committee of Creditors comprising the homebuyers was constituted.

During the insolvency process, the homebuyers pooled their own money to continue construction under a ‘Pool and Build’ mechanism. A resolution plan was later approved, with SMV Agencies Private Limited becoming the successful resolution applicant.

The dispute before the Supreme Court arose from time extension charges demanded by NOIDA under the lease deeds for the two projects.

Under the original lease terms, charges of 4%, 5% and 6% of the lease premium were payable for the first, second and third years of delay. The NCLAT had directed that these charges be treated as CIRP costs.

The homebuyers argued that the delay had occurred before the insolvency process and was attributable to the original developer. They contended that they should not be made to bear the resulting liability.

NOIDA, meanwhile, sought payment of charges even beyond the initial three-year period, citing a later policy.

The Supreme Court said the purpose of the penalty was to deter a developer from delaying a project. But in the present case, the original developer was no longer in control of the project, the Court observed.

The Court also noted that NOIDA’s role was not limited to earning revenue from the land. Its purpose included promoting development and providing housing.

The Bench said the projects could be completed only if the resolution plan was put into effect. Imposing the penalty on the homebuyers and the new developer as CIRP cost would instead make that more difficult.

“The homebuyers and the SRA are sought to be penalised for past sins of the Corporate Debtor, which cannot be allowed. 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,” the Court said.

Therefore, the Court held that in the peculiar circumstances of the case, NOIDA should waive the time extension charges.

It also set aside the NCLAT’s direction treating the time extension charges as CIRP costs and rejected NOIDA’s claim for charges beyond the three-year period under its later policy.

The parties in the case were represented by Senior Advocate Dhruv Mehta, along with advocates Rachit Mittal, Yashraj Singh, Parish Mishra, Kanishk Raj, Srishti Agrawaal, Aayushi Kiran, Shivansh Bansal, Ravinder Singh, Ritvik Bharadwaj, Nishita Kushwaha, Nishi, Garima Jain, Som Raj Choudhury, Sumant Batra, Sanyam Saxena, Sahil Sethi, Shrutee Aradhana, Samridh Bindal, Devika Tiwari, Aditi Bhushan and Prashant Kumar Nair.

[Read Judgment]