A Curious Case Of Noida Authority In CIRP
This judgement has wide ramifications across the region of Noida, Greater Noida and Yamuna Expressway due to the model of development of group housing projects is somewhat similar to that of Noida Authority writes Girish Rawat, Partner, L&L Partners
Last week the Hon’ble Supreme Court of India handed out a crushing blow to the hopes of New Okhla Industrial Development Authority (“Noida Authority”) of being treated as a financial creditor in the Corporate Insolvency Resolution Process (“CIRP”) commenced against a corporate debtor under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Noida Authority is charged with the statutory duty to carry out planned development of the area, including setting norms for development of industrial and residential complexes in the area such as maximum permissible FAR, maximum ground coverage and maximum height and approving the building plans.
Noida Authority preferred an appeal against the order of the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) wherein it was held that the Noida Authority is not a financial creditor but instead an operational creditor as the lease executed by Noida Authority is not a financial lease in terms of Clause 5(8)(d) of the IBC.
In relation to the Group Housing Projects, Noida Authority had the policy of allotting the land acquired by it to the developers on long term lease basis for approved purposes, against the payment of lease premium and lease rent. Under the said policy, the lease rent could be paid on an annual basis, or it could be paid at one go as provided in the lease deed. However, only a part of the lease premium is collected upfront, and balance of the premium is collected over a period of time after expiry of the period of moratorium, and during the moratorium period the developer is required to pay the lease rent and the interest on the lease premium as provided in the lease deed. Thus, the developer gets to enjoy the possession and other rights in the Group Housing Plot on payment of small percentage of the lease premium to Noida Authority and balance amount and lease rents are paid in a staggered manner over a period of time as provided in the lease deed.
The intent behind such a relaxed policy seems to be to facilitate and finance the cost of acquisition of the leasehold rights by the developers, as the developer would have to otherwise raise either capital or debt from banks or financial institutions to fund the cost of acquisition of the lease hold rights upfront. However, many errant developers exploited the lacuna in the Noida Authority’s policy by launching the projects and collected the funds from both banks or financial institutions and the homebuyers for construction of the project but defaulted in payment of the lease premium and/or lease rentals to Noida Authority as per the approved schedule.
Similarly in the case in hand, the corporate debtor paid mere ten percent of the total lease premium upfront and got the possession of the land. The balance amount of the lease premium was payable in sixteen half yearly installments with interest falling due after the end of the moratorium period, which consisted of two years from the date of commencement of the lease.
It was argued on behalf of the Noida Authority that it shall be treated as a financial creditor of the corporate debtor much like banks and homebuyers, as under the lease deed the corporate debtor, instead of approaching a bank, has raised financing from Noida Authority in the manner provided in the lease deed and that too on reasonable terms and that it should find a seat in the committee of creditor of the corporate debtor.
The Hon’ble Supreme Court after reviewing the terms of the lease deed held that merely granting a moratorium, followed by the staggered payment in sixteen half yearly installments of the balance of premium, cannot lead to the conclusion that the corporate debtor has raised fund, under the lease, from Noida Authority. Further, the Hon’ble Court while holding that Section 5(8)(d) of the IBC includes only a finance or a capital lease as stipulated under the Indian Accounting Standards, observed that there may be a situation where a lease, which is not finance or a capital lease under the said Section 5(8)(d), may create a financial debt within the meaning of Section 5(8)(f) of the IBC, if, the courts on the terms of the lease concludes that it involves raising of funds that has a commercial effect of the borrowing. However, in the facts of the present case, the Hon’ble Supreme Court observed that the lease in question did not fall within the ambit of the said Section 5(8)(f).
This judgement has a severe financial implication on Noida Authority especially in cases where the land has been allotted on similar terms. As per a news report published in a leading news agency, Noida Authority has allotted 24 schemes for land spanning across 71.03 lakh sq. meters to developers of Group Housing Projects between year 2005 to 2018, and the dues under these schemes amount to Rs. 20,000 crore. The recovery of such amounts may become a challenge as Noida may not be treated as financial creditor, in the event CIRP is initiated against such developers. In CIRP, it is typically the committee of creditors constituting of the financial creditors which calls the shots when it comes to ruling the destiny of the corporate debtor, as they are at the helm of the affairs of the corporate debtor. It is the committee of creditors which votes and finally decides the resolution plan which is binding on all the stakeholders of the corporate debtor.
This judgement has wide ramifications across the region of Noida, Greater Noida and Yamuna Expressway due to the model of development of group housing projects is somewhat similar to that of Noida Authority, and the implications are quite visible on the ground. As per one of the news reports of a leading news agency as fallout of this order the Noida Authority is considering changing the policy and charging the entire amount of the lease from the developers upfront. However, it may have it’s own pitfalls as charging the entire lease charges upfront may make some of the future deals commercially unattractive for the developers due to high rates of allotment. Alternatively, the Noida Authority and other similarly placed authorities may look at other legal structures such as entering into an agreement to lease upfront and the lease deed to be executed on a future date subject to payment of the lease charges and meeting of construction milestones.
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