Moneycontrol PRO

SC clarifies that NOIDA is not a financial but an operational creditor

While some legal experts say that the apex court’s decision is a shot in the arm for homebuyers, who will now have a greater say in the insolvency resolution of a distressed real estate company, others point out that it is only half the battle won

While NOIDA being declared an operational creditor will make resolutions faster, this will also hurt the authority’s financial interests.

While NOIDA being declared an operational creditor will make resolutions faster, this will also hurt the authority’s financial interests.

In what could benefit thousands of homebuyers of real estate companies facing insolvency proceedings, the Supreme Court has held that the New Okhla Industrial Development Authority (NOIDA) is not a financial creditor but an operational creditor under the Insolvency and Bankruptcy Code (IBC).

While some legal experts say that the apex court’s decision is a shot in the arm for many beleaguered real estate projects where plans have already been approved by the committee of creditors but are awaiting the NCLT’s nod due to NOIDA's claim, others point out that it is only half the battle won.

The order shows that homebuyers’ stake will be on a higher rung as they are financial creditors and are a part of the committee of creditors (CoC). They can persuade other members of the CoC to accept or reject or for that matter modify resolution plans.

This clarification from the apex court will ensure higher priority for homebuyers as creditors and more say in the insolvency resolution of a distressed real estate company. Due to the Supreme Court ruling, arguments over whether NOIDA (or such authorities) has the first charge over land or property in a distressed real-estate project (and not homebuyers) appear to be settled, say legal experts.

At the end of the queue

Close

Kumar Mihir, an advocate representing homebuyers in the Supreme Court, said that this order would impact all projects where NOIDA was claiming land dues. “This order will finally clarify the status of NOIDA and Greater NOIDA Authorities in all ongoing corporate insolvency resolution proceedings of real estate projects stuck due to this confusion. Being operational creditors, these authorities are now at the end of the queue and it is in their interest to ensure that the real estate projects are revived and not liquidated,” he said.

The apex court delivered its verdict on May 17 following appeals filed by NOIDA in which a common question arose as to whether the authority is entitled to be treated as a financial creditor within the meaning of the IBC.

“We would think that, having regard to the fact that both the NCLT and NCLAT have proceeded on the basis that the appellant (NOIDA) is an operational creditor, we need not stretch the exploration further and pronounce on the questions, which may otherwise arise,” a bench of justices KM Joseph and Hrishikesh Roy said in its 186-page verdict on May 17.

“We would proceed on the basis that, while the appellant is not a financial creditor, it would constitute an operational creditor,” it said, while dismissing the appeals.

NOIDA had filed appeals, including the one against an order of the National Company Law Appellate Tribunal (NCLAT), which had affirmed the view taken by the NCLT that there was no financial lease in terms of the Indian Accounting Standards and there was no financial debt.

The authority had claimed status as a financial creditor based on its status as a lessee under the specified lease deeds.

NOIDA versus homebuyers

Pertinently, the Supreme Court distinguished the NOIDA case from that of the homebuyers “by holding that in the case of a homebuyer, there is a transaction by reason of the fact that there was a transfer of funds to the corporate debtor, which is not the case with NOIDA. Therefore, the position of NOIDA has been clearly distinguished from that of the homebuyers. The homebuyers will continue to be treated as a financial creditor under the IBC, and therefore will have a better claim than an authority like NOIDA,” explained Ruby Singh Ahuja, senior partner at Karanjawala & Co.

According to Piyush Singh, founding partner, PSP Legal, the Supreme Court order declaring the NOIDA Authority as an operational creditor comes as a big boost for real estate projects in NOIDA that were stuck in the insolvency process, as the resolution process for revival of the company will now be much faster. Earlier, the NOIDA Authority was claiming to be a financial creditor and was stalling the revival process.

This judgment will bring relief to homebuyers stuck in NOIDA, Greater NOIDA and Yamuna Expressway, as all these authorities will now become operational creditors, while homebuyers will enjoy majority voting rights in the Committee of Creditors. Being a financial creditor gives a seat and voting rights on the Committee of Creditors, which approves the resolution plan, whereas an operational creditor enjoys none, he explains.

Singh also said that in case the NOIDA Authority had been declared a financial creditor, it would have made most resolution plans under the IBC unviable because the NOIDA Authority has not been giving any discount on the principal, interest and penal interest that it charged on the lease amount. The present judgment will balance the interests of all stakeholders in the IBC.

A festering issue settled

The case thus puts an end to the longstanding question of whether the NOIDA Authority can get a seat on the CoC.

The apex court has declared that NOIDA’s dues are not a financial debt and therefore the authority will not have any say in the CoC.

“The Supreme Court has rightly held that the leases executed are not in the nature of a financial lease giving NOIDA preference in payment in the resolution process. In case NOIDA’s view had been upheld, it would have led to a situation where the financial dynamic of offers by resolution applicants would have gone haywire,” wrote Avnish Sharma and Prateek Kumar, Partners at Khaitan & Co, in a joint note.

The Apex Court order is a boost for homebuyer rights. The clarification that NOIDA (or such authorities) are operational creditors and therefore on a lower rung than homebuyers (who are financial creditors) in the creditor hierarchy will ensure homebuyers have a greater say in the insolvency resolution of a distressed real estate company,” said Sushmita Gandhi, Partner, IndusLaw.

This will also help the new acquirer of a stuck project but it all depends on whether NOIDA decides against filing a curative petition as it has in the past, said Santosh Kumar Agarwal, CFO and executive director at AlphaCorp.

That may well happen. There are indications that the authority will file either a review application or a curative plea in the Supreme Court against the order to protect its financial interests.

Agarwal had earlier said there are several challenges that developers who have taken over stuck projects through the NCLT face even after a resolution plan has been cleared. Uncertainty about the legal status of such authorities under bankruptcy law has all along been an area of concern, complicating the finalisation and implementation of the resolution plan.

The Uttar Pradesh RERA website shows that over 70 projects across the state face insolvency proceedings before the NCLT. The UP RERA chief has also been quoted as saying that NCLT proceedings benefit homebuyers and that timely resolution of such cases can help restore homebuyers’ confidence.

Only nine cases out of 223 debt-laden real estate companies admitted for resolution under the IBC until September 2021 have been resolved, a study by advisory firm Grant Thornton Bharat has revealed.

Only half the battle won

Amit Goenka, CEO and Managing Director at Nisus Finance Services Co Pvt Ltd, is of the opinion that only half the battle has been won.

“It is imperative that there be a broader diktat from the apex court that mandates that since now they are an operational creditor … and have no claim whatsoever with regard to any dues payable to them either for the lease or for the development, they should grant timely approvals, renew leases/plans, and register projects so that the housing units are completed,” he said.

Under the IBC, in addition to financial and operational creditors, who can file an application for admission of the defaulting company into the insolvency resolution process, homebuyers (constituting the lower of 10% of allottees or 100 buyers) can also file to admit a defaulter into insolvency proceedings. This effectively gives homebuyers the opportunity to either seek relief under RERA or file for admission into the insolvency resolution process under the IBC.

Reports indicate that dues form 80-90% of the total liability in cases that have gone to the NCLT.

Real estate experts also said that while NOIDA being declared an operational creditor will make resolutions faster, this will also hurt the authority’s financial interests.

Indeed, NOIDA CEO Ritu Maheshwari has been quoted as saying that the Authority is exploring legal options and will file either a review application or a curative plea in the Supreme Court against the order as its financial interests will be impacted. So, there could be more to come in this battle.

 
Vandana Ramnani
first published: May 19, 2022 10:32 am
Sections
ISO 27001 - BSI Assurance Mark