Homebuyers File Review Petition Against Supreme Court Judgment Holding Greater Noida Industrial Authority A 'Secured Creditor' Under IBC

A plea has been filed before the Supreme Court seeking review of its judgment dated February 12, 2024 which classified Greater Noida Industrial Development Authority as a 'secured creditor' for the purposes of Corporate Insolvency Resolution Processes under the Insolvency and Bankruptcy Code (IBC).

Filed by a homebuyers' association, the plea states that the impugned judgment has led the National Company Law Tribunal to send back many resolution plans to the Committee of Creditors for reconsideration on the ground that the same do not treat Noida/Greater Noida as 'secured creditor'.

To briefly state the factual matrix of the petitioner's case: the petitioner-society comprises of persons who purchased apartments in a Group Housing Project in Noida. The developer in their case was allotted land by the Noida authority. Subsequently, the developer did not honor the builder-buyer agreement and tried to unilaterally extend the time-limit for delivery of flats. Awaiting possession since about 2011-12, the allottees sought initiation of CIRP against the developer.

In the resolution plan that was finalized, Noida authority's claim as 'operational creditor' (unsecured) was admitted by the resolution professional. While approval of the plan was pending before NCLT, the Supreme Court delivered its February 12 judgment holding that authorities like Greater Noida/Noida shall be treated as 'secured creditor'. Subsequently, on an application by Noida authority, NCLT sent the resolution plan back to CoC for resubmission in light of the Supreme Court's judgment.

As a result (given the similar nature of both Noida and Greater Noida authorities), the petitioner assails that Noida authority is required to be treated in accordance with Section 53(1)(b)(ii) of IBC, which mandates priority payment over homebuyers, whose claims have been admitted as unsecured financial creditors.

It is contended that the impugned judgment jeopardized the rights of all homebuyers (members of the petitioner-association). Further, the rights of secured creditors who extended loan(s) to the Corporate Debtor before the initiation of the CIRP also got adversely affected.

Insofar as the impugned judgment held that Greater Noida authority shall be treated as secured creditor by virtue of Section 13 and 13-A of the Uttar Pradesh Industrial Area Development Act, 1976, the petitioner asserts that Section 13-A was brought by virtue of a 2016 amendment (on 22.03.2016), ie much after the period when lease deed was entered between the Corporate Debtor therein and the Noida Authority.

“Respondent No. 1 cannot avail the benefits of Section 13-A of the 1976 Act, which creates a charge over any amount payable to Respondent No. 1 under Section 13 of the 1976 Act, as Section 13-A cannot be applied to transactions entered into before the 2016 amendment.”

Further, it highlights that the Resolution Professional in the case failed to stress upon Section 11(4)(h) of the Real Estate (Regulation and Development) Act, 2016 which provides that a promoter developer shall not, “after he executes an agreement for sale for any apartment, plot or building, as the case may be, not mortgage or create a charge on such apartment, plot or building, as the case may be, and if any such mortgage or charge is made or created then notwithstanding anything contained in any other law for the time being in force, it shall not affect the right and interest of the allottee who has taken or agreed to take such apartment, plot or building, as the case may be;”.

Apart from the above, the petitioner calls into question the impugned judgment's classification of Greater Noida/Noida authorities without drawing an exception in cases where allotment of lands was made by these authorities prior to the insertion of Section 13-A of the 1976 Act. In the case at hand, for instance, the agreement for sale was entered before the 2016 amendment of the 1976 Act. Hence, no charge in favor of Greater Noida authority could have been created by a subsequent amendment since that was not within the scope of the consensus ad idem by the parties when they executed the lease deed (dated 28.10.2010).

Among the grounds taken to seek review, another contention is that if a charge is created pursuant to the 2016 amendment of the 1976 Act, even then Section 11(4)(h) shall override Section 13-A of the 1976 Act, as RERA Act is a special central legislation and Section 11(4)(h) contains a 'notwithstanding provision'. As such, RERA Act will prevail over any state law which runs contrary to its provisions.

The petitioner also stresses that Noida authority is a governmental entity, dues whereof shall be treated differently than those of homebuyers. “That only because it came into existence because of a delegated legislation or does not collect 'tax' but 'lease rent' and 'lease premium', it cannot be accorded a similar treatment to the Government, will lead to hyper-classification and a self-serving interpretation.”

Based on the preamble to the IBC, it is the petitioner's argument that separate and distinct treatment of amounts payable to secured creditors, and dues payable to the government, signifies legislature's intention to treat both differently. “Allocating a significant portion of the funds introduced by the Resolution Applicant to government agencies would contradict the objective and purpose of the Code. Such allocation would necessitate additional investment in a financially burdened Corporate Debtor, given that financial creditors in a class (homebuyers), who are pivotal in voting on the resolution plan, are positioned lower in the hierarchy established by Section 53 of the Code”, the petition states.

Assailing the impugned judgment, the petitioner also avers that the Supreme Court failed to address the plight of homebuyers in the event of liquidation. “a class that actively funds the initiation and progression of a project should not suffer undue prejudice in the event of liquidation. If Respondent No. 1 were to be regarded as a secured creditor in this instance, it could result in significant harm to the allottees/homebuyers…”.

According to the petitioner, the impugned judgment has also redefined the term 'security interest' as laid down under IBC, without prescribing any reasons for enlarging the scope of the term. This shall create ambiguity in the working of IBC.

In terms of relief, the petitioner seeks that either the subject observations [in paragraphs 54(b) and 55(c) of the impugned judgment] be set aside, or, the Court clarify that the same were in peculiar facts of the case and shall not be treated as precedent for other CIRPs.

The review petition has been filed through AoR Anukriti Pareek.

Case Title: Blossom Zest Flat Buyers Welfare Association v. Greater Noida Industrial Development Authority and Ors.