Why SC ruling opens quicker path out of insolvency for residential projects

NOIDA/NEW DELHI: The Supreme Court’s ruling on Tuesday giving the Noida Authority operational creditor, instead of financial creditor, status brings some wind into the sails of housing projects that are mired in insolvency proceedings and will help push them towards faster resolution.
Since the Insolvency and Bankruptcy Code (IBC) was formulated in 2016, and amended in 2018 to give homebuyers financial creditor status, several Noida-based realtors have been dragged to the National Company Law Tribunal (NCLT) both by buyers and institutional lenders like banks.
The Supreme Court’s ruling puts homebuyers’ interest above the Noida Authority’s because an operational creditor is not part of the committee of creditors (CoC), the body that votes and drives the resolution process once a project is declared insolvent. .
Under the IBC, the NCLT appoints an interim resolution professional (IRP), who forms the CoC. The CoC is constituted of financial creditors like homebuyers and lending banks and institutions. In case of liquidation of a project, the money collected through the process first goes to financial creditors. Only after meeting their liabilities does it flow to operational creditors like entities who have allotted land for a project or supplier creditors that have provided raw materials.
Multiple sources closely associated with corporate insolvency resolution processes (CIRP) told TOI that Noida Authority’s removal from CoCs as a result of the apex court’s order will make resolutions quicker because the government agency has been citing its dues from land allotment to identify itself as the biggest financial creditor with a significant say in the CoC when resolution plans were discussed and put to vote. At the same time, the change in status could translate into a big financial setback for the Noida Authority because it would have to settle for whatever value the resolution applicant proposes and the CoC agrees to.
Nonetheless, it will have the right to challenge any resolution plan in the NCLT, appellate tribunal NCLAT and the Supreme Court as an operational creditor.
According to sources, around 36 projects under the Greater Noida Industrial Development Authority and 24 projects under the Noida authority have gone to NCLT under IBC, involving land dues of over Rs 30,000 crore. Among those with large dues are Lotus, 3C, RG Group, Earth Infra, Logix, Today Homes Noida and AVP Archade.
Anurag Nirbhaya, a resolution professional at a group housing project, said, “As there is no financial disbursement by Noida, the Supreme Court has taken the right decision by identifying it as an operational creditor. It is the need of the hour as homebuyers have been facing many problems because of incomplete projects. The order is in tandem with the accounting standard of the Institute of Chartered Accountants as well. The overall resolution of the real estate projects now will be done properly.”
Aditya Parolia, a senior corporate lawyer, said with development authorities as financial creditors, it’s tough to resolve stressed projects. For instance, among various projects that have gone to NCLT under IBC for CIRP, the bidder for Jaypee Infratech had to make a provision of almost Rs 6,000 crore towards land dues of the Yamuna Expressway Industrial Development Authority. Parolia blamed land allotment policies adopted by the development authorities for the present mess.
In most housing projects in Noida, land was leased to developers for housing projects with just a 10% upfront payment. The rest could be paid in instalments (16 half-yearly ones after a certain stipulated time frame).
Between 2009 and 2013, over 6,000 acres were allotted to developers under similar schemes. Many of those projects have still not been completed and dues have ballooned into thousands of crores with penal interests.
Legal experts felt another consequence of the ruling that would ultimately benefit the beleaguered real estate sector in Noida are that it would now be in the Noida Authority’s interest to ensure projects are completed on time and do not go into insolvency. The land allotment policy itself could also change. Kumar Mihir, a lawyer, said, “Noida, which has allotted land to developers, wanted its dues cleared first before banks and homebuyers, delaying any resolution plan which did not suit its financial payment. The biggest impact of the SC ruling will be if Noida is not a financial creditor, it will not be able to dictate terms.” Lawyer Prashant Kanha added, “It’s a good ruling for homebuyers. Moreover, Noida will try to ensure development happens in a regulated manner and projects see completion.”
Anurag Nirbhaya, resolution professional in a group housing project in Ghaziabad, said, “As there is no financial disbursement by Noida, SC has taken the right decision by identifying it as an operational creditor. It is the need of the hour as homebuyers have been facing a lot of issues with projects not getting completed. The order is in tandem with the accounting standard of the Institute of Chartered Accountants as well. The overall resolution of the real estate projects now will be done properly.”
CEO Ritu Maheshwari said the Noida Authority would consult the state government and go for a review of the ruling as their dues form 80-90% of the total liability in cases that have gone to NCLT.
“Although our position has changed in the scheme of things, we will continue to file our claims. There are 20-22 NCLT cases and we were financial creditors in them. We are studying the SC’s order and taking legal advice to decide our next strategy accordingly,” she told TOI on Wednesday.
Maheshwari also hinted at a change in the land allotment process. The Noida Authority might consider passing a resolution at its board meeting to allot land after taking the entire amount rather than allowing payment through instalments.
Real estate association Naredco, meanwhile, welcomed the ruling. RK Arora, UP president of Naredco and CMD of Supertech, some of whose projects are also facing insolvency proceedings, said, “The Authority should ensure projects do not get stuck and issue completion certificates, occupation certificates and other clearances on time. That will ensure projects are getting completed on time.”