Supreme Court clarifies treatment of La Residentia project: No NBCC takeover, but controlled sales allowed (29 June 2021)

Date of the Judgment: 29 June 2021
Judges: Uday Umesh Lalit, J. and Ashok Bhushan, J.
Can a real estate project, initially linked to a larger, troubled group, be treated differently if it has made substantial progress? The Supreme Court of India addressed this question in the case concerning the “La Residentia” project, a venture initially associated with the Amrapali Group. The court had to decide whether to hand over the project to NBCC (India) Limited, as it did with other Amrapali projects, or allow the existing developers to complete it under supervision. The bench, comprising Justices Uday Umesh Lalit and Ashok Bhushan, delivered a unanimous judgment, opting for the latter approach.

Case Background

The case revolves around the “La Residentia” project in Greater Noida, developed by La-Residentia Developers Private Limited. The company was formed as a special purpose vehicle by a consortium of six entities, with Vidhyashree Buildcon Pvt. Ltd. as the lead member. The project, marketed as “Amrapali La Residentia,” promised apartments within 36 months. However, the project became entangled in the larger controversy surrounding the Amrapali Group, which was accused of siphoning off funds from homebuyers.

A forensic audit revealed that La Residentia was significantly influenced by the Amrapali Group, despite being a separate entity. The audit also noted that funds from homebuyers were diverted, and the project was marketed using the Amrapali brand name. This led the Supreme Court to initially order the company to surrender either 19.75% of the land or 632 flats, equivalent to the diverted funds.

The company argued that it was an independent entity and should not be treated as part of the Amrapali Group. They sought permission to sell the 632 flats to raise funds for project completion. Meanwhile, homebuyers sought to bring the project under the same management as other Amrapali projects, i.e., NBCC.

Timeline

Course of Proceedings

The Supreme Court initially intervened due to concerns about the Amrapali Group’s financial irregularities. The Court directed a forensic audit, which revealed the close ties between La Residentia and Amrapali. Consequently, the Court ordered the surrender of 19.75% of the project’s land or 632 flats.

La Residentia challenged this order, claiming it was an independent entity and that the 632 flats should be sold to raise funds for project completion. Homebuyers, on the other hand, sought to have the project brought under the same management as other Amrapali projects, i.e., NBCC, to ensure its completion. The court considered these arguments, along with the financial interests of Religare Finvest Ltd., a creditor of the company.

Legal Framework

The judgment primarily deals with the practical application of previous orders concerning the Amrapali Group. The court considered the forensic audit findings and the need to protect the interests of homebuyers. There are no specific legal provisions or statutes discussed in this judgment.

Arguments

The arguments presented before the Supreme Court can be categorized as follows:

• Homebuyers’ Arguments:
  • The project was marketed as an Amrapali Group project, and the company was significantly influenced by the Amrapali Group.
  • The entire project land should be treated as part of the assets of the Amrapali Group, not just 19.75%.
  • All flat buyers should receive the same benefits as those in other Amrapali projects, including reduced dues to GNIDA.
  • The project should be taken over by the Court Receiver and completed by NBCC, similar to other Amrapali projects.
• La-Residentia Developers Private Limited’s Arguments:
  • The company is an independent legal entity, and Stunning Constructions Private Limited was merely a shareholder.
  • No funds from the Amrapali Group or its homebuyers were used in the project, except for a small amount towards share capital.
  • The company should be allowed to sell the 632 flats to raise funds for project completion.
  • The project should receive the same benefits as other Amrapali projects, particularly regarding GNIDA dues.
  • Handing over the project to NBCC would escalate costs and delay completion.
• Religare Finvest Ltd.’s Arguments:
  • The company had extended financial accommodation to La-Residentia Developers Private Limited.
  • The project land and 939 flats were mortgaged with them, and their financial interests should be protected.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in this order. However, the core issues that the court addressed were:

1. Whether La-Residentia Developers Private Limited should be treated as part of the Amrapali Group of Companies.
2. Whether the project should be handed over to NBCC for completion.
3. How to manage the 632 flats that were ordered to be surrendered.
4. How to balance the interests of homebuyers, the company, and its creditors.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court primarily relied on its previous orders in the Amrapali Group cases, particularly the orders dated 23.07.2019 and 14.10.2019. The court also considered the order dated 28.07.2020 concerning the “Heartbeat City” project.

Judgment

The Supreme Court, after considering all aspects, decided against handing over the La Residentia project to NBCC. The court noted that the project had made significant progress, with 1143 flats already handed over to buyers and construction work at an advanced stage in phases one and two. The court also acknowledged that handing the project to NBCC would escalate costs.

The court allowed La-Residentia Developers Private Limited to continue with the project’s development, subject to certain conditions. The 632 flats, which were initially ordered to be surrendered, were allowed to be sold, but under the supervision of the Court Receiver. The proceeds from the sale would be used to complete the project, with any remaining funds going to the general account for the benefit of Amrapali Group homebuyers.

How each authority was viewed by the Court?

• The orders dated 23.07.2019 and 14.10.2019 were not recalled or revisited. The court maintained the initial order regarding the 19.75% share but modified the injunction on the 632 flats to allow for their sale under supervision.
• The order dated 28.07.2020 concerning the “Heartbeat City” project was distinguished. The court noted that the “Heartbeat City” project had no progress, while the La-Residentia project had advanced significantly.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the progress made in the La Residentia project. Unlike other Amrapali projects, where construction was either stalled or non-existent, La Residentia had completed a significant portion of its development. This weighed heavily in the court’s decision to allow the existing developers to complete the project under supervision, rather than handing it over to NBCC.

The court also considered the potential cost escalation and delays that would result from handing the project to NBCC. The court aimed to protect the interests of homebuyers by ensuring the project’s completion and by ensuring that the funds generated from the sale of the 632 flats were used for the project and other Amrapali homebuyers.

The court’s decision was more influenced by the factual matrix of the case rather than the legal aspects.

The court considered alternative interpretations, such as handing over the project to NBCC, but rejected them due to the progress made by La-Residentia and the potential for increased costs and delays. The final decision was reached by balancing the interests of all parties involved and ensuring the project’s completion.

The court’s reasoning can be summarized as follows:

• The La Residentia project had made substantial progress, with a significant number of flats already delivered.
• Handing over the project to NBCC would lead to cost escalation and delays.
• The court aimed to protect the interests of homebuyers by ensuring the project’s completion.
• The court sought to balance the interests of all parties, including the company and its creditors.

Here are some direct quotes from the judgment:

“Thus, if the instant project is now handed over to the NBCC, it would result in escalation in costs to the detriment of the flat buyers.”

“At least 1143 flat buyers have received possession while the work of construction with respect to phases one and two is at an advanced level.”

“The difference between the amounts received from the concerned flat buyers for purchase of said 632 flats and the expenditure incurred on cost of construction shall finally be credited to the general account maintained for the benefit of the flat buyers of the Amrapali Group of Companies.”

There were no dissenting opinions in this case.

Key Takeaways

• Real estate projects with substantial progress may be treated differently from projects with no progress, even if they have links to troubled groups.
• Courts will consider the practical implications of their orders, such as cost escalation and project delays.
• The interests of homebuyers remain a paramount concern for the courts.
• Controlled sales of assets can be allowed under court supervision to raise funds for project completion.

Directions

The Supreme Court issued the following directions:

1. La-Residentia Developers Private Limited is allowed to continue the construction and development of the project.
2. The company is allowed to sell the 632 flats, subject to the following conditions:
   • All transactions must be counter-signed by the Court Receiver or his nominee.
   • The sale price must be certified by the Court Receiver as fair and appropriate.
   • All sale proceeds must be credited to a separate account under the control of the Receiver.
   • The cost of construction for these flats will be paid to the company, certified by the company’s Chartered Accountants and to the satisfaction of the Receiver.
   • The Receiver may provide advances for construction based on the progress of work.
3. The injunction on the 632 flats is modified to allow for their sale under supervision.
4. The difference between the sale proceeds and construction costs of the 632 flats will be credited to the general account for Amrapali Group homebuyers.

Development of Law

The ratio decidendi of this case is that a real estate project that has made substantial progress, even if initially linked to a troubled group, can be allowed to continue development under supervision, rather than being handed over to a third party like NBCC. This decision marks a departure from the earlier approach of handing over all Amrapali-linked projects to NBCC.

Conclusion

The Supreme Court’s decision in the La Residentia case provides a nuanced approach to dealing with real estate projects entangled in larger financial controversies. By allowing the existing developers to complete the project under supervision, the court balanced the need to protect homebuyers’ interests with the practical realities of project completion. The court’s decision also highlights the importance of considering the specific circumstances of each case, rather than applying a uniform approach.