2025 (4) TMI 1385 - HC - Indian Laws

Maintainability of petition - survival of terms of the allotment letter after the execution of the lease deed - cancellation of the allotment letter has the consequent effect of cancelling the lease deed in absence of specific reference to the lease deed - petitioner s prior writ petition challenging proportionate cancellation disentitles it from challenging the present cancellation on proportionality grounds - cancellation of the entire allotment for non- payment of some dues is excessive administrative action and hit by the doctrine of proportionality - cancellation of the entire allotment was only on account of non-payment of dues or also on the account of purported defaults in development/construction - cancellation of allotment was on account of purported defaults in development/ constructions -subsistence of homebuyers and banks sub-leases without validity of lease. Whether the writ petition is maintainable? - HELD THAT - The impugned order of cancellation is being challenged as an illegal arbitrary and disproportionate executive fiat. The petitioner is not seeking to establish any new right but attempting to safeguard its rights under the allotment made in its favour. The impugned order itself recites that it was passed not only to protect the interest of YEA but also the sub-lessees and homebuyers. It thus seeks to subserve larger public interest. As such it cannot be said that the writ petition is liable to be thrown out on the ground of maintainability. However the exercise of power of judicial review shall have to be within the well established parameters - the issue is answered against YEA and in favour of the petitioner holding the writ petition as maintainable. Whether the terms of the allotment letter except those specifically referred to and incorporated by reference in the lease dead survive after the execution of the lease deed? - Whether the impugned cancellation of the allotment letter by letter dated 12.02.2020 has the consequent effect of cancelling the lease deed in absence of specific reference to the lease deed? - HELD THAT - The provisions relating to sub-lease as contained in the letter of allotment also find mention in the reservation letter (vide Clauses 9.12 9.13 9.14). The allottee was also given right to mortgage the property for arranging funds for implementation of the project subject to certain conditions. The allottee was required to complete minimum 40% of the permissible covered area earmarked for core activity within five years from the date of execution of lease deed. In special circumstances the said period could be extended. The provisions of U.P. Industrial Area Development Act 1976 and regulations framed thereunder were made applicable. The power under Section 14 of the Act 1976 is not confined to transfer by lease only. It also applies to transfer by other modes contemplated under Section 7 of the Act 1976 i.e. sale auction allotment or otherwise. Therefore the legislation has not provided any specific procedure for exercise of the power of resumption of the site or building (except implicit requirement of compliance of the principles of natural justice) unlike Section 111(g) of the Transfer of Property Act 1882. All that is required is that the order should reveal that the building site is being resumed for breach of any express condition of the lease/transfer. The instant case is not a case of absolute transfer by sale and therefore Sections 10 and 11 of the Transfer of Property Act on which A.P. Industrial Infrastructure Corporation Limited was grounded are not applicable. Moreover it was a case based on sole interpretation of the terms of contract. In the instant case as already discussed the respondent-Corporation even independent of Clause 4.2 of the Allotment letter continued to have power to cancel the lease in view of Clause 38 of the lease deed which saved all rights conferred on YEA under any law for the time being in force including Section 14 of the Act 1976. The statutory power under Section 14 to resume the site was not whittled down in any manner. The allotment letters existed for limited purposes alongwith the lease deeds and irrespective of Clause 4.2 of the Allotment letters the YEA had the power to resume the site by virtue of Section 14 of UPIAD Act independent of and read with Clause 38 of the lease deeds. The impugned order thus has the effect of cancelling the lease deeds. Whether the petitioner s earlier Writ C- No. 47262/2017 challenging the decision taken by the respondent in its meeting dated 04.09.2017 for cancelling proportionate land would disentitle the petitioner from challenging present cancellation on the ground of proportionality? - HELD THAT - The challenge in the earlier Writ Petition No. 47262 of 2017 was essentially based on the ground that there was no occasion even to proportionately cancel the land in view of the fact that the default in payment was due to various actions of the respondents themselves such as not approving building plans etc. - the issue is answered in favour of the petitioner and is decided accordingly Whether the cancellation of the entire allotment for non- payment of some dues is excessive administrative action and hit by the doctrine of proportionality? - Whether the cancellation of the entire allotment was only on account of non-payment of dues or also on the account of purported defaults in development/construction? - Whether if the cancellation of allotment was on account of purported defaults in development/ constructions the cancellation is illegal? - HELD THAT - The basic ground for cancellation was default on part of the petitioner- Company in failing to pay the dues of the Development Authority. Even last show-cause notice dated 09.12.2019 was for alleged non- payment of the dues of the Authority and not on account of non- development and therefore we agree with the submission of learned Senior Counsel for the petitioner that non-development could not be a ground for cancellation. While holding that the recital regarding non-development was not ground for cancellation it was a relevant consideration while cancelling the allotment in entirety even on ground of non-payment of dues. Likewise the obligation of the petitioner-Company to the homebuyers another important stakeholder of the SDZ policy was also duly kept in mind. It shows that the Authority consciously took into consideration different factors which were necessary for attaining the goal of planned development of the area and objectives of the SDZ policy. This in fact is a strong countervailing factor in favour of the Authority to repel the contention that its action was arbitrary and taken in undue haste. The sole and primary objective of the allotment under the SDZ policy was to ensure planned development along the Yamuna Expressway. The respondent being the nodal agency to oversee proper implementation of SDZ project and as a Development Authority for the area while deciding what action was to be taken in the facts of the instant case should be given sufficient leeway to decide what specific measure would be in larger public interest. For the said purpose it was competent to and had rightly considered different aspects regarding non-development interest of homebuyers and sub-lessees. The cancellation of entire allotment is not hit by doctrine of proportionality nor was illegal for any other reason - while passing the cancellation order the Authority had considered several factors including default in development/construction but the cancellation was primarily on ground of non-payment of the dues of the Authority. Whether homebuyers and banks sub-leases can subsist without validity of lease? - HELD THAT - Undoubtedly the homebuyers are one of the major stakeholders in the present dispute. In fact the main ground which impelled YEA to resort to the extreme step of resumption of the leased land is inordinate delay on part of JAL in abiding by the timelines prescribed for completing the constructions resulting in immense difficulties to the homebuyers. Further as noted YEA has also filed affidavit reiterating its commitment to safeguard the interest of the homebuyers and the steps it would take in this respect. It is therefore necessary to issue directions to ensure that YEA fulfills its commitment and interest of the allottees/homebuyers is protected. Undoubtedly the Financial Institutions cannot be expected to engage in development of land and construction activity. The sub-lease was obtained by the Financial Institutions to protect the money advanced to JAL. The same was admittedly with the consent of YEA and in terms of the provisions of the allotment orders/lease deeds YEA is committed to protect interest of the sub-lessees which would apply to all sub-leases including the lease in favour of financial institutions. It is opined that the Financial Institutions should be permitted to assign their interest in favour of third party. Conclusion - i) The writ petition challenging cancellation is maintainable. ii) The allotment letters and lease deeds coexist; cancellation of allotment cancels leases. iii) The cancellation order dated 12.02.2020 effectively cancelled the lease deeds. iv) The earlier writ petition challenging proportionate cancellation does not bar present challenge. v) Cancellation of entire allotment is lawful not violative of proportionality given persistent defaults and public interest. vi) Cancellation was primarily for non-payment but non-development was a relevant factor. vii) Money deposited by petitioner is not forfeited automatically and must be refunded to be dealt with under insolvency. viii) Homebuyers and sub-lessees interests must be protected; directions issued for their protection and project completion. ix) Sub-leases in favour of financial institutions stand protected with option to obtain leases directly from Authority. x) Insolvency proceedings continue; claims and funds to be managed under IBC framework. The impugned cancellation order dated 12.02.2020 is upheld.

Summary

The core legal questions considered by the Court include:

1. Whether the writ petition challenging the cancellation of allotment is maintainable under Article 226 of the Constitution, given the contractual nature of the dispute.

2. Whether the terms of the allotment letters survive after execution of the lease deeds, and the legal effect of cancellation of the allotment letters on the lease deeds.

3. Whether cancellation of the allotment letter without specific cancellation of the lease deed results in cancellation of the lease deed.

4. Whether the petitioner's prior writ petition challenging proportionate cancellation disentitles it from challenging the present cancellation on proportionality grounds.

5. Whether cancellation of the entire allotment for non-payment of dues is excessive and violates the doctrine of proportionality.

6. Whether the cancellation was solely on grounds of non-payment or also due to defaults in development/construction.

7. If cancellation was on grounds of non-development, whether such cancellation is illegal.

8. Whether homebuyers and financial institutions' sub-leases can subsist without a valid lease from the Authority.

Ancillary issues considered include the effect of the petitioner's insolvency proceedings on relief, principles for determining the legality of YEA's dues, and the status of YEA's claims under the Insolvency and Bankruptcy Code (IBC).

Issue-wise Detailed Analysis:

Issue 1: Maintainability of the Writ Petition

The dispute arose from contractual agreements between the petitioner and the Authority involving allotment letters and lease deeds. The Authority contended that as the matter was purely contractual, the writ petition was not maintainable. The petitioner argued that the Authority's actions were arbitrary and violative of Article 14, thus attracting public law elements and making writ jurisdiction appropriate.

The Court examined precedents including ABL International and recent Supreme Court rulings emphasizing that while writ jurisdiction is limited in contractual disputes, it is not barred when the State or its instrumentality acts arbitrarily or violates fundamental rights. The Court noted that the writ petition challenged an executive order affecting public interest, including interests of homebuyers and financial institutions, and thus involved public law elements.

It was held that the writ petition is maintainable, as the cancellation order was challenged as illegal, arbitrary, and disproportionate executive action, implicating public interest and constitutional guarantees.

Issues 2 and 3: Survival and Effect of Allotment Letters and Lease Deeds

The petitioner contended that after execution of lease deeds, the allotment letters were superseded and ceased to have effect, so cancellation of allotment letters could not affect the lease deeds which lacked a cancellation clause. The Authority argued that the allotment letters and lease deeds formed a composite transaction and subsisted together, with cancellation of allotment letters under Clause 4.2 affecting the leases as well. The Authority also relied on statutory power under Section 14 of the U.P. Industrial Area Development Act, 1976 (the Act, 1976) to cancel and resume leased land.

The Court undertook a detailed comparison of the terms of the allotment letters and lease deeds, noting that many clauses were identical or incorporated by reference, while some were modified or omitted. The lease deeds incorporated the allotment letters as schedules and referred to them, indicating coexistence rather than supersession. The conduct of the parties showed reliance on both documents post-execution of leases.

Statutory provisions under Section 14 of the Act, 1976 empower the Authority's Chief Executive Officer to resume sites or buildings and forfeit money paid in case of breach of conditions or non-payment. The Court held that the Authority's power to cancel and resume the leased land was independent and not confined by the lease deeds. The cancellation order effectively cancelled the leases as well.

The Court distinguished a precedent relied upon by the petitioner involving sale deeds, noting that absolute ownership transfers differ fundamentally from leasehold transfers.

Findings: The allotment letters and lease deeds coexisted for limited purposes; cancellation of allotment letters had consequential effect of cancelling lease deeds under statutory powers. The cancellation order thus cancelled the leases.

Issue 4: Effect of Prior Writ Petition on Present Challenge

The petitioner's prior writ petition challenged proportionate cancellation of land, but the present order cancelled the entire allotment. The Court held the prior petition was rendered infructuous by subsequent developments and did not bar the petitioner from challenging the entire cancellation on proportionality grounds.

Issues 5, 6 and 7: Cancellation and Doctrine of Proportionality

The petitioner argued that cancelling the entire allotment for partial non-payment was excessive and disproportionate, violating Article 14. It contended that the Authority should have taken least restrictive measures, such as cancelling only proportionate land or recovering dues as arrears of land revenue under Clause 38 of the lease deeds. The petitioner also argued that cancellation on grounds of non-development was not lawful as the cancellation letter cited non-payment as the operative ground.

The Authority countered that the doctrine of proportionality does not apply to contractual commercial disputes and that the cancellation was in accordance with contractual and statutory rights after persistent defaults and failure to develop the project. The Authority emphasized the public interest in protecting homebuyers and ensuring project completion, noting multiple extensions and restructuring attempts granted to the petitioner before cancellation.

The Court analyzed the doctrine of proportionality, citing Supreme Court precedents including Teri Oats, Andhra Pradesh Industrial Infrastructure Corporation, and Modern Dental College. It recognized proportionality as a test of reasonableness balancing public interest and individual rights, requiring least restrictive measures and rational connection to objectives.

However, the Court distinguished Teri Oats on facts, noting that in the present case, the petitioner had large outstanding dues, failed to develop the project adequately, and caused harm to homebuyers. The Authority had taken multiple restrictive steps short of cancellation before resorting to the final measure.

The Court reviewed the extensive record of defaults, extensions granted, rescheduling plans, invocation of bank guarantees, and escrow arrangements. It noted the petitioner's failure to pay dues timely and to meet development milestones, including completion of 40% of core area within the stipulated period. The Court also considered the financial insolvency of the petitioner and the serious impact on homebuyers.

Findings: The cancellation was not excessive or disproportionate. It was a last resort after least restrictive measures failed. While non-payment was the primary ground, non-development was a relevant consideration. Cancellation on these grounds was lawful.

Fate of Money Paid by Petitioner

The petitioner deposited substantial sums pursuant to interim orders. The Authority claimed forfeiture of these amounts. The Court held that under Section 14 of the Act, forfeiture of money is discretionary and not automatic upon cancellation. The Authority had not exercised forfeiture expressly or impliedly. Therefore, the amounts deposited must be refunded to the petitioner and placed at the disposal of the Resolution Professional under insolvency proceedings for distribution as per IBC.

Issue 8: Effect of Cancellation on Homebuyers and Sub-lessees

The cancellation order stated sub-leases would not be affected. The Authority undertook to protect the interests of homebuyers and sub-lessees, proposing options such as re-auctioning the land with conditions to complete housing projects or undertaking completion itself. The Court recognized the homebuyers as major stakeholders who suffered due to delays and directed protective measures.

Directions were issued to ensure timely completion of housing projects with specific timeframes based on project completion percentages, formation of a committee including homebuyer representatives to oversee progress, and declaration of the period since cancellation order as a "zero period" for homebuyers, protecting them from penalties and interest during that time. A nodal officer was to be appointed for grievance redressal.

Regarding sub-lessees, the Court directed the Authority to enter into lease agreements with them on terms similar to those with the petitioner, ensuring continuity of their rights. Documentation and notices were to be completed within specified timelines.

For financial institutions holding mortgages and sub-leases as security for loans, the Court recognized their interests but noted that security interests in leasehold land cease upon cancellation of leases. The Authority was directed to protect their interests by offering options to obtain leases in their own or assignees' names subject to dues recovery rights. Documentation was to be completed within fixed timelines.

Ancillary Issues: Insolvency Proceedings and Claims under IBC

The petitioner was admitted into Corporate Insolvency Resolution Process (CIRP) under IBC. Appeals against admission were dismissed by NCLAT and Supreme Court. The Court recognized that insolvency proceedings affect rights and remedies, including claims of the Authority and financial institutions. The amounts deposited by the petitioner were directed to be dealt with by the Resolution Professional under IBC.

Significant Holdings and Core Principles:

"The writ petition is maintainable where the State or its instrumentality acts arbitrarily or violates fundamental rights, even in contractual matters."

"The allotment letters and lease deeds form a composite transaction and coexist; cancellation of allotment letters under contractual and statutory powers results in cancellation of lease deeds."

"Section 14 of the U.P. Industrial Area Development Act, 1976, empowers the Authority to resume leased land and forfeit money paid upon breach of conditions, independent of Transfer of Property Act provisions."

"Doctrine of proportionality applies to administrative action affecting fundamental rights and public interest, requiring least restrictive measures, but does not apply to pure contractual commercial disputes unless arbitrariness or public interest is involved."

"Cancellation of entire allotment for persistent defaults and failure to develop project, causing harm to homebuyers, is not disproportionate or illegal."

"Money paid by the lessee is not automatically forfeited upon cancellation; forfeiture is discretionary and must be exercised explicitly."

"Homebuyers' and sub-lessees' interests are to be protected despite cancellation of lease; mechanisms must be established to ensure completion of housing projects and continuity of sub-leases."

"Insolvency proceedings under IBC affect claims and rights of parties; amounts deposited are to be managed by Resolution Professional."

Final Determinations:

1. The writ petition challenging cancellation is maintainable.

2. The allotment letters and lease deeds coexist; cancellation of allotment cancels leases.

3. The cancellation order dated 12.02.2020 effectively cancelled the lease deeds.

4. The earlier writ petition challenging proportionate cancellation does not bar present challenge.

5. Cancellation of entire allotment is lawful, not violative of proportionality, given persistent defaults and public interest.

6. Cancellation was primarily for non-payment, but non-development was a relevant factor.

7. Money deposited by petitioner is not forfeited automatically and must be refunded to be dealt with under insolvency.

8. Homebuyers' and sub-lessees' interests must be protected; directions issued for their protection and project completion.

9. Sub-leases in favour of financial institutions stand protected with option to obtain leases directly from Authority.

10. Insolvency proceedings continue; claims and funds to be managed under IBC framework.