SC Amrapali judgment: A warning for lenders

By Soumyajit Mitra and Mohit Yadav, SNG & Partners
1 October 2019

The landmark judgment of the Supreme Court in favour of over 42,000 homebuyers in the projects being constructed by the Amrapali group of companies in Noida and Greater Noida, Uttar Pradesh was a huge relief for the homebuyers. The ruling not only punished the Amrapali Group but will also in the future deter all errant stakeholders and developers accustomed to circumventing the law.

Soumyajit Mitra
Principal associate
SNG & Partners

While relying on the audit report submitted by forensic auditors, the court held that it was apparent that a serious fraud had been committed with the connivance of officials of the Noida and Greater Noida Authorities and the banks. The audit report clearly established the diversion of funds by the directors through the creation of dummy companies, submitting professional fees, creating bogus bills, selling flats at undervalue price, payment of excessive brokerage, and so on. The court has restrained the unchallenged authority exercised by Noida and Greater Noida Authorities by clearly stating their loss of control over and interest in such lands due to a lack of timely vigilance.

The court ruled that mortgages created by Amrapali in their favour were bad in law, since the mortgages were subject to conditions imposed by the Noida authorities, but never fulfilled by Amrapali. Thus, lenders will not be entitled to enforce the mortgages. It was held that it is the duty of the lenders to ensure that funds are utilized only for development of the real estate project and if funds had been diverted, they should have been strictly dealt with. The court ruled that home buyers cannot suffer on account of the fraud, negligence and connivance of parties.

Mohit Yadav
SNG & Partners

Though the mortgage by banks on sold units cannot be enforced, it may be overreaching to suggest that banks will not have valid charges on unsold units on which no buyer interest has been created. On the facts of the present case, the court refused to recognise the mortgages of the lenders at all. This may not be the case in other matters where permission to mortgage is proper (subject to the payment of all applicable dues) and the bank is monitoring such end use of proceeds. In such cases, the right to enforce mortgages on the unsold units should be available to the lenders along with the corresponding receivables.

Preventive steps required. In order to secure the interest of the banks, the following precautions should be taken:

  • The conduct of a thorough title search report to ensure that all land dues and premiums have been paid up to date;
  • The close monitoring of future land dues and other outstanding payments to authorities relating to the project;
  • The conducting of due diligence prior to funding to ascertain the proceeds to be received from home buyers, expenses, stage construction, and so on;
  • The enforcement as conditions precedent not subsequent of security creation and perfection;
  • Independent checks to mitigate frauds under the provisions of the Real Estate Regulatory Act (RERA) as RERA authorities only rely upon the certificates usually procured from borrower’s consultants;
  • Mortgages not to be permitted on the basis of conditional notices of compliance. Lease deeds and terms for creation of mortgage to be checked to ensure compliance;
  • Financing and security documents should bind the borrower to pay land dues and premiums on time;
  • Strict monitoring of the end use of loan proceeds, not just rely on borrower’s CA certificate for the purpose. Loan proceeds to be held in an escrow account in accordance with the Reserve Bank of India circular of 2011 on ‘End Use of Funds-Monitoring’;
  • Lenders to be aware that step-in rights of projects are subject to the provisions of RERA including consent of two thirds of allottees and RERA authorities.

Among other directions, the court also directed the Central Government and State Governments and authorities to ensure appropriate action be initiated against leaseholders and developers of similar projects at Noida, Greater Noida and other places in various States for delay in projects completion and further directed them to ensure that projects are completed in time bound manner with buyers not being defrauded.

The judgment seems to be more to derive from equity and not from the strict interpretation of the provisions of law. Lenders now need to be vigilant and to ensure that the security given against loans is clear beyond any reasonable doubts as the responsibility of the lender does not come to an end upon funding; the lender is required to monitor regularly the end use of such monies.

SNG & Partners has offices in New Delhi, Mumbai and Singapore. Soumyajit Mitra is a principal associate and Mohit Yadav is an associate.