The Story of an Urgent Proviso in the Pandemic Driven World!

“…That Circumstances Exist Which Render It Necessary For Him To Take Immediate Action, He May Promulgate Such Ordinance As The Circumstances Appear To Him To Require..”

-Article 213 of the Constitution of India

The Covid-19 pandemic and the national lockdown is  one of the firsts that India and its citizens have seen since its independence which has affected the lives of millions not only domestically but also internationally and while the world  thrives  to come back to the normalcy, we thought of writing about the most urgent proviso which found its way initially as an ordinance and eventually as an amendment by the State of Uttar Pradesh in the midst of the year 2020.

I. INTRODUCTION

It was in the early 1970s when the Uttar Pradesh government changed its policies and steps were being taken to make wide allotment of lands to developers. This was done to make the state of Uttar Pradesh more investment-friendly and in order to attract businesses to set up their operations. According to this, lands were allotted for development and large sums of money were invested by various developers while some of the projects succeeded others continue and did not give the expected returns that the state hoped.

This overall action of proper planning and development of residential and industrial units was  done pursuant to the enactment of the Uttar Pradesh Industrial Area Development Act, 1976 (“Act”). This Act was enacted to provide for the constitution of the authorities for the development of certain areas in the state into an industrial and urban township and for matters connected therewith. The Act constituted authorities like the New Okhla Industrial Development Authority (“NOIDA”) and the Yamuna Expressway Industrial Development Authority (“YEIDA”) to perform functions such as acquiring land, preparing plans, demarcating and developing sites, providing for infrastructure for industrial, commercial and residential purposes and to provide for amenities and regulating erection of buildings and setting up industries along with providing the norms as enshrined under the Act.

II. COMING OF THE UTTAR PRADESH INDUSTRIAL AREA DEVELOPMENT (AMENDMENT) ORDINANCE, 2020

During the Covid -19 pandemic when the whole world was struggling, , the State of Uttar Pradesh on July 28, 2020 enacted the Uttar Pradesh Industrial Area Development (Amendment) Ordinance, 2020 (“Ordinance”) by way of which a proviso was added in the existing Section 7 of the Act[1].

Before we dwell into the aspects of the proviso which was added by the Ordinance, it is imperative to understand as to why an Ordinance, the provision of law granting such a right to the Governor, the need of urgency for such an ordinance came to be and why in the pandemic ridden time was it ratified into an Act by the Legislative Assembly of Uttar Pradesh a short month later.

The term Ordinance[2] though  not expressly defined under the Constitution of India, however, the process for the promulgation of the same is laid under Articles 123, 213[3] and 239B. An Ordinance can be regarded as a law, framed by the Executive, i.e. the President or the Governor of the state, without the consent of the legislature, when the legislature is not in session, to tackle an emergency situation. It is pertinent to mention that the power under Article 213 is conditional and is subject to the conditions laid under sub-clause 2 and 3[4].

For the States, the Governor derives authority for promulgation of ordinances, under Article 213[5] of the Constitution of India. However, to pass the litmus test for the same, it is essential that the same doesn’t qualify as colourable legislation and is mandated to tackle an emergency situation. However, the dubious circumstances under which the state government has proposed the present Ordinance raises reasonable apprehension whether this was done within the realms of an emergency situation.

It was held in the case of D.C. Wadhwa & Ors vs State Of Bihar[6],  where the Supreme Court while discouraging the practice adopted by the State Government of Bihar of repromulgating ordinances which had ceased to operate, held that the power to promulgate an ordinance is essentially a power to be used to meet an extraordinary situation and it cannot be allowed to be “perverted to serve political ends”.

III. CONVERSION OF THE ORDINANCE INTO THE AMENDMENT ACT

Thereafter, on August 31, 2020, the Uttar Pradesh Legislature passed the Uttar Pradesh Industrial Area Development (Amendment) Act, 2020 (“Amendment Act”) which was deemed to come into force with effect from July 28, 2020. The Amendment Act repealed the Ordinance.

The Ordinance and consequently the Amendment Act added a proviso to Section 7[7] of the Act which gives the authority the power to sell, lease or transfer in any other manner any land or building belonging to the authority. The Amendment Act has added the following proviso to this section:

Provided that where any land so allotted is not utlised for the purpose for which it was allotted within the period of five years from the date of possession or within the period fixed for such utilization in the conditions of allotment, whichever is longer, the lease deed will stand cancelled and the land shall vest with the Authority.

Provided further where the aforesaid period has already lapsed before the commencement of this Act, the authority shall give a notice to the allottee to use the land for the purpose for which it was allotted within a period of one year and if within the above period of one year the allottee does not use the land, the allotment and lease deed shall stand automatically cancelled.”

The proviso has far-reaching implications and in the view of the authors would be folly of the Doctrine of Legitimate Expectation as such an action would be taking away the accrued right of parties and shouldn’t pass judicial muster.

Realistically, imagine the far-reaching impact of the Amendment Act qua developers who may lose their accrued rights in properties. This action would not only have a far reaching impact on the developers but also on the banks and similar financial institutions who have granted the financial assistance to these developers and in lieu of the same would have taken the land parcels as collateral/ security.  The proviso clearly states that if the entity who was allotted any land by the authority under Section 7 of the Act fails to utilize it for the purpose for which it was allotted within a duration of five years or within the period fixed for such utilization in the conditions of the allotment whichever is longer, the land shall vest with the Authority and if that period has already lapsed before July 28, 2020, the allottee will get served a notice to use the land within a period of one year as per the agreed conditions and if it fails to do so, the allotment would stand automatically cancelled. Therefore, the Amendment Act introduced last year is certainly raises valid concerns on its intent and motive especially when India has been either in some form of National Lockdown, State Lockdown and Night Curfews for more than a year.

The Act provided for the constitution of an Authority for the development of certain areas in the State into industrial and urban townships and for matters connected therewith thereby inviting investors and businesses to invest in properties and lands in Uttar Pradesh, in turn, enjoy a lease period of about a century without any such conditions attached in the master document i.e. the sub-lease deed usually entered by the governmental bodies such as NOIDA, YEIDA etc with the developers. But by introducing the Amendment Act, the government is deviating from the practice and both the express and the implied commitments made by them while allotting the land to such developers and run contrary to the covenants, promises made to the developers, subsequent sub-lessees during the lease period which in most of the cases is for a period of 90-99 years from the date of the sub lease deed entered between the state acting through the public authorities with the developers.

There is a legitimate expectation among investors and through the medium of this Amendment Act, the authorities are taking or at least seems to have an intent to take away accrued rights of such parties and it ,therefore, raises questions with respect to its constitutional validity and at the same time the Act should also pass the test of reasonableness, fair play and equity.

The expected threat turned real when the action was undertaken by the Authority against in the very next week in the matter of Sudarshan Kumar Kapur v. NOIDA[8] wherein NOIDA passed an order cancelling the lease deed of a plot since the land in question was not utilised by the Petitioner pursuant to the Ordinance. When the Petitioner challenged the same the Hon’ble High Court of Allahabad stated,

“The writ petition is, therefore, disposed of with the observations that the Chief Executive Officer (CEO), NOIDA, District Gautam Buddh Nagar shall consider the request of the petitioner for grant of one more year for making completion of the construction over the plot in dispute in accordance with the amended Ordinance, 2020. A reasoned and speaking order shall be passed, accordingly, within a period of six weeks from the date of receipt of a copy of this order. The order impugned dated 7.8.2020 shall be subject to the fresh decision to be taken by the Chief Executive Officer, NOIDA.”

Similarly in another matter pertaining to J.M. Housing Limited, which challenged the order of the Authority via a Writ Petition before the Hon’ble High Court of Allahabad[9]. A writ was preferred before the High Court challenging an order passed by NOIDA on cancelling the lease in favour of the Petitioner and forfeiting the security pursuant to the amended Section 7 of the UP Industrial Area Development Act, 1976. The High Court while quashing the order of the NOIDA Authority on the technicality and non-fulfillment of the second part of proviso i.e. the notice wasn’t issued by the Authority, the High Court stated that:

“5. The 1st part of the proviso provides that where any land so allotted is not utilized for the purpose for which it was allotted within a period of 5 years from the date of possession or within the period fixed for such utilization in the conditions of allotment, whichever is longer, the lease deed will stand cancelled and the land shall vest with the Authority. The 2nd part of the proviso provides that where the aforesaid period has already lapsed i.e. where the allotted land is not utilized within 5 years from the date of possession or within the specified period in the terms of allotment and the said period has expired before the commencement of the Amending Act, the authority is obliged to give a notice to use the land for the purpose for which it was allotted within a period of one year and if within the above period of one year the allottee does not use the land, then the allotment and lease deed shall stand automatically cancelled.

6. Thus, the condition precedent for applicability of the 2nd part of the proviso is that the period for utilization should have expired before the commencement of the Amending Act i.e. 28.7.2020 and the Authority before cancelling the allotment / lease had given a notice to the allottee to utilize the land within a year………”

It may be relevant to also highlight that Act[10] provides that such laws require wide publicity and should be made known to the public through necessary mediums which is unlikely in the pandemic. In fact, the authors themselves only found the Act from the website of the Legislative Assembly and the same was not even available on the authority websites.

IV. CONCERNS FOR THE STAKEHOLDERS AND THE INTERESTING QUAGMIRE ON PENDING CASES

This Amendment Act is bound to create more problems for entities that are currently undergoing Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

There is a multitude of real estate companies and developers that are undergoing CIRP in Uttar Pradesh and numerous matters are pending before the National Company Law Tribunal (“NCLT”) which have since then only increased due to the limited functioning of the NCLT owing to the pandemic while the Allahabad bench been largely vacant or only a makeshift bench made available since 2019.

In the authors’ view, in such a scenario, the Resolution Professionals will have to also keep on toes of such aspects besides spending a substantial amount of time and money to challenge this Amendment Act and raise issues before the NCLT, Allahabad High Court and eventually the Supreme Court. As on date, there are many crucial projects which have been engaged in CIRP for a long period and this Amendment Act is going to add more woe for them too.

Lastly, this Amendment might also affect and have an impact on the financial institutions/ banks who in their regular course of business takes the land parcel(s) as security/ collateral being offered to the developers as the wordings of the Act are quite exhaustive and as a result of the same, this issue would become an important point from the diligence perspective of the financial institutions taking the land as a security and at the same for subsequent sub-lessees who would be either dealing with the developer and/ or the financial institution, with respect to the land, as the case may be. In addition to the same, this Act may also encroach upon the rights which are otherwise available to the banks to dispose of the land within a period of 7 (Seven) years from the date of its acquisition as per the provisions of the Banking Regulation Act, 1949 which in turn provides for a mechanism of disposal of non-banking assets[11].

V. CONCLUSION

In the authors’ view, the action of passing such an Act would deviate from the object that the Act was passed i.e.  to attract businesses and developers. At the same time, it  could act as a deterrent to the investors and other stakeholders including the financial institutions  and in turn increase litigations in the already strained and pendency of the High Court and other tribunals.

Further, given the pandemic situation, the manner of introducing the Amendment Act is also alarming especially when parties are trying to invoke the force majeure clauses, statutory authorities providing relaxations, the apex courts extending timelines and limitations. Another concern is that the authorities may use this Amendment Act in imposing unreasonable thresholds or taking away the land from such allottees, developers and cancelling their lease deeds respectively.

The State of Uttar Pradesh needs to ensure that timely completions and developments do take place. However, the act of passing an Ordinance and thereafter the Amendment Act in the pandemic when the world at large is seeking concessions is onerous on  the  developers, financial institutions and investors which form an important part of the economy. According to the authors, the mode and manner in which this Amendment Act was brought and considering the wide amplitude of the language being used, the same is required to pass the judicial muster and may be amenable to challenge on various grounds so as to balance the equity of the stakeholders in this entire process.

Authors:

Abhimanyu Chopra, Partner
Parag Maini, Partner

Footnotes:

[1] Power to the Authority in respect of transfer of land. – The Authority may sell, lease or otherwise transfer whether by auction, allotment or otherwise any land or building belonging to the Authority in the industrial development area, on such terms and conditions as it may, subject to any rules that may be made under this Act, think fit to impose.
[2] Ordinance is a law promulgated by  the President or the Governor of the State when the legislative houses are not in session as per the powers vested with them as per the Constitution of India.
[3] The Constitution of India, Article 213. Power of Governor to promulgate Ordinances during recess of Legislature
(1) If at any time, except when the Legislative Assembly of a State is in session, or where there is a Legislative Council in a State, except when both Houses of the Legislature are in session, the Governor is satisfied that circumstances exist which render it necessary for him to take immediate action, he may promulgate such Ordinance as the circumstances appear to him to require: Provided that the Governor shall not, without instructions from the President, promulgate any such Ordinance if:-
(a) a Bill containing the same provisions would under this Constitution have required the previous sanction of the President for the introduction thereof into the Legislature; or
(b) he would have deemed it necessary to reserve a Bill containing the same provisions for the   consideration of the President; or
(c) an Act of the Legislature of the State containing the same provisions would under this Constitution have been invalid unless, having been reserved for the consideration of the President, it had received the assent of the President
(3) If and so far as an Ordinance under this article makes any provision which would not be valid if enacted in an Act of the legislature of the State assented to by the Governor, it shall be void:
Provided that, for the purposes of the provisions of this Constitution relating to the effect of an Act of the Legislature of a State which is repugnant to an Act of Parliament or an existing law with respect to a matter enumerated in the Concurrent List, an Ordinance promulgated under this article in pursuance of instructions from the President shall be deemed to be an Act of the Legislature of the State which has been reserved for the consideration of the President and assented to by him.
[4]ibid
[5] id.
[6]1987 SCC (1) 378
[7] id
[8] Writ- C. No. 19793 of 2020; Order dated 01.12.2020
[9] Writ- C. No. 2238 of 2021; Order dated 02.02.2021
[10] 44. Public notice how to be made known. Every public notice given under this Act shall be in writing over the signature of the secretary to the Authority and shall be widely made known in the locality to be affected thereby affixing copies thereof in conspicuous public places within the said locality, or by publishing the same by beat of drum or by advertisement in a newspaper having circulation in the locality or by two or more of these means and by any other means that the secretary may think fit.
[11] Section 9- Disposal of non-banking assets- The Banking Regulation Act, 1949

Date: June 23, 2021