Recently, the Allahabad High Court exposed serious irregularities in the development of the Sports City project in Noida. The case involved M/s Arena Superstructures Pvt. Ltd., which was allotted land under the ambitious scheme but failed to meet its obligations, leading to insolvency proceedings. However, the court went beyond the surface, scrutinizing the actions of both the developers and the Noida Authority, uncovering potential fraud, mismanagement of homebuyers’ funds, and deliberate inaction by authorities. The judgment provides significant insights into the misuse of insolvency laws and the larger implications for real estate projects, homebuyers, and financial institutions.
M/s Arena Superstructures Pvt. Ltd. was allotted a plot under the Sports City project in Noida through a sub-lease deed dated 19.10.2012. The project faced delays, leading to insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
During the Corporate Insolvency Resolution Process (CIRP), a Resolution Plan was approved by the NCLT on 19.07.2023. It extinguished NOIDA’s claims and required it to issue necessary approvals. NOIDA opposed this, seeking financial creditor status and additional payments, but the NCLT rejected its objections.
NOIDA appealed before the NCLAT, which upheld the Resolution Plan but directed 50% of receivables to be set aside. NOIDA did not challenge this order. However, it later refused to revalidate the project’s layout plan, citing the lack of Sports City infrastructure.
Aggrieved, M/s Arena Superstructures and a homebuyer filed writ petitions before the Allahabad High Court, seeking enforcement of the Resolution Plan and action against NOIDA.
Contentions of the Petitioner:
The petitioners, represented by Senior Advocate Mr. Shashi Nandan, argued that their case is distinct from other related matters and should be heard separately. They contended that since the resolution plan has been approved by the NCLT under the IBC, NOIDA is bound to comply with it and cannot introduce new objections to stall its implementation. The resolution plan mandates NOIDA to grant necessary approvals, revalidate layout maps, and facilitate project completion, which the authority has failed to do.
The petitioners emphasized that NOIDA's refusal to revalidate the layout map violates its obligations under the sub-lease deed and contradicts the NCLT and NCLAT orders. Despite NOIDA’s appeal against the NCLT order, there is no stay, making the resolution plan binding. The delay caused by NOIDA and the state government has stalled the project, putting homebuyers at risk.
Additionally, homebuyers argued that they have been unfairly caught in the dispute between NOIDA and the developers. They invested in the project believing it to be legally sound, but financial mismanagement and fund siphoning by ASPL’s management have left the project incomplete. Criminal proceedings have been initiated against ASPL's directors, and homebuyers demand that illegally diverted funds be recovered to complete the project. They asserted that NOIDA must comply with the NCLT-approved resolution plan to protect their rights.
Contentions of the Respondent:
The Noida Authority contended that the Sports City project was designed as an integrated development requiring the Consortium, rather than individual entities, to complete the project as a whole. However, multiple companies with the same directors were incorporated after the scheme’s launch, raising concerns about the true structure and intent of the Consortium. The Lead Member, M/s Xanadu Estates Pvt. Ltd., secured separate lease deeds for various subsidiaries, yet all remained bound by the original terms.
Despite being granted possession, the petitioner failed to meet its financial obligations, even after availing the benefit of a "zero period." Multiple notices for outstanding payments were ignored. Additionally, large-scale irregularities were flagged by the Comptroller and Auditor General (CAG), prompting investigations and restrictions on further subdivision and map approvals.
The Authority argued that the Consortium prioritized residential and commercial developments while neglecting the mandated sports facilities. The subdivision of land does not absolve individual members of their responsibilities, and they remain bound by the original lease terms. The petitioner, therefore, cannot claim independent rights while ignoring obligations essential to the project’s intended purpose.
The respondent further asserted that the same individuals incorporated multiple companies to secure leases but failed to develop sports infrastructure. Instead, they focused on residential construction before entering insolvency, warranting the piercing of the corporate veil to hold the real controllers accountable.
The non-development of sports facilities defeated the project’s purpose. Leaving open spaces was insufficient, and the proposed investment was inadequate due to cost escalation. There were also concerns that any facilities built may be restricted to residents rather than the public.
Regarding homebuyers, Noida Authority argued it had no contractual obligations, as agreements were made with private developers. Additionally, the insolvency proceedings were seen as an attempt to evade dues amounting to ₹99,14,75,095. The respondent also highlighted that unauthorized shareholding changes were made post-allotment, violating project terms.
Observation of the Court:
The Court divided the case into two phases: pre-insolvency and post-insolvency.
During pre-insolvency, several lease violations were noted. The Court stated, "the conditions were not followed to extend undue benefit to the allottees/builders." It found that construction obligations were unmet, remarking, "nothing was done towards the development of the Sports City."
The lease required proportional development of sports facilities. However, the Court observed, "no proportional recreational/sports facility was ever developed." Unauthorized share transfers were also noted. The Court stated, "some of the company has been sold by transferring the shares without the permission of the authority."
Payment obligations were ignored. The Court pointed out, "the allottee had to pay the entire premium in 16 half-yearly installments," but ASPL defaulted. It criticized NOIDA Authority for inaction, stating, "for the reasons best known to NOIDA Authority, they did not ever ask the allottees to pay the outstanding dues."
Homebuyers’ funds were collected but misused. The Court remarked, "the entire past failure of the ASPL was in clear connivance with the Noida Authority."
Criminal charges were filed under Sections 120B, 406, and 420 of the Indian Penal Code (IPC). The Court noted, "the accused persons started advertising and intentionally deceiving the home buyers." It found that funds were siphoned off, stating, "a major portion was siphoned off, with the result no fund was left for the construction and completion of the project."
On insolvency, the Court questioned its legitimacy. It observed, "the moot question is to see whether the Company genuinely got into insolvency or the insolvency is engineered after siphoning of the fund." It stressed "piercing the corporate veil" to identify those responsible.
The Court reaffirmed, "lifting the corporate veil is not only permissible, its frontiers are unlimited and ever-expanding." It concluded, "lifting of corporate veil can only take us to the accused who is involved in the siphoning."
Under the Prevention of Money Laundering Act, the Court observed, "the process or activity connected with proceeds of crime is a continuing activity." Since charges were filed under Sections 120B and 420 IPC, it noted, "these transactions fall within the ambit of PMLA Act."
Regarding Section 32A of IBC, the Supreme Court ruled, "it is not as if the wrongdoers are allowed to get away. They remain liable." It emphasized, "the extinguishment of the criminal liability of the corporate debtor is apparently important to the new management to make a clean break with the past."
The Court found fraud by the promoters, stating, "it is apparent that the promoters/erstwhile management have played a fraud on the home buyers, Noida Authority, and on the State." It added, "if this amount which is illegally stashed/invested in other companies is brought back, then most of the creditors would be paid off."
It declared, "we would be failing to discharge our constitutional obligation if we keep the eyes shut and allow the promoters to go scot-free."
Post-insolvency, the resolution plan was binding. However, NOIDA rejected revalidation due to non-compliance. The Court noted, "once a resolution plan is duly approved by the Adjudicating Authority under Section 31, the claims as provided in the resolution plan shall stand frozen."
The Court highlighted that genuine insolvency must be distinguished from fraudulent ones, observing, "ingenuine proceedings initiated by the corporate debtor just to avoid the civil and criminal liabilities after siphoning away the funds."
It emphasized "Fraus Omnia Vitiat," stating that fraud invalidates all transactions. It found rampant fraud in real estate, where builders "collect money from homebuyers but default on payments to authorities and creditors."
The Court ruled that fraudulent insolvency proceedings violate the objectives of IBC. It declared, "the interest of the homebuyers is supreme and their interest should be well protected."
Judicial review is necessary in such cases. The Court ruled, "NCLT does not have the power to issue direction to the Noida Authority to revalidate the map. This power is only with the Hon’ble Supreme Court and High Court under Article 226 of the Constitution of India."
On consortium insolvency, the Court set guidelines ensuring solvent members take responsibility. It emphasized that insolvency laws should not be misused to escape liabilities.
The decision of the Court:
With the aforesaid observations, the writ petition was disposed of. The Registrar (Compliance) was directed to send a copy of this judgment to the learned NCLT, Delhi, and the Director of the E.D. for information and necessary compliance forthwith.
