[Noida Sports City Scam] Allahabad HC Lays Down Guidelines Regarding Rights Of Other Members Of Consortium When One Member Goes Into Insolvency

While directing CBI inquiry against officials of New Okhla Development Authority and various allottes/ builder involved in development of the Sporty City project in Noida, the Allahabad High Court laid down guidelines regarding the rights of other members of consortium, when one member goes into insolvency as the same is not provided in the Insolvency and Bankruptcy Code, 2016.

Holding that the IBC is not indented to hamper projects of national importance, the bench of Justice Mahesh Chandra Tripathi and Justice Prashant Kumar laid down the following guidelines:

Firstly, the Court provided that the Interim Resolution Professional (IRP), performing its duties under Section 20 of IBC, must seek the company's “willingness to continue to perform its functions/ obligations in the contract awarded to the consortium” within 4 weeks of commencement of CIRP. This decision shall be independent from the Committee of Creditors.

“If no such intention is communicated within the said period, it will be presumed that the company is unwilling to participate in the subject project.”

Secondly, the IRP must inform the consortium about the incapability of the company under insolvency to participate in the business of the consortium if he assess the same. In such case, the other consortium members (jointly or severally) will have an option to undertake the remaining project on their own and complete the same. The option to complete the project must be exercised within 4 week of communication by the IRP.

Lastly, the Court held that

“If the consortium members fail to communicate their willingness to complete the project on their own and without the participation of the member facing CIRP or express their inability to complete the said project, the Authority shall make alternate arrangements to ensure timely completion of the project.”

Factual Background

NOIDA launched a scheme for development of Sports City in Sector Nos. 78, 79, and 150 in 2011. One of the conditions was that the developer had to infuse his funds to develop the same. Out of the 30% land on which construction was allowed, 28% was to be developed for Group Housing and 2% for commercial purpose.

The entire project was for an area of 7,27,500 sqm., out of which 5,92,300 sqm. land was immediately allotted to the Consortium lead by M/s. Xanadu Estates Private Limited on 04.05.2011. An application to sub-divide the land was approved by NOIDA. Since entire allotment of land was not made and the Sports City was an integrated project, request for grant of benefit of zero period was accepted by NOIDA.

Subsequently, NOIDA asked the allottees that upon transfer of possession of 80% of the total allotted area, the issue of grant of benefit of zero period will be closed, which was not objected by the later. The remaining 20% land was allotted in the adjacent sector. In 2014, certain parcel of land was sub-divided in favour of the petitioner, M/s Three C Green Developers Pvt. Ltd.

Petitioner requested sub-division of another plot in favour of its subsidiary company M/s Robust Innovations Pvt. Ltd., which was accepted. Payments were to be made by the allottees between 4.11.2011 to 4.5.2021. The integrated map proposed by the petitioner on behalf of the Consortium was approved by NOIDA and the members of the Consortium divided development responsibilities between themselves. Revised map along with division of development responsibilities between the members of the Consortium was also approved by NOIDA in 2014.

Since the remaining land allotted in 2017 and 2018 was not free from encumbrances, petitioner wrote to NOIDA to not ask for the payment of instalments due. Due to inaction on part of NOIDA, the petitioner approached the High Court seeking, inter alia, seeking a writ of mandamus to restrain NOIDA from levying or collecting any lease rent, interest and penal interest from 01.02.2017 till date.

Petitioner had taken certain loan for the development project, which could not be repaid. As a result, the Debenture trustee has filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 during the pendency of the writ petition which has been admitted by NCLT. An IRP stepped in the shoes of the company to represent it.

High Court Verdict

The Court observed that there were large illegalities committed by the Builders (sub-lessees) in connivance with the officials of NOIDA which resulted in loss to the authority, State Government and public at large. The Court expressed shock at the lack of concern by NOIDA regarding report of the Controller and Auditor General of India which highlighted the scam.

Holding that such action of NOIDA had created problems for the homebuyer, the Court observed that

“The timeline of events, the total inaction of the NOIDA Authority and the apathy of the State Government, in the face of the CAG report compels us to pass suitable orders in the matter. A Court, much less a Constitutional Court, cannot sit helpless in the face of blatant illegalities and apparent collusion.”

Observing that Sports City was to be developed as an integrated project and not by bifurcating it into smaller projects by handing over to individual developers, the Court held that the concept and scheme of Sports City had been frustrated by NOIDA.

Noting that money which was to be used for development of sports facilities was syphoned off by the allottees who developed the residential and commercial projects, the Court held that a channel for back-door allotment to ineligible persons was created.

Further, regarding the smaller companies being owned by the same promoters, Niramal Singh, Surpreet Singh Suri and Vidur Bharadwaj, the Court observed that

“Since in this case there has been a web of companies incorporated by the same promoters and all of his newly incorporated companies applied as a consortium, and there after the share holdings have changed in certain companies without the permission of the authority, contrary to the provisions of the sports city scheme.”

The Court held that since the promoters of all the companies in the consortium were same, the consortium was not a genuine one. It was held that most of the assets was parked in the smaller companies, while the liability of developing the sprots facilities rested on 2 bigger companies. It was further held that initiation of corporate insolvency for various companies of the consortium was a way to escape paying NOIDA and the financial institutions.

It was held that the money to be used for development of sports facilities of syphoned off to “tailor-make” insolvency of the smaller companies by the original promoters of the companies. In such cases, the Court held that doctrine of 'piercing of corporate veil' was necessary.

“The insolvency was a strategic manoeuvre designed solely to evade liabilities and shirk the responsibility of providing the promised sports facilities.”

Further, the Court expressed shock at the inaction by NOIDA in collecting payments, cancelling leases, or taking action against its own officers.

The Court held that IBC was never intended to be used as a tool by the companies to evade civil and criminal responsibilities.

“The intention of Insolvency and Bankruptcy Code was not to allow the unscrupulous promoters to siphon away the money and then take the illegal advantage of the law and initiate, insolvency proceeding just to avoid to fulfil their obligations and also to avoid civil and criminal liabilities. Creation of companies for short periods and specific purposes leads to the futility of their resolution and even insolvency. It only carries liabilities which will extinguish or greatly diminish with the resolution/ liquidation process. This cannot have been the intention behind IBC.”

Referring to the object of the IBC in maximization of value of assets of a corporate debtor and balancing interest of all stakeholders, the Court held that the Code is silent qua the rights of a Consortium if one of its members goes into insolvency. The Court held that members of a consortium who would become insolvent will not be able to take part in the activities of the consortium. Accordingly, the Court framed the aforementioned guidelines.

While dismissing the writ petition, the Court directed Central Bureau of Investigation to lodge complaint against all the conniving officials of the NOIDA and the allottees/ builders involved in allotment, development, sanction of Sports City Project and any other person who may be involved in the scam.

Case Title: M/S Three C Green Developers Pvt. Ltd. And 8 Others v. State Of U.P. And 2 Others [WRIT - C No. - 31823 of 2019]

Case Citation: 2025 LiveLaw (AB) 75

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